IBM United Kingdom Limited v. LzLabs GmbH was a claim in the Technology and Construction Court in London over the development of LzLabs’ Software Defined Mainframe (SDM), software intended to let customers run applications compiled for IBM mainframes on x86 computers under Linux without recompiling them. IBM alleged that LzLabs’ UK subsidiary Winsopia used its licence of IBM mainframe software to reverse engineer that software for LzLabs. In a judgment of 10 March 2025, Mrs Justice O’Farrell found that Winsopia breached its IBM customer agreement in dozens of respects, that the acts were not protected by the rights of lawful users under the Software Directive, and that LzLabs and its main investor John Moores procured the breaches and were liable, with Winsopia, for unlawful means conspiracy.[1] In April 2025 the court prohibited marketing and sale of the SDM and ordered GBP 20 million to be paid on account of costs.[2] The Court of Appeal refused permission to appeal on 4 July 2025.[3]
Background
The defendants were LzLabs GmbH, a Swiss company incorporated in 2011 that developed the SDM; Winsopia Limited, its English subsidiary incorporated in 2013; LzLabs Limited, a UK technical support subsidiary; two executives, Mark Cresswell and Thilo Rockmann; and John Jay Moores, who financed the SDM and was the main beneficial owner of the LzLabs companies.[1]
The judgment recounts earlier history. Mr Moores founded BMC Software in 1980 and later founded the predecessor of Neon Enterprise Software. In 2009 Neon sued IBM Corp in Texas over a product called zPrime, and IBM alleged that Neon had reverse assembled z/OS in breach of its licence. That litigation settled in 2011 with a permanent injunction restraining Neon, Mr Moores and others from reverse assembling, reverse compiling or otherwise translating any IBM program without IBM’s consent. According to the judgment, the project that became the SDM was conceived within weeks of that settlement.[1]
In 2013 Winsopia bought an IBM mainframe, and on 15 August 2013 IBM licensed IBM mainframe software to it under an IBM Customer Agreement (ICA). The court quoted clause 4.1.3, under which the customer agreed not to “reverse assemble, reverse compile, otherwise translate, or reverse engineer the ICA Program unless expressly permitted by applicable law without the possibility of contractual waiver”, or to sublicense, assign, rent or lease an ICA Program or transfer it outside the customer’s enterprise. Clause 4.1.1(d) allowed use of source or restricted material only to resolve problems and to make the program work with other products.[1] The SDM was marketed from March 2016.[1]
The dispute
In December 2020 IBM Corp told Winsopia that IBM would audit its compliance and requested information, including lists of IBM software, machines and users, and confirmations that LzLabs employees had not used the IBM software and that it had not been used to develop the SDM. Winsopia refused, saying the request exceeded IBM’s audit rights. IBM gave notice terminating the ICA on 24 February 2021, and issued proceedings on 21 September 2021 seeking a declaration that the licence had been lawfully terminated, an injunction and damages or an account of profits.[1]
IBM’s technical particulars alleged 51 items of breach in six categories: disassembly, decompilation and translation; systematic creation and analysis of compiler listings; systematic use of traces, dumps, SLIP traps and other debugging techniques; copying IBM source code, macro expansions and copybooks; transferring “unscrubbed” materials containing IBM software; and use outside Winsopia’s enterprise and beyond the designated machine.[1]
The defendants said the SDM was the product of almost ten years of research and development under a clean room process and code of conduct, and that no IBM material was used except as permitted by the ICA and the Software Directive (Directive 2009/24/EC, implemented in the Copyright, Designs and Patents Act 1988). They relied in particular on the lawful user’s rights to observe, study and test a program (Article 5(3)) and to decompile for interoperability (Article 6), and counterclaimed.[1]
Decision or outcome
Liability (March 2025)
After a 33-day trial,[3] the court’s conclusions on the ICA were that it granted a licence of limited scope, to use the software for Winsopia’s business on the designated machine, and that its restrictions applied to each ICA Program and any component of it. The ICA had to be read subject to the Article 5(3) and Article 6 rights, but those exceptions were to be interpreted restrictively.[1] The court stressed that whether an activity was legitimate observation, study and testing, or decompilation for interoperability, was fact-specific for each allegation.[1]
The court then found:[1]
- Winsopia breached the ICA in respect of 41 of the items (one of them in part), including every item of disassembly and decompilation, compiler listing analysis, debugging-tool analysis and copying of source code, macros and copybooks, and several items of transferring unscrubbed material and use outside its enterprise.
