qsgi second amended complaint

8/2/2019 QSGI Second Amended Complaint

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UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF FLORIDA

CASE NO: 09:11-CV 80880-KLR

QSGI, Inc., a Delaware Corporation,Plaintiff,

v.IBM GLOBAL FINANCING, a Division ofInternational Business Machines Corp., andINTERNATIONAL BUSINESS MACHINESCORP., Parent to and/or d/b/a IBM GLOBALFINANCING,

Defendants.- - - - - - - - - - - - - - - - - - - - - - - - - - - - ~ /

SECOND AMENDED COMl'LAINT

COMES NOW the Plaintiff, QSGI, INC. ("QSGJ") by and through its undersignedcounsel and sues the Defendants, IBM GLOBAL FINANCI\[G ("IGF") and INTERNATIONALBUSINESS MACHINES CORPORATION ("IBM"), and stites as follows:

1. This is an action for damages brought pursuant to th, Florida Antitrust Act of 1980, Fla.Stat. 542.l5, et seq. ("Florida Antitrust Act"), and the Florida Deceptive and Unfair TradePractices Act ("FDUPTA"), Fla. Stat. 501.201, et seq.

2. Plaintiffs action is an action for damages in excess cfthe sum of SEVENTY-FIVETHOUSAND ($75,000) DOLLARS AND 00/100, exclusive of interest, costs and attorneys fees.

PARTIES3. QSGI is a Delaware corporation, with its principal place ofbusiness in Palm Beach, Palm

Case 9:11-cv-80880-KLR Document 53 Entered on FLSD Docket 03/28/2012 Page 1 of 15


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Beach County, Florida. At all times material hereto QSGI was engaged in the business ofpurchasing, selling and servicing used IBM mainframe computers throughout the United StatesofAmerica.

4. The Defendant, IBM, is a New York corporation wit.1 its principal place of businesslocated in New York. IBM is the overwhelming lead m:mufacturer and seller of mainframecomputers throughout the United States and the world. A t all times material hereto IBM wasengaged in the business of purchasing and selling used IBM mainframes computers throughoutthe United States ofAmerica and Florida.

5. The Defendant, IGF is a New York corporation with its principal place of business inNew York. At all times material hereto IGF was engaged in the business of purchasing andselling used IBM mainframe computers throughout the U n i t ~ d States ofAmerica and Florida.

JURISDICTION AND 'VENUE6. This Court has jurisdiction pursuant to 28 U.S.C. 1332.7. IBM and IGF conduct business in the Southern District of Florida and the acts and

damages which give rise to this complaint all occurred in Palm Beach County Florida, thereforevenue is proper in this court pursuant to 28 U.S.C. 1391.

IBM MAINFRAMES8. IBM mainframe computers are large, custom-made, expensive, powerful computers used

for processing very high volumes of information at very high speeds. This case involves the sale

and purchase of used IBM mainframes.9. Because IBM mainframes are so expensive, used mainframes prices for purchasers can

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range from $6,500 to over $7,500,000; purchasers always n:ed to customize or modify the largeand complex mainframes to fit their needs so that they do not overpay for the licensing of theoperating system which is tied to the Millions ofInst ruction per Second ("MIPS") capacity of themainframes. The computing capacity of IBM mainframe computers are measured in part inMIPS, and each used mainframe is configured to run at a c(:rtain capacity, i.e. 5000 MIPS, 4000MIPS, or 1000 MIPS.

10. These mainframes are so specialized to the needs of.he original purchaser that no twomainframes are exactly alike.

11. It is virtually impossible that a purchaser seeking to buy a used IBM mainframewould find a mainframe with the exact specifications, priOl to any modification by IBM, in anyseller's inventory including IGF.

12. It is this market for used IBM mainframes that IBM b.as effectively destroyed by itsenactment of the six-month rule.

13. IBM has a monopoly power in the relevant product markets and submarkets.14. QSGI contends that the relevant geographic market is world-wide.15. QSGI contends that the relevant market is the purchase, service, and sale of used IBM

mainframes.IBM's MARKET POSITION

16. IBM Mainframe Customers include most ofthe larg'!st corporations in the world, many

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of whom have used IBM mainframes and software for over 40 years. Almost 95% of Fortune500 companies use IBM's Information Management Systems for their most critical datamanagement needs.

