IBM Corporation v. Micro Focus, Inc.

Background

IBM alleged that Micro Focus obtained access to IBM’s CICS Transaction Server for z/OS software through IBM developer programs and then copied and reverse engineered parts of it to create Micro Focus Enterprise Server and Micro Focus Enterprise Developer. IBM specifically pointed to similarities between IBM’s and Micro Focus’s web service binding files, including similar architecture, IBM internal structures, processing sequences, optimizations, defects, missing features, and use of EBCDIC encoding.

IBM asserted a federal copyright-infringement claim and a breach-of-contract claim. It alleged that Micro Focus’s agreements with IBM prohibited uses including copying, reverse engineering, separating program elements from the program, and using the software to undermine IBM’s mainframe systems.

Micro Focus also sought to disqualify Kirkland & Ellis LLP from representing IBM. Micro Focus had previously retained Kirkland for various matters, including transactions, intellectual-property-related work, securities litigation, restructuring, debt advice, and other legal services. Kirkland’s engagement documents included an advance waiver allowing the firm to represent other clients whose interests were adverse to Micro Focus in matters that were not substantially related to Kirkland’s work for Micro Focus.

Motion to Dismiss

The court applied the standard for a motion to dismiss for failure to state a claim. At this stage, the court accepted well-pleaded factual allegations as true and asked whether they plausibly supported relief.

Copyright claim. The court held that IBM adequately pleaded copyright infringement. IBM attached registration certificates for nine versions of CICS Transaction Server and alleged that those registrations covered the software, including the web service binding component. The court found those allegations sufficient at the pleading stage to support IBM’s ownership of valid copyrights.

The court also found that IBM adequately alleged copying. Micro Focus allegedly had access to IBM’s software, and IBM identified detailed similarities between the two products. Those allegations were sufficient to plead actual copying and substantial similarity, meaning similarity involving protected elements of IBM’s work.

The court also allowed IBM to seek statutory damages and attorneys’ fees at this stage. Although IBM did not specify when the alleged infringement began, the court found it plausible that infringement of the version registered later than three months after publication began on or after that registration date. The court therefore declined to preclude those remedies before discovery showed when the alleged infringement began.

Breach-of-contract claim. The court held that IBM’s contract claim was preempted by the Copyright Act and dismissed it. Copyright preemption applies when the work involved falls within copyright’s subject matter and the asserted state-law rights are equivalent to copyright rights.

The court found that the subject matter requirement was met because IBM’s contract allegations concerned copying and reverse engineering software, which falls within the broad subject matter covered by copyright law. The court also found that the rights IBM sought to enforce—restrictions on copying, distributing, reverse engineering, and creating derivative software—were equivalent to rights protected by copyright. The contract claim therefore was not qualitatively different from IBM’s copyright claim.

Motion to Disqualify Counsel

The court denied Micro Focus’s motion to disqualify Kirkland. It applied New York’s professional-conduct rules to the conduct of attorneys appearing in the Southern District of New York, while also considering the Delaware-law provision in the parties’ retention agreement. The court stated that there was no meaningful difference between New York and Delaware law on the issues presented.

The court assumed, without deciding, that Kirkland’s representations of IBM and Micro Focus created a concurrent conflict of interest. It nevertheless found the conflict consentable because Micro Focus had given advance written consent in its engagement documents to Kirkland’s representation of clients directly adverse to Micro Focus in matters that were not substantially related to Kirkland’s work for Micro Focus.

The court found that Kirkland’s work for Micro Focus was not substantially related to IBM’s claims concerning the creation and distribution of Micro Focus Enterprise Suite software. The court also relied on Kirkland’s ethical screen and the representation that information received from Micro Focus had not been used in the IBM litigation. It concluded that the potential for divided loyalty and disclosure of confidential information was low and that Micro Focus had given advance, informed written consent.

Disposition

The court granted the motion to dismiss in part and denied it in part. IBM’s copyright-infringement claim will proceed. IBM’s breach-of-contract claim is dismissed. The motion to disqualify Kirkland as IBM’s counsel is denied. Micro Focus was directed to file an answer by June 13, 2023. The opinion was initially released under seal pending the parties’ review for possible redactions.