- Those breaches did not fall within the rights conferred by the Software Directive and the CDPA.
- LzLabs and Mr Moores unlawfully procured the breaches, and LzLabs, Winsopia and Mr Moores were liable for unlawful means conspiracy. The claims against LzLabs Limited failed, and Mr Cresswell and Mr Rockmann were not liable for procuring the breaches because they could rely on the principle in Said v Butt by way of defence, and the conspiracy claims against them failed.
- IBM’s audit request was valid, and Winsopia’s refusal to comply was a breach of the ICA. IBM validly terminated the ICA under its terms or, alternatively, at common law.
- The defendants had deliberately concealed the connection between Winsopia and LzLabs and Winsopia’s breaches, so the claims were not time-barred.
Consequential orders (April 2025)
Winsopia agreed to stop using the ICA Programs and to deliver up or destroy them, subject to preserving materials for these proceedings and proceedings in Texas.[2] The defendants argued that an injunction against the SDM was disproportionate because the agreed expert evidence was that no ICA Program source code was reproduced in it, and proposed a “Remediated SDM”. The court rejected this. It held that reverse engineering and other breaches had been used to develop or improve the SDM, so that it was “tainted”, and that the evidence for removing the affected modules was “woefully inadequate”. It prohibited LzLabs, Winsopia and Mr Moores from marketing or selling the SDM or services derived from it, worldwide rather than only in the United Kingdom, and required them to terminate existing SDM contracts.[2] The court ordered GBP 20 million on account of costs by 1 October 2025, refused permission to appeal, and stayed the SDM injunction pending disposal of any appeal to the Court of Appeal.[2] Damages were left for a separate quantum determination.[1]
Court of Appeal (July 2025)
LzLabs, Winsopia and Mr Moores applied to the Court of Appeal for permission to appeal. Lord Justice Coulson noted that the proposed grounds had shifted towards the Software Directive, which had not been the defendants’ primary defence at trial, and that most grounds attacked the judge’s findings of fact after a 33-day trial with extensive expert evidence. Coulson and Males LJJ refused permission on 4 July 2025.[3]
Significance for software licensing and SAM practice
The case is a detailed English application of the Software Directive’s exceptions to a licence that prohibits reverse engineering. The court accepted that contractual terms cannot override the lawful user’s rights under Articles 5(3) and 6, but read those rights restrictively and found, item by item, that the activities in question went beyond them.[1] It is also a licence compliance case in the ordinary sense: the claim was for breach of contract, not copyright infringement, and it turned on the licence’s scope (enterprise and designated machine), its restrictions and its audit clause.[1][3]
It can be compared with the CJEU’s ruling in SAS Institute v. World Programming, where a licensee’s study of a program to reproduce its functionality was held lawful, and with IBM v. Micro Focus, a US dispute over alleged reverse engineering of IBM mainframe software.
Lessons learned
- Licence scope is enforced as written. The court found breaches not only for reverse engineering but also for use outside Winsopia’s enterprise and beyond the designated machine.[1] Check who uses licensed software, on which machines and for whose benefit, including group companies.
- Statutory exceptions are narrow. The Software Directive rights to observe, study and test, and to decompile for interoperability, were interpreted restrictively and did not cover the disassembly, compiler-listing analysis, debugging and copying the court found.[1] Do not assume that a clean room label or a legal exception covers a particular technique without advice on the facts.
- Answer audit requests on their terms. The court held IBM’s audit request valid and Winsopia’s refusal to provide any of the requested information a breach that supported termination.[1] If you think a request exceeds the audit clause, engage with it and negotiate scope rather than refuse outright.
- Individuals can be liable. Mr Moores, as investor and beneficial owner, was held liable for procuring the breaches and for conspiracy, while the claims against two executives failed.[1] Liability for licence breaches can extend beyond the contracting entity.