17. IBM is the largest patent holder in the world with o v ' ~ r 49,000 patents.18. IBM boasts some $5,000,000,000,000 ($ Five Trillion) in assets resides on IBM's

mainframe computers. IBM notes that '"[i]if you ever uled an automated teller machine tointeract with your bank account, you used a mainfranle." Almost all of those are IBMmainframes.

19. Most of the world's largest corporations and government entities rely on mainframecomputers for their high volume and mission-critical data processing needs, including matterssuch a billing, accounting, order entry, record keeping and transaction processing.

20. Even though some of the world's biggest companies. and many government agencies, areincluded among the universe of IBM mainframe cu:;tomers, those otherwise powerfulorganizations have no choice but to depend, minute-by-minute, hour-by-hour, and day-by-day,on the hardware, maintenance, software, support and selvices provided by IBM because ofIBM's overwhelming market share.

21. Slight disruptions in the availability ofdata, or a temporary inability to processtransactions, could lead to catastrophic business consequences for many of IBM's mainframecustomers.

22. As a result even large Fortune 500 corporations and powerful government agencies arevulnerable to IBM's anticompetitive practices.

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23. IBM's overwhelming share of the mainframe market can be demonstrated by one verynotable feature of its contracts with mainframe customers. Most, if not all, of the contractsbetween IBM and IBM mainframe customers are adhesiJn contracts, drafted by IBM, thatinclude (quite incredibly) a provision that grants IBM the ulilateral right to change the terms ofthe contract on three months' notice to the client. Only all entity with monopoly power couldsecure such terms in its contracts with customers.

24. IBM has an overwhelming position in the market for new and used IBM mainframes anduses its overwhelming position to structure its company policies and procedures to eliminatecompetition from the market solely for the purpose of excluding competition.

1956 CONSENT DECREE25. As a result of IBM's previous anticompetitive behavior and its willingness to create

monopolies in the market, the United States government forced IBM to sign and operate underthe terms of a 46 year "Consent Decree."

26. The "Consent Decree" required IBM to no longer engage in anticompetitive practices andprovided for more stringent government monitoring of IBM to ensure it did not employ suchanticompetitive practices.

27. In 2002, IBM persuaded the government to lift the Consent Decree with the promise thatit would no longer engage in anti competitive practices.

28. No longer monitored by the government under the Consent Decree, IBM began toentrench and expand its monopoly power in the markets f;)r mainframe hardware and softwarewhereby IBM mainframe customers now pay supra-compet,tive prices for IBM mainframes.

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IBM's 2007 SIX-MONTH RULE29. In 2004, IBM's market share for new mainframes was a dominating 80 percent and that

percentage continues to grow today. Additionally, IBM commands approximately 90 percent ofthe market for used mainframe computers in the United States.

30. The used mainframe market consists of vendors who purchase used IBM mainframes forresale to a new purchaser. Used mainframes come into the market through the termination ofleases or the sale of older mainframes which no longer me!)t the need of the original purchaser.Vital to the sale of these used mainframes is the ability to modify the capacity of the mainframesto meet the needs of the new purchaser. Central to IBM's monopoly power is the fact that themainframes cannot be modified without IBM's proprietary micro-code.

31. In the summer of 2007, IBM instituted a policy change whereupon IBM prohibited themodification of a recently purchased used IBM mainframe's capacity on demand. The policyprohibited any modification for six-months (hereinafter " s i ~ - m o n t h rule"). Prior to the six-monthrule, a new purchaser could buy a used mainframe from ('SGI or another IGF competitor, andfor a reasonable fee IBM would modify the mainframe's capacity upon installation of themainframe at the new purchaser's jobsite.

32. Although the wording of the six-month rule appears to apply to IGF, in reality it doesnot because the six-month rule only comes into effect once the used IBM mainframe is actuallyinstalled at the purchaser 's jobsite. Therefore, any used IBVI mainframes that are stored at IGF,can be modified and customized for the purchaser prior to installation because IBM technicianshave access to all the parts and micro-code necessary to do :;0.

33. Thus, while IBM would contend the six-month rulelpplies indiscriminately to IGF, the6 of 17



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truth of the matter is IGF has an unfair advantage as a resut of IBM's anticompetitive behaviorand can modify used IBM mainframes to the appropriate capacity for the purchaser prior todelivery and is not affected by the six-month rule.

