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Whistleblower Claims IBM Defrauded IRS In Software Purchase Arising Out Of Audit

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Oracle is not the only software company accused of using predatory audit tactics to drive sales of its software products. In 2013 an IBM employee named Paul A. Cimino filed a whistleblower suit under the False Claims Act alleging that IBM used an audit of its customer the Internal Revenue Service (“IRS”) to fabricate alleged areas of non-compliance. In 2018 the Complaint was unsealed, and IBM moved quickly to dismiss the Complaint.

Unfortunately, the District Court bought IBM’s argument that the Complaint did not adequately plead fraud in the inducement, and dismissed the lawsuit. Mr. Cimino appealed to the D.C. Circuit Court of Appeals and the appeal appears to now be fully briefed. I am rooting for Mr. Cimino and his lawyers and truly hope that this injustice can be rectified, if the facts as pleaded are true. Until software companies using predatory and unfair audit tactics to drive software sales are held to account in a court of law, the bad behavior will only get worse.

​The facts alleged in the Complaint about IBM’s conduct are appalling. According to the Complaint:

  11. This case arises out of a fraudulent scheme perpetraded by Defendant IBM against the United States Department of Treasury – Internal Revenue Service (“IRS) whereby IBM falsely and fraudently represented to the IRS that the IRS owed millions of dollars in compliance penalties in order to indue the IRS to give up it’s existing rights and to enter into a software agreement that the IRS did not need and did not want. Further, the Defendant IBM told the IRS that if the IRS entered into the new deal, any compliance penalties would be waived, but the billed the IRS for millions of dollars in penalties anyway.

Each day we see cases where software companies vastly inflate audit findings in a transparent attempt to obtain leverage over their customers, and force a large software purchase. There are strategies that can be employed before and during the audit to mitigate the risk of such excessive findings. Unfortunately many companies are “penny wise and pound foolish” and don’t seek professional help before or during the audit, but instead wait till the issuance of the final audit report. This is a mistake.

Enterprise software customers really need to be proactive in managing their licenses well before the audit notice arrives. And do not let software companies use the audit as a tool to force your company to give up older and perhaps more favorable licenses. In our experience, enterprise software companies sometimes use audits to try to push their customers to migrate from older, more favorable licenses to ones that are better for the licensor. Companies buy perpetual licenses for a reason and should be skeptical of software vendors using inflated audit findings to force a customer to give up valuable contractual rights.

If a software company tells you that they are going to conduct a friendly audit to right size your IT footprint and to optimize your licenses, this should be an immediate red flag. Enterprise software companies are not out to help you, but only to sell more software. Plaintiff here alleges that IBM tried this very trick with the IRS. The IRS also made the mistake of telling IBM too much about its future plans, including that the IRS planned to move off IBM. According to the Complaint, IBM then used this knowledge against the IRS to force it into a new and more expensive contract.