Analysts: IBM-LzLabs suit a cautionary tale for IT buyers

The U.K.'s High Court ruled Monday that a subsidiary of LzLabs GmbH reverse-engineered IBM software to create its mainframe modernization product. This ruling poses an existential threat to the vendor's future business and risk to enterprise IT organizations that use it, according to tech experts.

The LzLabs product at the heart of the dispute, Software Defined Mainframe (SDM), was launched in 2016. LzLabs claimed SDM could bring mainframe-based apps to a Linux-based platform without recompiling them, and found enterprise buyers including Swisscom, which used SDM to replace its IBM mainframe hardware in 2019. Other companies named on LzLabs' website include Canadian telecom Rogers Communications; German vehicle manufacturer MAN Truck & Bus SE; and Italian banking group BPER Banca S.p.A.

The U.K. lawsuit, filed in September 2021, alleged that LzLabs subsidiary Winsopia purchased licensed IBM mainframe software in 2013 for the purposes of reverse-engineering that software on behalf of LzLabs. This week, the court found that Winsopia breached its contract with IBM by reverse-engineering the software in multiple ways and that LzLabs and its founder, John Moores, unlawfully procured the information gained by Winsopia and are liable for those breaches of contract. A separate hearing is scheduled to determine damages and any injunction against Winsopia and LzLabs' businesses.

Another pending lawsuit against LzLabs and a U.S. subsidiary that IBM filed in Texas in 2022 alleges LzLabs used the information Winsopia obtained to infringe IBM patents with SDM, according to the Texas complaint. That lawsuit seeks an injunction on LzLabs and its subsidiaries from "further misappropriating or using IBM's trade secrets," according to the complaint, as well as damages based on lost profits for IBM.

The U.K. ruling does not bode well for LzLabs or its customers, and serves as a warning to others to do their homework when it comes to IBM-adjacent products, said Stephen Elliot, an analyst at IDC.

Pick a vendor that ultimately goes broke because they infringed IBM IP and you are in a bunch of trouble. Up a creek without a paddle kind of trouble ... left without a core transactional system.

"For IT leadership teams, doing business the right way remains very important, and part of the IBM culture," Elliot said. "[IBM] will protect their turf through product innovation, sales and intellectual property legal action if needed."

Another tech analyst, Steven Dickens, CEO at HyperFrame Research, spelled that out a bit further.

"I expect to see LzLabs implode [because of the U.K.] ruling," Dickens said. "LzLabs has made some very grand claims over the years, and some big clients have bitten -- now they are stranded."

In other words, "Pick a vendor that ultimately goes broke because they infringed IBM IP, and you are in a bunch of trouble. 'Up a creek without a paddle' kind of trouble ... left without a core transactional system." 

LzLabs did not immediately respond to a request by Informa TechTarget for comment.

Mainframe modernization moves on

LzLabs also serves as a warning to aspiring tech founders about following a similar route, Dickens added.

"While LzLabs has been contesting this case, their competition has caught up and accelerated past them," Dickens said, citing newer mainframe modernization players such as Astadia Inc. AveriSource LLC, Bloop AI and Mechanical Orchard use AI to modernize mainframe code. AWS also recently introduced mainframe modernization features with its Amazon Q Developer AI assistant.

Steven Dickens

"The mainframe space is more vibrant than I have seen it in decades," Dickens said. "We have a new AI-fueled mainframe coming [from IBM], M&A activity with Rocket Software dropping $2.3 billion to buy [application modernization] assets from OpenText, and vendors such as BMC and Broadcom infusing their products with AI. The mainframe space is evolving to remain cutting edge, and certain workloads are also moving to the cloud through AI-driven modernization."

In a further testament to IBM's aggressive defense of its mainframe IP, shortly after its May 2024 OpenText deal, Rocket also settled a lawsuit by IBM against Micro Focus alleging copyright infringement on its Customer Information Control System mainframe transaction processing system. OpenText was formerly part of Micro Focus, and took over the products that were the subject of IBM's lawsuit, according to an IBM statement.

"In the interest of the long-standing partnership between the two companies, Rocket Software has agreed to modify the relevant products," the statement said.

Beth Pariseau, senior news writer for Informa TechTarget, is an award-winning veteran of IT journalism covering DevOps. Have a tip? Email her or reach out @PariseauTT.