QSGI AND COMPETITORS ADVERSELY AFFI:CTED BY SIX-MONTH RULE34. The used mainframe market consists of vendors who purchase used IBM mainframes for

resale to potential customers. Used mainframes come into 1he market through the termination ofleases or the sale of older mainframes which no longer m e , ~ t the need of the original purchaser.IBM's anticompetitive behavior has not only directly injured QSGI, but every company that isinvolved in the purchase, service, and sale of used IBM mahframes.

35. Several companies were adversely effected by the sixth-month rule in a manner similar toQSGI including: Mainframe Services, Chattanooga, TN; Tc,p Gun Technology, Prior Lalce, MN;Atlantix Global, Norcross, GA; Great Lalces Computer, Grand Rapids, MI; Epoka IT Equipment,Pandrup, Denmark, NSR, Littleton, CO; CHS Computer Sales, Atlanta, GA; and Simon Systems,Inc., Chaska, MN among other companies that are involved in the purchase, service, and sale ofused IBM mainframes.

36. All of the companies referenced above, and QSGI, c )nstitute the remainder of the marketfor the purchase, service, and sale of used IBM mainframes of approximately 10%. This 10%represented, prior to IBM's enactment of the six-month rule, the only economically viableoptions for purchasers that wished to not overpay IBM for unnecessary MIPS capacity on theirmainframes.

37. QSGI operated in direct competition with IGF in the used mainframe market. QSGI

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purchased used IBM mainframe computers and marketed them to customers interested in savinga substantial amount ofmoney by purchasing a used instead of a new mainframe.

38. Prior to the enactment of the six-month rule, QSGI IY.arketed itself and operated as anefficient, competent, and economically prudent alternative tJ IGF for purchasers, and eventuallybecame the second largest seller of used IBM mainframes.

39. After the enactment ofthe six-month rule, QSGI's large inventory of used IBMmainframes were essentially rendered worthless. The six-IYLonth rule made it impossible for anypurchasers to economically choose to purchase a used IBM mainframe from QSGI because theycould no longer achieve the required modification for a period of six months.

40. The inability to modify the used mainframes would Jorce the purchaser to pay forlicensing tied to unnecessary MIPS capacity, and made i: economically inefficient to chooseQSGI, or other IGF competitor, even though the initill purchase price of QSGI's usedmainframes were considerably less than what IGF offered.

41. As a direct result IBM's anticompetitive six-month rule, QSGI lost customers, its abilityto sell its inventory of used IBM mainframes, and ultimatdy was forced to go out of business.

After the enactment of the six-month rule, QSGI's market share is 0%.42. IBM's six-month rule effectively destroyed the competition in the market for the

purchase, service, and sale of used IBM mainframes. Used mainframes are only economicallyviable to the purchaser provided that they can be modified upon purchase to fit the needs of thenew purchaser to avoid overpaying significant amounts of money for the monthly costs oflicensing the operating systems for the unnecessary MIPS.

43. The lack of ability to modify the used mainframes after purchase for six months made it80f17



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economically impossible for purchasers to buy used mainframes from QSGI or another IGFcompetitor. As a direct result of the lack of competition, ptrchasers are now forced to buy theirused mainframes from IGF at supra-competitive prices.

ANTICOMPEITIVE INJURY TO THE PURCHASERS44. As a direct result oflBM's enactment of the six-month rule, purchasers are now forced to

pay significantly larger prices for their used IBM mainfrlmes. Purchasers do not have anyeconomically viable options to buy used IBM m a i n f r ~ m e s from QSGI, or another IGFcompetitor, because the six-month rule precludes them from modifying the mainframes. Thesix-month rule effectively negates any price advantage or the initial purchase because of theenormous costs associated with licensing for unnecessary MIPS.

45. Prior to the six-month rule, purchasers had opportunties in a competitive market to pay alower price for a used IBM mainframe from QSGI or another IGF competitor. Thoseopportunities no longer exist because the six-month rule derjes new purchasers the crucial abilityto modify the mainframes after installation to avoid overpaying the licensing of the unnecessaryMIPS. The purchasers' monthly licensing costs can rise to $250,000 therefore the ability tomodify the ma.inframes' MIPS is crucial to avoid overpayin's for unnecessary capacity.

46. Depending on the age ofthe ma.inframe, MIPS capacity, and other variable features,mainframes can range from $6,500.00 (z800 - 2066-0AI) to over $7,500,000 (zlO - 2097-764).

