IBM United Kingdom Limited v LzLabs GmbH & Ors

A software licence must be construed according to its wording, context and commercial purpose, but subject to mandatory statutory rights under the Software Directive and the Copyright, Designs and Patents Act 1988. A licence covering computer programs may extend to their constituent components, code fragments and generated data. Observation, study and testing protect investigation of functionality, ideas and principles; they do not permit detailed disassembly, decompilation or analysis of the expression and internal implementation of software. Interoperability exceptions apply only where reproduction or translation is indispensable and their statutory conditions are met. A party procuring systematic contractual breaches may be liable for inducing breach and unlawful means conspiracy. Contractual limitation clauses require clear wording and do not ordinarily protect deliberate concealment.

IBM licensed mainframe software to Winsopia under an IBM Customer Agreement. Winsopia was later acquired by LzLabs, which used Winsopia’s IBM mainframe and licensed software during development of the Software Defined Mainframe, intended to run IBM mainframe applications on alternative hardware.

IBM alleged contractual breaches involving reverse engineering, disassembly, decompilation, compiler listings, debugging tools, copying and transfer of IBM software, and use outside the permitted enterprise and machine. It also alleged procurement of breach and unlawful means conspiracy. The defendants relied on the Software Directive, the Copyright, Designs and Patents Act 1988, contractual construction, limitation and clean-room procedures. The central questions concerned the scope of the ICA, the statutory exceptions, liability of the corporate and individual defendants, the audit request, termination and limitation.

1. Construction of the ICA. The licence was limited to Winsopia’s business, the United Kingdom and the Designated Machine. “ICA Program” included the whole licensed program and its constituent parts, including components, CSECTs, macros, copybooks, routines, sub-routines, generated code and data. Customer applications did not themselves become ICA Programs merely because they were processed, but IBM components inserted or generated during compilation, link-editing or execution remained subject to the ICA. The ICA prohibited reverse engineering and transfer outside Winsopia’s Enterprise, subject to applicable law.
2. Statutory exceptions. The ICA had to be construed subject to Articles 5(1), 5(3) and 6 of the Software Directive and the corresponding provisions of the Copyright, Designs and Patents Act 1988. Observation, study and testing permitted investigation of functionality, ideas and principles through authorised loading, displaying, running, transmission or storage. It did not extend to detailed analysis of instructions, parameters, data structures, control flow or internal implementation. Article 6 required reproduction or translation to be indispensable to obtain interoperability information, and did not permit use to create a program substantially similar in expression. Error correction under Article 5(1) remained subject to specific contractual provisions.
3. Technical breaches. Winsopia breached the ICA in relation to the principal pleaded items involving disassembly, decompilation, translation, systematic compiler-listing analysis, debugging tools, macros, copybooks and transfer of unscrubbed IBM materials. The statutory exceptions did not provide a defence. Some allegations were not established, including certain unproven transfers and the Justin Bendich allegation.
4. Procurement and conspiracy. LzLabs and Mr Moores procured Winsopia’s breaches. LzLabs UK was not shown to have caused them. Mr Cresswell and Mr Rockmann caused breaches as Winsopia directors but acted bona fide within the scope of their duties and therefore relied on Said v Butt. LzLabs, Winsopia and Mr Moores were liable for unlawful means conspiracy. The claims against LzLabs UK, Mr Cresswell and Mr Rockmann failed.
5. Audit and termination. IBM’s audit request was valid and reasonable. Winsopia’s refusal to provide the requested information breached the ICA. IBM validly terminated the ICA and associated agreements under clauses 1.12.2 and 4.5.3, alternatively at common law for repudiatory breach.
6. Limitation. The two-year contractual time bar applied between IBM and Winsopia but not to the other defendants. It did not protect wrongdoing deliberately concealed until discovery or reasonable discoverability. The defendants deliberately concealed the connection between Winsopia and LzLabs and the breaches. IBM’s claims were not time-barred.