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Glasshouse Systems, Inc v. International Business Machines Corporation

July 20, 2011

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



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

July _20__, 2011

FINDINGS OF FACT AND CONCLUSIONS OF LAW

On June 17, 2008, GlassHouse Systems, Inc. ("GlassHouse") filed this action against International Business Machines Corp. ("IBM") and asserted six claims: promissory estoppel, breach of fiduciary duty, negligent misrepresentation, equitable estoppel, intentional interference with prospective business advantage, and unjust enrichment. Compl., ECF No. 1. IBM moved to dismiss all of the claims pursuant to Federal Rule of Civil Procedure 12(b)(6). Mot. Dismiss, ECF No. 4. On March 16, 2009, I granted this motion in part, dismissing all counts except the promissory and equitable estoppel claims. Mem., ECF No. 15. After discovery closed, IBM moved for summary judgment on both estoppel claims. Mot. Summ. J., ECF No. 40. On October 19, 2010, I granted the motion in part, dismissing only the equitable estoppel claim. Mem. & Order, ECF Nos. 51-52.

From May 25 to June 1, 2011, I held a bench trial on the remaining promissory estoppel claim. Both sides submitted proposed findings of fact and conclusions of law, ECF Nos. 95-96, and presented additional oral argument on June 30, 2011. I exercise diversity jurisdiction pursuant to 28 U.S.C. § 1332.

I.FINDINGS OF FACT

1. GlassHouse is a Vermont corporation with its domestic headquarters located in Illinois. IBM is a New York corporation headquartered in New York.

2. IBM is a major technology company that manufactures computer products and sells services related to those products. For some of its products and services, IBM contracts with independent businesses to market and sell to end-user customers ("end-users"). IBM refers to these contractors as Business Partners and the contracts as Business Partner Agreements.

3. The Business Partner Agreements state that IBM approves the Business Partner to actively market IBM products and services at prices and terms that will be set by IBM in future communications.

4. One of IBM's product lines is System z.*fn1 System z products are mainframe computers, i.e., robust computing systems that are able to process many tasks concurrently. They are purchased by large organizations that need systems with significant data capacity and processing speed. The price for a System z mainframe ranges from several hundred thousand dollars to millions of dollars.

5. IBM does not sell or market certain System z products and services directly to end-users. IBM contracts with approximately thirteen Business Partners to do so on its behalf ("zBPs"). z-BPs do not have exclusive geographical territories in which to operate, such that each z-BP is free to market to any end-user.

6. At all relevant times to this action, GlassHouse has been a z-BP. The parties periodically renewed their Business Partner Agreement. Def.'s Ex. 28.*fn2

A. IBM's Pricing Process

7. z-BPs receive prices from IBM in two ways*fn3 by referencing an IBM publication called the Pricing Guide or through a request form called a special bid. The Pricing Guide is over six hundred pages and IBM alters it throughout the year. z-BPs use a special bid form to request a price when a price is not listed in the Pricing Guide, when a price is listed but states that a z-BP needs special approval to use the price, or when a z-BP wants to request a lower price than what is listed.

8. In May 2002, IBM introduced a discount program for its z-BPs called Opportunity Development Pricing ("ODP").

9. The ODP program was ostensibly aimed to reward z-BPs that "performed significant sustained sales and marketing activities to successfully" persuade an end-user to adopt System z. Def.'s Ex. 46 at 12. It was in IBM's interest to develop this program to motivate z-BPs to spend significant unpaid time marketing products.

10. z-BPs were told that only a z-BP that had expended sufficient effort and resources into developing a sales opportunity could receive an ODP discount.

11. The introduction of ODP did not mean that z-BPs could now gain exclusive ownership of a client's account. More than one z-BP could earn ODP for the same sales opportunity. Since ODP was introduced, there have been many times in which IBM has given ODP to more than one z-BP for the same opportunity.

12. In 2006 and 2007, the ODP discount was twenty-one percent.

13. The program allowed z-BPs to assume that they would be entitled to ODP when they were developing a sales opportunity. T.T. 4, 26:7-16, 28:20-21; Pl.'s Ex. 133 at 4.

14. The concept of z-BPs needing to earn ODP predictably led to disputes amongst z-BPs regarding whether a competitor deserved the discount. IBM attempted to reduce the number of these conflicts. When more than one z-BP wanted to claim ODP on the same opportunity, IBM would conduct a review of the z-BPs' marketing documentation to determine whether one, both, or neither had legitimately earned the discount. In its review, IBM only considered marketing activities in the preceding twelve months.

15. A review could be initiated in one of two ways.*fn4 First, if two or more z-BPs submitted a special bid form claiming ODP for the same sales opportunity, IBM's certification team would conduct a "certification review." Second, a z-BP could ask its designated IBM representative for an "ODP review" when the z-BP had directly been informed by a competitor that it intended to seek ODP on the same sales opportunity. This information was to be obtained through a process called "self-policing."

16. One of the rules of the ODP program was that the thirteen z-BPs engage in self-policing amongst themselves. If a z-BP suspected that another z-BP might be discussing the same sales opportunity with an end-user, the first z-BP should contact the second z-BP directly to ask whether the second z-BP intends to request an ODP discount. If the second z-BP indicates ...


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