47. For example, a zlO - 2097-505 is 2219 MIPS had an original list price of about $2.5million from IBM, and sells for approximately $250,000 frem QSGI or another IGF competitor.

48. Another examples is a zlO -2097-764 that has 29,59) MIPS. IGF had an original list

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price of $26,000,000 and QSGI, or another IGF competltor, would sell the mainframe forapproximately $7,000,000.

49. There are several examples of customers that receivei quoted prices from QSGI on usedIBM mainframes for significantly lower prices, but were )rced to buy from IGF because theycould not afford to overpay the licensing for unnecessary 1HPS for a period of six months. Thetransactions below identify the quoted transactions with the 'Jotential customer, type of used IBMmainframe sought, and the quoted price from QSGl.

50. BJC Health Care, z890 2086-A04, quoted price $10, ,288.51. Axicom Corporation, z890 2086-260, quoted price $51,823.52. Office Depot, z9EC 2094-706, quoted price $1,335,(100.53. Office Depot, z9EC 2094-707, quoted price $1,546,142.54. Axicom Corporation, z9BC 2096-F02, quoted price $127,470.55. Axicom Corporation, z890 2086 370, quoted price $N,780.56. AutoZone, Inc., z9BC V04, quoted price $495,000.57. Vishay Dale Electronics, Inc., IBM z800+peripherai>, quoted price $59,850.58. First National Bank, z990 DR Life Raft, quoted pric,,! $450,000.59. All of the above noted transactions are only a few examples of the anticompetitive injury

to the purchaser. All of the above noted purchaser wO'lld have purchased their used IBMmainframes for a significantly lower amount from QSGI bat for the enactment of the six-monthrule.

60. As a result of the six-month rule, the purchasers were adversely affected because theywere forced to buy their used mainframes from IBM at a much higher price than the pricesquoted by QSGI. Because of the lack of competition in the market, purchasers were directly

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injured because they were forced to overpay IBM's supra-competitve prices for usedmainframes,

61. IBM's six-month rule directly and adversely affected purchasers by forcing them to payIBM's supra-competitive prices for used mainframes, when in a competitive market, they wouldseek out the bes t possible price that was previously provided by companies like QSGI.

62. The operations ofIGF were and are controlled by IB VI, and IGF is nothing more than asegment of IBM. As a result each Defendant is jointly and severally liable for the injuries anddamages complained of herein.

63. The causes of action asserted herein arise under Flcrida Law, to wit: The FloridaDeceptive and Unfair Trade Practices Act, Fla. Stat. SOl 201, et seq and the Florida AntitrustAct, Fla. Stat. 542.019. The actions of IBM and IGF complained of herein are done for thepurpose of maximizing IBM's profits by using its monopoly power over the used IBMmainframe market.

COUNT IFLORIDA DECEPTIVE AND UNFAIR TRADE PRACTICES ACT

64. QSGI re-alleges and reaffirms paragraphs 8-63.65. IBM and IGF engaged in an unfair practice and dec


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used IBM mainframes from IGF at supra-competitive prices because they are the only companythat can provide all of the necessary modifications to the mai nframes prior to installation.

68. Before the enactment ofthe six-month rule purchasels could buy from QSGI, oranother IGF competitor, used IBM mainframes for prices eonsiderably lower than IGF's. Butthe six-month rule effectively destroyed competition from QSGI, and other IGF competitors,because the purchasers cannot afford to pay the licensing on the unnecessary MIPS.

69. Furthermore, IBM and IGF's six-month rule is decertive because companies like QSGIbought used IBM mainframes with the knowledge that the mainframes could be modified uponinstallation for resale.

70. Prior to the six-month rule, QSGI was able to sell u s , ~ d IBM mainframes to purchasers forprofit because it was possible to modify the mainframes immediately after installation so that thepurchaser did no t overpay for licensing unnecessary MIPS.

71. As a result of the six-month rule purchasers are fOfCl:d to buy from IGF because thelicensing fees for the unnecessary MIPS would completel:, negate any advantage on the initialpurchase price from QSGI.

72. As a direct and proximate result of the six-month ruie QSGI suffered actual damageswhen its entire inventory of used IBM mainframes valued at $4,000,000 was rendered effectivelyworthless after the enactment of the six-month rule and QSGI was forced to dispose of themainframes. QSGI suffered further actual damage, as a direct and proximate result of the sixmonth rule when its $10,000,000 investment in Qualtech WIS sold for $3,000,000.

