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Cimino v. International Business Machines Corp.

United States District Court, District of Columbia

September 30, 2019

PAUL A. CIMINO, Plaintiff-Relator,
v.
INTERNATIONAL BUSINESS MACHINES CORPORATION, Defendant.

          MEMORANDUM OPINION

          AMIT P. MEHTA UNITFED STATES DISTRICT COURT JUDGE.

         I. INTRODUCTION

         Plaintiff-Relator 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 action.

         IBM now moves to dismiss Relator’s First Amended Complaint. For the reasons below, the court grants Defendant’s Motion.

         II. BACKGROUND

         A. Factual Background

         Defendant 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.

         The IRS 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.

         Sometime 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.

         Relator 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.”).[1] 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.

         Relator 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 IRS).

         The IRS 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.

         On 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.

         IBM 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.

         On 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.

         Undeterred, 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. ¶ 127.

         The IRS 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.

         But 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 ...


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