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GlassHouse Systems, Inc. v. International Business Machines Corp.

October 18, 2010

GLASSHOUSE SYSTEMS, INC., PLAINTIFF
v.
INTERNATIONAL BUSINESS MACHINES CORPORATION, DEFENDANT



The opinion of the court was delivered by: Anita B. Brody, J.

MEMORANDUM

This case addresses a dispute between Defendant International Business Machines Corporation ("IBM") and Plaintiff GlassHouse Systems, Inc. ("GlassHouse"), a company authorized to sell IBM products. GlassHouse alleges that IBM broke its promise to give exclusive favorable pricing when IBM gave a competing business favorable pricing for a major sales opportunity that GlassHouse had spent time developing. On March 16, 2009, the Court dismissed four of GlassHouse's six claims under Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief can be granted. IBM now requests summary judgment with respect to GlassHouse's two remaining claims: promissory and equitable estoppel. I will grant this motion in part; IBM is entitled to judgment as a matter of law on the equitable estoppel claim, but not on the promissory estoppel claim.

I. BACKGROUND*fn1

IBM is a major technology company that manufactures computer products and offers services related to those products. IBM contracts with thousands of independent businesses (business partners or "BPs") to market IBM services and products to end-user customers ("end-users"). The contract that IBM uses to authorize these BPs to market on its behalf is known as a Business Partner Agreement.

A. The Parties' Business Partner Agreement

GlassHouse has been an IBM-authorized BP since 1998, and the companies have periodically renewed their Business Partner Agreement ("the Agreement"). The Agreement describes IBM's relationship with a BP and explains the terms under which BPs may market IBM products to end-users. The Agreement does not describe protocols for how BPs should interact with each other. Some material provisions of the Agreement are:

· As our IBM Business Partner . . . we approve you to market on our behalf at prices and terms established by IBM. . . . You agree to . . . actively market Products and Services.

· The price, charge and discount if we specify one, for each Product and Service will be made available to you in a communication which we provide to you in published form or through our electronic information systems or a combination of both.

Pl.'s Opp. Mot. Dismiss Ex. A at 19, 25, ECF No. 10.

B. The ODP Program for System z BPs

GlassHouse is one of only thirteen BPs ("z-BPs") that markets IBM's System z products and services.*fn2 In 2002, IBM created a program of discounted pricing for its z-BPs called Opportunity Development Pricing ("the ODP program"). The ODP program rewards z-BPs that engage in time-intensive efforts and successfully persuade end-users to adopt System z products.

The central component of the ODP program is the discount itself. The program provides that when a z-BP performs significant, sustained sales and marketing activities to successfully develop an opportunity with an end-user, IBM will give it a reduced wholesale price on System z products. In August 2007, the ODP discount for z-BPs was generally 21% below list price.

The ODP program includes rules that IBM requires z-BPs to follow and promises about how IBM will treat the z-BPs. Together, these protocols enable z-BPs to notify IBM of competition amongst the z-BPs so that IBM can regulate the competition when necessary. IBM communicated the protocols to z-BPs at advisory council meetings, but the protocols were not written terms of the Business Partner Agreements. After the events that gave rise to this lawsuit, IBM distributed a written description of the ODP program protocols.

One ODP program rule is that the thirteen z-BPs must engage in a process called "self-policing" amongst themselves. If a z-BP suspects that another z-BP might be discussing a sales opportunity with the same end-user, the first z-BP must contact the second z-BP directly to ask whether the second z-BP intends to request an ODP discount from IBM. If the second z-BP answers that it will seek ODP, and this leads to disagreement as to who qualifies for ODP on the opportunity, then the z-BPs must contact IBM to resolve the conflict by conducting a review. In an ODP review, IBM considers both z-BPs' documentation reflecting their marketing activities to determine whether one, both, or neither z-BP qualifies for the ODP discount. If a z-BP is not awarded ODP, it is permitted to continue to negotiate with the end-user using a non-discounted price; however, a losing z-BP is unlikely to try to compete with a z-BP that has been rewarded the substantial 21% discount. The protocols for self-policing and ODP reviews that IBM created for z-BPs allow z-BPs to discover and resolve conflicts before multiple z-BPs spend considerable time and resources to develop the same sales opportunity.