73. As a direct and proximate result of such unfair and deceptive trade practices QSGI was

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damaged. Previously QSGI was IGF's largest competitor in the purchase, service and sale ofused IBM mainframes and represented a part of roughly 10% of the market share not owned byIBM. QSGI now has effectively 0% market share because it 10 longer is in business.

WHEREFORE, Plaintiff, QSGI, prays this Honorable Court enter judgment in its favorand against the Defendants for all damages allowed by law its attorneys' fees and all costs ofthis proceeding and further enters judgment prohibiting the Defendants from engaging in suchunfair and deceptive trade practices in the future.

COUNT IIBREACH OF FLORIDA STATUTE 542.19 FLORIDA ANTITRUST ACT

74. QSGI re-alleges and reaffirms paragraphs 8-63, and 71.75. At all times material hereto IBM and IGF had monopoly power over the relevant

geographic and used IBM mainframe markets demonstrated by its 90% market share.76. IBM and IGF used their monopoly power to damage, prevent, and eventually drive

competition from the used IBM mainframe market. IBM unlawfully exercised its monopolypower by its enactment of the six-month rule that denied any used mainframes, not purchaseddirectly from IGF, any modification for a period of six montbs.

77. Conversely, any used IBM mainframes that were purchased directly from IGF were ableto be modified prior to shipping and installation with tb.e required modifications for thepurchaser. As a result, IBM and IGF used its monopoly power in an exclusionary manner andeliminated competition from QSGI, and other IGF competitOl s.

78. By the exercise of its monopoly power IBM and IGF directly damaged QSGI causing itto lose profits, lose customers, lose the value of its inventOlY, and was eventually forced to goout of business.

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79. Previously QSGI was IGF's largest competitor in the purchase, service and sale of usedIBM mainframes and represented a part of roughly 10% of the market share not owned by IBM.The purchase, service and sale, of used IBM mainframes is a multi-billion dollar industry thatcontinues to grow every year. QSGI now has effectively 0% market share because it no longer isin business.

80. IBM also eliminated all possibility of price competitic.n in the market for used IBMmainframes because, like QSGI, all other competitors relied on the ability to modify the usedIBM mainframes immediately upon installation to meet the p .Ifchasers' needs.

81. As a result of the six-month rule, purchasers are direcrly injured because they are nowforced to buy their used mainframes from IBM at supra-competitive prices because there are noother competitors in the market that can provide used mainframes with all the necessarymodifications upon purchase.

82. Prior to the six-month rule, purchasers had opportuniLes to buy used mainframes atprices considerably lower than IGF's. After the enactment of the six-month rule, noeconomically viable opportunity exists because of the lack of competition and purchasers areforced to pay higher supra-competitive prices from IGF.

83. As a result of IBM and IGF's use of their monopoly p')wer, they unfairly increased theirmarket share of used IBM mainframes to approximately 100%. IBM's increase in market shareis not the result of any better management or business operation, but is solely the result of its useofmonopoly power that directly injured competition at the expense of the purchaser.

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WHEREFORE, Plaintiff, QSGI prays this Honorable Court enter jUdgment in its favorand against the Defendants for all damages allowed by law, including treble damages, itsattorneys' fees and all costs of this proceeding and further enters judgment prohibitingDefendants from engaging in such Antitrust Conduct in the fllture.

DEMAND FOR TRIAL BY JURYPlaintiff, QSGI, demands trial by jury of all issues so triable as a matter of right.

Respectfully submitted,THE FI.RRARO LAW FIRMlsi Juan P. Bauta, IIJUAN P. BAUTA II, ESQ.Florida Bar No.: 894060CASE A. DAM, ESQ.Florida Bar No.: 7560914000 Ponce de Leon Blvd., Suite 700Miami, Florida 33146Telephone: (305) 375-0111Facsim Ie: (305) 379-6222

CERTIFICATE OF SERVICEI hereby certify that a true and correct copy was sen ed electronically via CMIECF this

28 th day of March, 2012.lsi Juar P. Bauta, IIJUAN P. BAUTA, II, ESQ.Florida Bar No.: 894060CASE A. DAM, ESQ.Florida Bar No.: 756091

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qsgi second amended complaint

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