A long-running legal case concerning the alleged $265m mis-selling of software licences by IBM to the US tax office has a new lease of life following a ruling by the US Court of Appeal earlier this week [PDF].
In 2013, senior IBM sales rep Paul Cimino – who sold IBM's Rational brand of software to the Internal Revenue Service (IRS) – filed a complaint under seal against Big Blue through the federal whistleblower False Claims Act alleging IBM Corp had fabricated audit results to mislead the IRS into signing a $265m software deal.
After a lengthy inquiry, investigators declined to intervene and the case was finally dismissed by US District Court Judge Amit Mehta in the US Court for the District of Columbia [PDF] in late 2019.
The ruling at the time noted that: "Over the course of four years, the United States sought, and the court granted, multiple extensions of time to investigate and to decide whether to intervene."
At the core of Cimino's original amended complaint were allegations firstly that: "IBM, with the assistance of ... Deloitte LLP, fabricated audit findings concerning the IRS's software usage, and then presented these false findings to the IRS in order to coerce the agency into renewing a software enterprise license in the amount of $265 million."
The second core claim was that the IRS had "renewed the software license under the threat of a $91 million penalty, which was [allegedly] supported by the false audit findings."
Judge Mehta said in a 19-page memorandum opinion in September 2019 dismissing the complaint that Cimino had failed to "plausibly allege facts" establishing the necessary "causal connection" between IBM's fraud and the IRS' payment of claims. At the time, the judge wrote:
The IRS knew, not long after entering the contract, about [Cimino's] accusation that IBM had disguised the $91m in penalties it promised it would forgo as the cost of new licenses. If Relator’s accusation were true, it would mean that more than one third of the contract price was in fact penalties, and that the IRS never received the value of new software licenses.
Yet, the IRS paid the $91 million, and made no effort to recoup it, and it continued to pay IBM for the duration of the contract and beyond. It is not plausible that the IRS would have sat by idly in the face of such an allegation.
In 2020, the US Justice Department called for the case to be reconsidered.
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This week's 26-page ruling from the three-judge panel in the United States Court of Appeals for the District of Columbia Circuit overturns, in part, the lower court's dismissal and allows some of Cimino's claims to proceed.
They stated that Cimino had "adequately pleaded but-for causation because he alleged facts that plausibly demonstrate the IRS would not have entered the agreement but for IBM's fraudulent conduct," and added: "We also conclude that Cimino plausibly pleaded materiality for fraudulent inducement under the FCA."
The judges remanded some of the claims in his suit back to a DC federal court for future proceedings.
The Register has asked IBM for comment. ®