In contrast, in a noncompetitive situation, a z-BP does not seek official confirmation of its ODP discount on an opportunity until it submits a special bid form for the project to IBM. If more than one z-BP requests ODP on their bid forms for an opportunity, IBM conducts a certification review at that time to determine whether one, both, or neither z-BP qualifies for the ODP discount. The certification review is similar in substance to the ODP review, except that it is conducted by different IBM employees.

Once ODP is awarded in a competitive situation, a z-BP that did not qualify for ODP is "locked out" from ODP for a minimum period of time. A z-BP who loses in an ODP or certification review cannot challenge the decision for ninety days, effectively giving the other zBP a period in which it enjoys exclusive favorable pricing for a given sales opportunity. Zozzaro Dep. 103:18-24, 377:1-379:3, Feb. 25, 2010; Osborn Dep. 137:3-12, March 4, 2010; Pl.'s Opp. Mot. Summ. J. Ex. 28; see Zozzaro Dep. 210:8-11; Pl.'s Opp. Mot. Summ. J. Exs. 11, 46. IBM promised that there were two other ways a z-BP would secure exclusive ODP without a formal ODP review decision from IBM. First, if a BP self-policed and the second z-BP answered that it would not seek ODP for the opportunity, then the second z-BP was locked out from claiming ODP for that opportunity for ninety days. Zozzaro Dep. 103:13-24, 377:1-379:3; see id. at 210:8-11; Pl.'s Opp. Mot. Summ. J. Exs. 11, 41. Second, if a z-BP requested an ODP review and the other z-BP declined to participate, the withdrawing z-BP was locked out from claiming ODP for ninety days. Zozzaro Dep. 103:13-24, 377:1-379:3; Osborn Dep. 137:3-12; see Zozzaro Dep. 210:8-11; Pl.'s Opp. Mot. Summ. J. Exs. 11, 46.

The principal impetus for creating the ODP program was incidents in which one z-BP spent considerable time developing a sales opportunity with an end-user and, just prior to finalizing the sale, another z-BP who had not performed comparable development activity entered with a lower bid to win the sale and take away the client's account. The ODP program ostensibly benefits IBM and z-BPs -- it creates incentives for z-BPs to spend significant unpaid time developing opportunities, and protects z-BPs when they do so.

C. The SEI Sales Opportunity

GlassHouse engaged in significant marketing activity to sell IBM products and services to a large financial services company, SEI Investments, Inc. ("SEI"). In March 2006, GlassHouse converted SEI to IBM technology. In late 2006, GlassHouse began discussing a significant upgrade with SEI. In early August 2007, GlassHouse submitted a series of special bid forms to IBM for the SEI upgrade.

Also in early August 2007, a GlassHouse employee told GlassHouse Senior Vice President Joseph Zozzaro that he had heard a rumor that competitor z-BP Mainline intended to pursue the SEI opportunity. On August 13, Zozzaro self-policed by e-mailing Mainline System z Director Santa Kraft. Zozzaro stated GlassHouse's intention to claim ODP pricing for the SEI opportunity and asked whether Mainline intended to provide SEI with ODP pricing.

After more than twenty-four hours passed without a response from Mainline, Zozzaro e-mailed GlassHouse's IBM representative, Steve Shiflett, and requested that IBM conduct an ODP review. Shiflett forwarded the request for an ODP review to IBM System z Business Partner Manager, John Dieker, to initiate a review. Before starting a review, Dieker asked Mainline's IBM representative, Jeff Rogers, to contact Mainline to see if they were assuming ODP on the opportunity. On August 15, 2007, Mainline told IBM that it would not request an ODP discount and that it declined to participate in a review.*fn3 IBM notified GlassHouse of Mainline's communication and stated that an ...


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