IBM, Red Hat Sued by Xinuos for Allegedly Stealing Code, Using it to “Crush Competition”

On Wednesday, computer software company Xinuos Inc. filed a complaint in the District of the Virgin Islands against International Business Machines Corp. (IBM) and Red Hat Inc. for purportedly stealing its copyrighted code and using it for anticompetitive conduct in the Unix/Linux paid server operating system market.

According to the complaint, “IBM and Red Hat conspired to illegally corner a market and crush competition.” Specifically, Xinuos claimed that “IBM stole Xinuos’ intellectual property and used that stolen property to build and sell a product to compete with Xinuous itself” by incorporating core elements of the stolen code into its own code. The plaintiff averred that “ IBM and Red Hat illegally agreed to divide the relevant market and use their growing market powers to victimize consumers, innovative competitors, and innovation itself.” Xinuos proffered that “after IBM and Red Hat launched their conspiracy, IBM then acquired Red Hat to solidify and make their scheme.” Lastly, the plaintiff argued that “IBM has been misleading its investors by falsely claiming all infringement claims against IBM regarding the copied code have been waived.”

The plaintiff contended that IBM and Red Hat engaged in the alleged anticompetitive conduct to “corner the market for operating system software that companies rely on to use servers.” The plaintiff stated that it, IBM, and Red Hat compete by selling their own server operating system software. Xinuos’ software was called UnixWare and OpenServer, IBM’s software is AIX for Power and Red Hat’s software is Red Hat Enterprise Linux.

Reportedly, after IBM stole this code, IBM and Red Hat agreed that “Red Hat would take control of the low end of the market, comprised of small and medium sized business, and IBM would take control of the high end of the market, comprised of the largest companies with the most complex operating system deployments.” Pursuant to this purported agreement, the defendants engaged in anticompetitive conduct to gain control over their respective market segments.

Xinuos claimed that IBM was motivated to engage in the alleged conduct because its server operating system software was “becoming less competitive” and “losing market share.” Meanwhile, Red Hat was allegedly motivated to engage in the alleged conduct because by staying out of the high end of the market, “it received IBM’s agreement to stay out of the low-end of the market, as well as its financial, reputational and technological help.”

The plaintiff averred that IBM has materially misled its investors because, while it correctly characterized that a third-party owns the copyrights to Unix and UnixWare, it falsely represented in its securities filings that “this third-party has waived any infringement claim against IBM.” Instead, Xinuos asserted that it owns this code, it has not entered a license agreement with IBM and it has not waived its infringement right claims against IBM.

As a result of the alleged unlawful conduct, Xinuos claimed that it has suffered significant monetary loss and other harm, while enabling the defendants to charge supracompetitive prices and harming competition and innovation.

IBM is accused of copyright infringement; both defendants are accused of Sherman Act and Clayton Act violations for their purported anticompetitive conduct, as well as for violating the Virgin Islands Antimonopoly Law and Virgin Islands Common Law for unfair competition and unjust enrichment.

Xinuos seeks declaratory judgment in its favor; preliminary and permanent injunction; for the removal and destruction of the plaintiff’s code from the defendants’ infringing products; a complete accounting; an award for damages, costs, and fees; and other relief.

Xinuos is represented by Moore, Dodson & Russell P.C.