IBM 2013 Annual Report Download - page 120

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
119
NOTE M.
CONTINGENCIES AND COMMITMENTS
Contingencies
As a company with a substantial employee population and with clients
in more than 175 countries, IBM is involved, either as plaintiff or defen-
dant, in a variety of ongoing claims, demands, suits, investigations, tax
matters and proceedings that arise from time to time in the ordinary
course of its business. The company is a leader in the information
technology industry and, as such, has been and will continue to be
subject to claims challenging its IP rights and associated products
and offerings, including claims of copyright and patent infringement
and violations of trade secrets and other IP rights. In addition, the
company enforces its own IP against infringement, through license
negotiations, lawsuits or otherwise. Also, as is typical for companies
of IBM’s scope and scale, the company is party to actions and pro-
ceedings in various jurisdictions involving a wide range of labor and
employment issues (including matters related to contested employ-
ment decisions, country-specific labor and employment laws, and
the company’s pension, retirement and other benefit plans), as well
as actions with respect to contracts, product liability, securities, foreign
operations, competition law and environmental matters. These
actions may be commenced by a number of different parties, includ-
ing competitors, clients, current or former employees, government
and regulatory agencies, stockholders and representatives of the
locations in which the company does business. Some of the actions
to which the company is party may involve particularly complex tech-
nical issues, and some actions may raise novel questions under the
laws of the various jurisdictions in which these matters arise.
The company records a provision with respect to a claim, suit,
investigation or proceeding when it is probable that a liability has
been incurred and the amount of the loss can be reasonably esti-
mated. Any recorded liabilities, including any changes to such
liabilities for the years ended December 31, 2013, 2012 and 2011
were not material to the Consolidated Financial Statements.
In accordance with the relevant accounting guidance, the com-
pany provides disclosures of matters for which the likelihood of
material loss is at least reasonably possible. In addition, the com-
pany also discloses matters based on its consideration of other
matters and qualitative factors, including the experience of other
companies in the industry, and investor, customer and employee
relations considerations.
With respect to certain of the claims, suits, investigations and pro-
ceedings discussed herein, the company believes at this time that the
likelihood of any material loss is remote, given, for example, the pro-
cedural status, court rulings, and/or the strength of the company’s
defenses in those matters. With respect to the remaining claims, suits,
investigations and proceedings discussed in this note, the company
is unable to provide estimates of reasonably possible losses or range
of losses, including losses in excess of amounts accrued, if any, for
the following reasons. Claims, suits, investigations and proceedings
are inherently uncertain, and it is not possible to predict the ultimate
outcome of these matters. It is the company’s experience that
damage amounts claimed in litigation against it are unreliable and
unrelated to possible outcomes, and as such are not meaningful indi-
cators of the company’s potential liability. Further, the company is
unable to provide such an estimate due to a number of other factors
with respect to these claims, suits, investigations and proceedings,
including considerations of the procedural status of the matter in
question, the presence of complex or novel legal theories, and/or the
ongoing discovery and development of information important to the
matters. The company reviews claims, suits, investigations and pro-
ceedings 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 discussions, discovery, proce-
dural 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 variables,
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, inter -
ference 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 estoppel and copyright infringement. Motions for sum-
mary 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 June
2013, the Federal Court in Utah granted SCO’s motion to reopen the
SCO v. IBM case. On July 10, 2013, the Court entered an order dis-
missing seven of SCO’s ten claims, specifically its breach of contract
and copyright claims, and one tortious interference claim.
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 modernization of social