United States District Court, District of Columbia
PAUL A. CIMINO, Plaintiff-Relator,
INTERNATIONAL BUSINESS MACHINES CORPORATION, Defendant.
P. MEHTA UNITFED STATES DISTRICT COURT JUDGE.
Paul Cimino is a former employee of Defendant International
Business Machines Corporation (“IBM”). His job
was to sell IBM’s Rational brand of software to the
Internal Revenue Service (“IRS”). Relator brought
this action against IBM under the federal False Claims Act in
June 2013. He alleges that IBM, with the assistance of the
professional services firm, Deloitte LLP, fabricated audit
findings concerning the IRS’s software usage, and then
presented these false findings to the IRS in order to coerce
the agency into renewing a software enterprise license in the
amount of $265 million. According to Relator, the IRS renewed
the software license under the threat of a $91 million
penalty, which was supported by the false audit findings.
After a multi-year investigation, the United States declined
to intervene. Relator nevertheless elected to prosecute the
moves to dismiss Relator’s First Amended Complaint. For
the reasons below, the court grants Defendant’s Motion.
IBM is a multinational corporation that offers computer
hardware, software, and business solutions to organizations
and government agencies. First Am. Compl., ECF No. 35
[hereinafter Am. Compl.], ¶¶ 44–45. Relator
Paul A. Cimino was a senior sales representative in
IBM’s Federal Sector unit during the relevant time
period and was primarily responsible for promoting sales of
IBM’s Rational brand of software to the IRS, a bureau
of the U.S. Department of the Treasury. Id. ¶
42. In late 2011, the IRS appointed Relator to a
fifteen-member IBM board-the Development Tools Assessment
Group-tasked with evaluating the IRS’s software and
licensing needs. Id. ¶ 51.
and IBM signed a license agreement in 2007 (“Initial
License”) authorizing the IRS to use IBM software
products, including the Rational, WebSphere, and Tivoli
brands. Id. ¶ 48. The term of the Initial
License was for one base year with the right to exercise
several option years. Id. ¶ 49. As a result of
exercising these options, the Initial License was set to
expire on September 30, 2012, though “the IRS had the
right to exercise at least one additional option year.”
Id. ¶ 49. As of 2012, the annual cost to the
IRS for IBM’s software was approximately $23 to $30
million. Id. ¶¶ 14, 69.
in 2011, through communications with IRS employees, Relator
learned that the IRS was not interested in renewing the
entire Initial License. Id. ¶ 54. The IRS was
not using all of the products it had purchased from IBM,
see Id . ¶ 12, and it had begun migrating away
from some IBM products to open-source software, see Id
. ¶ 54. The IRS nevertheless would need to continue
using some of IBM’s software for the upcoming tax
season, see Id . ¶ 70, so it intended to
negotiate an extension only for the software that it actually
needed, id. ¶¶ 54–56.
alleges that “IBM stood to lose significant revenue if
the IRS stopped purchasing the software” in the Initial
License, a potential outcome which prompted IBM to formulate
a plan to pressure the IRS into a new, long-term deal.
Id. ¶¶ 57–59. The first phase of the
alleged scheme would be to convince the IRS that it should
forgo the final option year. Id. ¶¶ 59,
61, 65. IBM did so by suggesting a friendly compliance audit
that would provide the IRS with software usage data, allowing
the IRS to realize cost savings in a new agreement by
choosing only the software it needed. Id. ¶ 66.
The Initial License authorized IBM to audit the IRS’s
software deployment. Id. ¶ 18; see also
Def.’s Mot. to Dismiss, ECF No. 48 [hereinafter
Def.’s Mot.], Def.’s Ex. 1, ECF No. 48-2
[hereinafter Def.’s Ex. 1], at 18 (“IBM may
verify your compliance with this [Software Relationship
Offering] . . . . IBM may use an independent
auditor.”). IBM expected, however, that the compliance
audit would reveal that the IRS had overutilized software and
therefore would be subject to steep compliance charges
allowed under the Initial License. Am. Compl. ¶ 67;
see also Id . ¶ 62 (IBM employee referring to
compliance audit as “hammer” to use against the
IRS). IBM expected that once the IRS declined the option
year, the agency would be compelled to enter into a large new
contract that included products it did not need, due to the
press of the approaching tax season and threat of stiff
overage fees. Id. ¶ 70.
cites several statements by IBM employees to this effect.
See Id . ¶ 61 (July 2012 email between
IBM’s Dermot Murray, Senior Director of Federal
Civilian Software, and Len Fleischmann, Manager of Enterprise
Sales for IBM’s Federal Sector, that the “[o]nly
way to work a new deal is for IRS to cancel the contract. . .
. Having IRS out of contract provides the maximum leverage on
getting the deal done.”); id. ¶ 62 (IBM
employee describing compliance audit in April 2012 as
IBM’s “only . . . shot at making money this
year”); id. ¶ 65 (IBM’s Michelle
Adams telling the IRS in May 2012 that it could realize
savings by choosing not to exercise the option year);
id. ¶ 66 (July 2012 conversation between Adams
and the IRS’s Patricia Hoover, Adam Kravitz, Greg
Rosenman, and others explaining how an audit could benefit
eventually agreed to the audit and declined to exercise the
option year “in favor of a three-month
‘bridge’ ending in December 2012.”
