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Neon Sues IBM for Trying to Destroy It

Neon’s the Texas outfit that could supposedly drain IBM’s prized mainframe revenue stream

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Neon Enterprise Software sued IBM Monday morning in federal court in the Western District of Texas claiming Big Blue is out "to crush" it and prevent mainframe customers from saving hundreds of millions of dollars.

Neon's the Texas outfit with the newfangled mainframe widgetry called zPrime that, if unfettered, could supposedly drain IBM's prized mainframe revenue stream.

It reportedly can, in some cases, save mainframe customers 90% of their onerous software licensing fees. One potential customer reckoned zPrime could save it $100 million over two years.

See, Neon can move legacy workloads onto the zAAP and zIIP specialty processors (SPs) that IBM uses to run XML and Java programs and accelerate DB2 apps on its big iron. There are no monthly software licensing fees associated with the widgets - even though they're no different from the mainframe's central processors (CPs) that run legacy workloads - and that's so mainframe users won't drift off and start running the more modern Java and SOA workloads on commodity boxes.

IBM doesn't want zPrime anywhere near its mainframes and, according to the suit, has run off potential Neon customers such as Wells Fargo, the big financial house, and Highmark, the insurance company, by claiming that their contracts forbid them to use the SPs for legacy workloads.

"In case after case," the suit alleges, "as IBM became aware that a given customer had tested and was prepared to acquire zPrime, IBM made clear that such a decision by the customer would result in prospective and severe discipline from IBM."

Neon says IBM has threatened to sue customers for using zPrime and to "extract from future negotiations any revenue lost via a customer's use of zPrime."

Neon apparently had more than 50 potential customers to start with and claims it was forced to sell zPrime for less than it would have fetched to those companies that IBM didn't have a completely "chilling effect" on. It told the court it expects to lose more sales and margin if IBM isn't stopped.

Both Neon and large mainframe users have reportedly combed through their contracts and IBM's collateral material in vain searching for the alleged prohibition. Neon says it has also repeatedly asked IBM for the citation and IBM hasn't produced it.

Neon's lawyer, Chris Reynolds of Reynolds, Frizzell, Black, Doyle, Allen & Oldham in Houston, reasons that if the language exists - as it does for the specialty processor used to run Linux on mainframes - the guys running IBM's mainframe unit would have stuck the passage under the nose of every mainframe user on the face of the earth and made them read it back to them after zPrime came out in June.

Instead Reynolds found IBM telling IT Jungle in 2006 when the zIIP processor came out that its interfaces were "open, and other vendors are open to leverage it....We want to make it accessible, since this can only help encourage more workloads to move to the mainframe."

Therefore he figures no restrictions exist, IBM is bluffing and Neon is perfectly within its rights. And he has asked the court for a declaratory judgment saying so.

Furthermore Neon is charging Blue with tortious interference, business disparagement and unfair competition under California law, which is stricter than most. It's asking that IBM be forced to disgorge any profits made at Neon's expense under the Lanham Act, which basically says that if IBM is found to have caused Neon to, say, lose a $2 million sale to protect $20 million in revenues, well, it could kiss that $20 mil good-bye.

Neon also wants IBM enjoined from bad mouthing it and zPrime any more as well as actual damages, punitive damages, pre- and post-judgment interest and attorneys' fee.

Neon, which is backed by BMC co-founder John Moores, has reserved the right to sue IBM for antitrust violations, figuring it could make a dandy case of monopoly maintenance and tying.

Of course the Justice Department is a couple of months into an antitrust investigation of IBM's behavior in the mainframe market since it got out from under its 1956 consent decree in 2002 so Neon may not have to.

On the other hand, if IBM produces a contract that restricts its mainframe users from using competitive software on those SPs, Neon could hit IBM with charges of foreclosing competition under the Clayton Antitrust Act, which outlaws conditioning a sale on the buyer not using rival products.

Evidently counselor Reynolds figures he's got IBM boxed in.

And IBM may not have helped its defense in issuing the statement it did in response to the suit.

It said Neon's claims "have no merit, and its product offers no innovation. Neon's software deliberately subverts the way IBM mainframe computers process data. This is akin to a homeowner tampering with his electrical meter to save money. IBM has invested billions of dollars in the mainframe this decade and we will vigorously protect our investment."

Perhaps IBM hadn't gotten to the part of the suit where it's accused of disparagement because it certainly just called Neon a thief.

Neon's suit says IBM has told customers that zPrime is an "unlawful ‘circumvention' technology" and has conditioned the sale of new SPs on the customer pledging not to use it.

IBM has 60 days to answer the suit and Reynolds fully expects IBM to countersue in return and probably ask that the charges be dropped and the venue switched to New York, where it lives. The parties might get in to see the judge about scheduling a jury trial in February or March, he said.

The suit's at www.neon.com/doc/misc/lawsuit.pdf.

More Stories By Maureen O'Gara

Maureen O'Gara the most read technology reporter for the past 20 years, is the Cloud Computing and Virtualization News Desk editor of SYS-CON Media. She is the publisher of famous "Billygrams" and the editor-in-chief of "Client/Server News" for more than a decade. One of the most respected technology reporters in the business, Maureen can be reached by email at maureen(at)sys-con.com or paperboy(at)g2news.com, and by phone at 516 759-7025. Twitter: @MaureenOGara

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