IBM 2012 Annual Report Download - page 112

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
111
the matter in question, the presence of complex or novel legal theo-
ries, and/or the ongoing discovery and development of information
important to the matters. The company reviews claims, suits, inves-
tigations and proceedings at least quarterly, and decisions are made
with respect to recording or adjusting provisions and disclosing
reasonably possible losses or range of losses (individually or in the
aggregate), to reflect the impact and status of settlement discus-
sions, discovery, procedural and substantive rulings, reviews by
counsel and other information pertinent to a particular matter.
Whether any losses, damages or remedies finally determined in
any claim, suit, investigation or proceeding could reasonably have a
material effect on the company’s business, financial condition,
results of operations or cash flows will depend on a number of vari-
ables, including: the timing and amount of such losses or damages;
the structure and type of any such remedies; the significance of
the impact any such losses, damages or remedies may have in the
Consolidated Financial Statements; and the unique facts and cir-
cumstances of the particular matter that may give rise to additional
factors. While the company will continue to defend itself vigorously,
it is possible that the company’s business, financial condition, results
of operations or cash flows could be affected in any particular period
by the resolution of one or more of these matters.
The following is a summary of the more significant legal matters
involving the company.
The company is a defendant in an action filed on March 6, 2003
in state court in Salt Lake City, Utah by the SCO Group (SCO v. IBM).
The company removed the case to Federal Court in Utah. Plaintiff
is an alleged successor in interest to some of AT&T’s UNIX IP rights,
and alleges copyright infringement, unfair competition, interference
with contract and breach of contract with regard to the company’s
distribution of AIX and Dynix and contribution of code to Linux. The
company has asserted counterclaims, including breach of contract,
violation of the Lanham Act, unfair competition, intentional torts,
unfair and deceptive trade practices, breach of the General Public
License that governs open source distributions, promissory estop-
pel and copyright infringement. Motions for summary judgment were
heard in March 2007, and the court has not yet issued its decision.
On September 14, 2007, plaintiff filed for bankruptcy protection, and
all proceedings in this case were stayed. On August 25, 2009, the
U.S. Bankruptcy Court for the District of Delaware approved the
appointment of a Trustee of SCO. The court in another suit, the SCO
Group, Inc. v. Novell, Inc., held a trial in March 2010. The jury found
that Novell is the owner of UNIX and UnixWare copyrights; the judge
subsequently ruled that SCO is obligated to recognize Novell’s
waiver of SCO’s claims against IBM and Sequent for breach of UNIX
license agreements. On August 30, 2011, the Tenth Circuit Court of
Appeals affirmed the district court’s ruling and denied SCO’s appeal
of this matter. In November 2011, SCO filed a motion in Federal Court
in Utah seeking to reopen the SCO v. IBM case.
On May 13, 2010, IBM and the State of Indiana (acting on behalf
of the Indiana Family and Social Services Administration) sued one
another in a dispute over a 2006 contract regarding the moderniza-
tion of social service program processing in Indiana. The State
terminated the contract, claiming that IBM was in breach, and the
State is seeking damages. IBM believes the State’s claims against
it are without merit and is seeking payment of termination amounts
specified in the contract. Trial began in late February 2012 in Marion
County, Indiana Superior Court and concluded in early April. On July
18, 2012, the court rejected the State’s claims in their entirety and
awarded IBM $52 million plus interest and costs. In August 2012, the
State of Indiana filed a notice of appeal. IBM also intends to appeal
certain portions of the court’s ruling.
The company was named as a co-defendant in numerous pur-
ported class actions filed on and after March 18, 2011 in federal and
state courts in California in connection with an information technol-
ogy outsourcing agreement between Health Net, Inc. and IBM. The
matters were consolidated in the United States District Court for the
Eastern District of California, and plaintiffs filed a consolidated com-
plaint on July 15, 2011. The consolidated complaint alleges that the
company violated the California Confidentiality of Medical Informa-
tion Act in connection with hard drives that are unaccounted for at
one of Health Net’s data centers in California; plaintiffs have been
notified by Health Net that certain of their personal information is
believed to be contained on those hard drives. Plaintiffs seek dam-
ages, as well as injunctive and declaratory relief. IBM has also
received a request for information regarding this matter from the
California Attorney General. On January 12, 2012, the court granted
IBM’s motion to dismiss the complaint for lack of standing, and on
February 22, 2012, the case against IBM was dismissed.
IBM United Kingdom Limited (IBM UK) initiated legal proceedings
in May 2010 before the High Court in London against the IBM UK
Pensions Trust (the UK Trust) and two representative beneficiaries
of the UK Trust membership. IBM UK is seeking a declaration that
it acted lawfully both in notifying the Trustee of the UK Trust that it
was closing its UK defined benefit plans to future accruals for most
participants and in implementing the company’s new retirement
policy. The trial in the High Court began in February 2013. In addi-
tion, IBM UK is a defendant in approximately 290 individual actions
brought since early 2010 by participants of the defined benefits
plans who left IBM UK. These actions, which allege constructive
dismissal and age discrimination, are pending before the Employ-
ment Tribunal in Southampton UK and are currently stayed pending
resolution of the above-referenced High Court proceedings.