Id. ¶ 68. IBM engaged Deloitte LLP to conduct
the audit. Id. ¶ 17. After Deloitte’s
audit showed only $500, 000 in possible compliance charges-to
Deloitte, a result almost unheard of with an entity as large
as the IRS, see Id . ¶ 74- “IBM
suppressed these initial audit results and never released
them to the IRS, ” id. ¶ 20. Instead, IBM
management requested that Deloitte manipulate the audit by
basing it on assumptions “that were either without
basis or . . . impossible” in order to create leverage
over the IRS. Id. ¶¶ 76– 77. One way
that IBM purportedly drove up overage fees was to have the
audit premised on the assumption that licenses deployed on
discontinued servers, and thus never used, see Id .
¶ 85, were in constant use, see Id . ¶ 83.
By September 2012, IBM’s changes to Deloitte’s
audit assumptions resulted in approximately $18.9 million in
overage fees. Id. ¶ 86.
September 18, 2012, Deloitte presented the over-deployment
statistics-though not the associated compliance penalties-to
IBM’s point of contact at the IRS, Adam Kravitz,
“so that they could come to agreement on baseline
findings.” Id. ¶ 87. Kravitz rejected the
figures because IBM could not substantiate them. Id.
¶ 88. In November 2012, IBM changed the audit
assumptions yet again-this time, resulting in $292, 000, 000
in overage fees. Id. ¶ 91. Although IBM’s
Murray considered the number “ridiculous” and
Fleischmann “‘was not comfortable
representing’ that number to the IRS[, . . . the
number] was represented to the IRS anyway.”
Id. ¶¶ 91–92.
also created an internal audit team (of which Relator was a
member) to validate Deloitte’s findings. Id.
¶ 94. Where Deloitte had found $27 million of Rational
brand software over-deployment, the internal audit team found
at most $3 million of over-deployment. Id. ¶
101; see also Am. Compl., Relator’s Exs. 1
& 2, ECF No. 35-1. Unsatisfied, Relator’s
supervisor, Ann Marie Somerville, and Dermot Murray
instructed the audit team to employ impossible assumptions.
Am. Compl. ¶ 110. For example, although technically
impossible, Somerville instructed the team to assume that
numerous IRS employees were using certain Rational brand
“floating user” licenses concurrently-including
employees who did not develop software and had no need to use
the Rational brand. Id. Eventually, the team came up
with $9.3 million in overage fees. Id. ¶ 116.
Still too low to create leverage, IBM did not disclose these
numbers to the IRS. Id. ¶¶ 117–18.
November 29, 2012, IBM presented $91 million in compliance
charges to the IRS’s Kravitz. Id. ¶ 121.
The charges included both overutilized licenses and
retroactive technical support for those licenses.
Id. ¶ 120. Kravitz again rejected the audit
findings. Id. ¶ 122.
IBM went over Kravitz’s head. When Kravitz was out on
vacation in early December 2012, IBM thought “this
[was] a good time to keep the pressure on.”
Id. ¶ 123. On December 11, 2012, Deloitte
presented its inflated findings to Kravitz’s superior,
the IRS’s Deputy Chief Information Officer, James
McGrane and others. Id. ¶ 124. Deloitte’s
presentation included a spreadsheet that contained a hidden
column that, if revealed, would have showed that there was
minimal to no usage of the products purportedly overutilized.
Id. IBM’s Mark Gruzin, Dermot Murray, and
others presented the same Deloitte findings to McGrane the
following week on December 19, 2012, when Kravitz remained
out of the office. Id. ¶ 125. IBM told McGrane
that it had retained lawyers to collect the $91 million
overage payment, but that IBM would agree to waive the
payment if the IRS entered a new contract. Id.
¶ 126. According to Chriss Schumm, an IBM employee who
attended the meeting with McGrane, the IRS was
“scared” of the Deloitte findings. Id.
then signed a five-year, $265 million license with IBM in
late December 2012 (“New License”). Id.
¶ 128; see also Def.’s Mot., Def.’s
Ex. 2, ECF No. 48-3 [hereinafter Def.’s Ex. 2] (New
License signed for the United States by Brian Carper on
December 27, 2012). The New License contained a “Base
Year” plus four additional “Option Years, ”
with an agreement end date of December 30, 2017. Def.’s
Ex. 2 at 5, 14. The IRS paid all or a substantial portion of
the $265 million contract price. Id. ¶ 134.
According to Schumm, the Deloitte findings were a
“substantial factor” in the IRS’s decision
to renew the licensing agreement. Am. Compl. ¶ 127.
there is more. According to Relator, IBM broke its promise to
forgo the overage fees and secretly included at least $86.9
million in such fees in the New License under the guise of
costs for prospective licenses and technical support.
Id. ¶ 137. As support, Relator notes that IBM
included the exact same number of purportedly over-deployed
Rational floating user licenses- 2, 353, to be precise-as
prospective licenses for first year of the New License.
Id. ¶ 139; see also Def.’s Ex. 2
at 21 (New License showing 2, 353 “IBM Rational
Lifecycle Package Floating User” licenses from December
31, 2012 to December 31, 2013). By contrast, for each
subsequent option ...