In another example of a competitor based patent lawsuit involving cloud computing, BMC Software filed a major patent campaign last year against its key competitor Cherwell Software. BMC, founded in 1980, is a leader in enterprise IT management solutions and has asserted seven patents against relative newcomer Cherwell alleging infringement by Cherwell’s cloud and on-premise service management offerings. BMC claims to power 82% of Fortune 500 companies with its IT solutions from mainframe to mobile to cloud. While primarily offering on-premise services for much of its history, BMC has increased its focus on Cloud SaaS solutions over the last few years. Cherwell, since launching its flagship product in 2007 – Cherwell Service Management – has rapidly grown to become a leader in the Information Technology Service Management (ITSM) industry, as evidence by its recognition in the 2017 IDC MarketSpace and inclusion in Deloitte’s 2016 Technology Fast 500 Ranking.
Following months of procedural wrangling (summarized below), BMC’s case against Cherwell is currently pending in the District Court of Colorado. In its 49-page Complaint, BMC highlights its $9 billion in R&D investment to build the market for ITSM solutions that allow companies to easily manage, track and service the ever-increasing number of network servers, computers, printers, software applications, and other IT resources needed across their networked systems. In contrast to BMC’s long history of investment and innovation, BMC alleges that Cherwell “built its business by copying the functionality of BMC’s products without regard to the intellectual property rights of BMC.” (Complaint, ¶ 6).
BMC also emphasizes the size of its patent portfolio of more than 500 granted and pending patents, including this photo of one of its “patent walls” in BMC’s Houston Headquarters that recognize and memorialize employee’s inventive contributions. In an effort to portray Cherwell as a free-rider, BMC points out that Cherwell has only one patented invention, and that Cherwell is able to compete unfairly since it did not bear the financial burden of developing the core technologies of the ITSM market. BMC claims that Cherwell repeatedly highlights its unfair market advantage through marketing materials that describe Cherwell products as a “cost effective alternative” and available “at a considerably lower price.” (Complaint, ¶¶ 12 and 16).
As is so often the case in the High Tech industry in particular, upstart companies often hire away senior talent from incumbent players and/or other emerging competitors. That’s exactly the case here, and BMC hammers that home to support its allegations of willful infringement. Specifically, BMC points to Cherwell’s hiring of Craig Harper (formerly BMC’s VP of North American Sales and Services) as Cherwell’s President and CEO, and other key ex-BMC employees who were “intimately familiar with BMC’s ITSM products and innovations and…knew that BMC protects such ITSM products and innovations through patent protection.” BMC goes on to allege that Cherwell improperly used those former BMC employees in its development of key aspects of Cherwell’s ITSM offerings, and that Cherwell copied key functions and features with full knowledge or willful blindness of BMC’s patents. BMC also asserts that Cherwell recently obtained $50 million in private equity funding from firms that invest in cloud service companies, and that Cherwell “sought funds from its investors not for R&D purposes, but…to accelerate its business to disrupt” BMC. (Complaint, ¶23). Coincidentally, in an Executive Transition press release on January 10, 2018, Cherwell announced that Mr. Harper is leaving the company to pursue other ventures. Harper’s tenure as CEO was relatively short-lived, and while executive transitions are certainly commonplace, it’s not a stretch to speculate that BMC’s patent campaign may have had some impact.
To its credit, BMC describes its patented technology and Cherwell’s alleged infringement in great detail. According to BMC, its core patented technologies ostensibly required for enterprises to build and deploy both on-premise and cloud-based ITSM systems include: (1) Configuration Management Database (CMDB) “Hierarchical Dynamic Inheritance,” (2) CMDB Federation, (3) “Metadata Driven” Discovery Tools, (4) “Extensible” Discovery Tools, (5) “Mid-server” Communications, (6) “Business Service” Monitoring and “Impact Visualization,” and (7) “Mergeable Apps.” BMC’s description of the alleged infringement by Cherwell’s cloud and on-premise offerings spans 30 pages of the Complaint, and is chock-full of diagrams, graphics, and detailed references to press releases, YouTube videos, industry articles, and Cherwell’s website pages.
As to the procedural wrangling, given the ongoing turmoil around patent venue in light of the Supreme Court’s TC Heartland decision, BMC apparently hedged its bets by filing multiple suits against Cherwell, and that was a costly strategy for both sides in terms of the attorney’s fees required to duke out the venue battle. Particularly in competitor cases, the larger party is often willing to spend mightily at the outset of the dispute, hoping to financially drain its smaller competitor. And BMC certainly appeared to follow that strategy.
BMC filed a first patent infringement complaint in the Eastern District of Texas on April 28, 2017, against Cherwell and its strategic business partner FireScope. Inside of a month, BMC filed a second lawsuit against Cherwell and FireScope in the Northern District of Texas (FireScope’s Corporate HQ is in Carrollton, TX) on the same seven patents asserted in the Eastern District. Then, on June 8, 2017, Cherwell filed its own Declaratory Judgment action against BMC in the District Court of Colorado presumably in order to land the dispute on its home turf (Cherwell’s HQ is in Colorado Springs, CO). BMC challenged the propriety of Cherwell’s DJ action given BMC first filed its lawsuits in Texas, and Cherwell conceded and voluntarily dismissed its case on September 13, 2018. Then, recognizing that it would not be able to hold venue on Cherwell in either of its Texas cases, BMC filed a third lawsuit in the Eastern District of Virginia on September 22, 2017, against Cherwell (but not FireScope) on the same seven patents as the Texas cases. Cherwell successfully got out of both of the Texas cases on improper venue, and then challenged venue in Virginia as well. Not surprisingly, given that Cherwell had no business ties to Virginia, Cherwell won its venue challenge again, and BMC’s case was transferred to Cherwell’s home turf – the District of Colorado – on December 21, 2017. Again, while it could have easily filed its case in Colorado in the first place, all told BMC employed a scorched earth venue fight designed to maximize Cherwell’s financial outlay to defend itself.
Even though BMC and Cherwell have been litigating for nine months, the case is still in its early stages, as Cherwell just filed its Answer and Counterclaim on January 19, 2018. The profile of this case suggests that BMC and Cherwell will be squaring off for quite some time. In cases like this where high level employees are lured away to lead a competitive startup that is disrupting the market and purportedly undercutting the business of an established player, the patent plaintiff typically will have every incentive to go the distance rather than settle out and license its core patents to its rival. If the early-stage venue fight is any indication, it certainly appears that BMC will continue to go to great lengths to protect its intellectual property and market position.