United States ex rel. Cimino v. IBM is a False Claims Act case brought by Paul Cimino, a former IBM sales representative, on behalf of the United States. Mr Cimino alleged that IBM presented the Internal Revenue Service (IRS) with a false software licence compliance audit in order to obtain a USD 265 million licence renewal. Everything below about IBM’s conduct is the relator’s allegation as recorded by the courts; the courts took it as true only to decide whether the complaint was sufficient. The United States investigated for several years and declined to intervene.[1]
Background
The IRS and IBM signed a licence agreement in 2007 covering IBM software including the Rational, WebSphere and Tivoli brands, with a base year and option years, running to 30 September 2012 with at least one further option available. The IRS paid roughly USD 23 to 30 million a year. The licence allowed IBM to verify compliance and to use an independent auditor.[1] The relator said the IRS was not using all the products it had bought, was moving some work to open-source software and intended to renew only what it needed.[2]
The dispute
According to the complaint, IBM proposed a friendly compliance audit, engaged Deloitte to run it, and expected it to show over-use that would give IBM leverage to obtain a long-term renewal. The relator alleged that Deloitte’s first results showed about USD 500,000 in possible compliance charges and were not released; that IBM then had the audit rebuilt on assumptions “without basis or impossible”, such as treating licences on discontinued servers as in constant use, producing figures from USD 18.9 million to USD 292 million; and that an internal IBM team found at most USD 3 million of over-deployment where Deloitte had found USD 27 million for the Rational products, before being told to assume that numerous IRS staff used “floating user” licences concurrently. On 29 November 2012 IBM presented USD 91 million in compliance charges, including retroactive support, which the IRS contact rejected. In December IBM allegedly presented the findings to a more senior IRS official and said it would waive the charges if the IRS signed a new contract. The IRS signed a five-year licence for USD 265 million on 27 December 2012. The relator further alleged that IBM then billed about USD 87 million of the disallowed charges as prospective licences and support, including 2,353 Rational floating user licences.[1]
Decision or outcome
District court (30 September 2019). The court granted IBM’s motion to dismiss. It held that the complaint did not plausibly plead causation, because it alleged only that the audit was a “substantial factor” in the IRS’s decision, and did not plead materiality, because the IRS had kept paying under the new licence, and had extended it by six months for USD 16,147,772, after being on notice of the suit.[1]
Court of appeals (6 July 2021). The D.C. Circuit held that causation is an element of fraudulent inducement under the False Claims Act and that the standard is but-for causation. It held that the relator had plausibly pleaded that but for the audit the IRS would not have entered the agreement, and had plausibly pleaded materiality, because the audit was capable of influencing the decision to renew; it said continued payment might later be used as evidence on materiality but did not defeat the claim at the pleading stage. It reversed the dismissal of the fraudulent inducement claims and affirmed the dismissal of the presentment claims, which were not pleaded with the particularity required.[2] The records read stop there; whether the allegations were later tested is not known.
Significance for software licensing and SAM practice
The case is not a finding that any audit was manipulated. It is a useful record of how a vendor audit of a large public customer was alleged to work: a contractual audit right, an over-deployment count built on stated assumptions, and a renewal negotiation running in parallel. The dispute over whether licences on discontinued servers or floating licences were counted properly shows that the counting method is as important as the licence terms.
Lessons learned
- Ask for the assumptions. The allegations centred on how deployments were counted, including licences on discontinued servers and concurrent use of floating licences.[1]
- Keep audit findings separate from renewal talks. The relator’s case depended on the audit charges being linked to an offer to waive them in exchange for a new licence.[1]
- Check how charges reappear in new contracts. The complaint alleged disallowed charges were carried into the renewal as prospective licences and support.[1]
- Keep your own usage data. The IRS contact rejected the findings because IBM could not substantiate them, according to the complaint.[1]