IBM vs. Apple: Why is Big Blue so upset over Mark Papermaster's departure?

Jordan Golson — Tue, 25 Nov 2008 01:49:12 -0500

IBM has filed a lawsuit in Federal court against Mark Papermaster, a former vice president at Big Blue who quit the company in mid-October after he was offered "the opportunity of a lifetime," to head up Apple's iPhone and iPod hardware development teams. The lawsuit alleges Papermaster is forbidden from working for Apple because he signed a non-compete agreement in 2006 (pdf), after receiving a promotion at IBM which resulted in his being exposed to sensitive internal information.

IBM alleges that Papermaster is violating a number of provisions of his noncompete, including those preventing him from working for "any significant competitor or major competitor" of IBM, or doing any work related to what he did at IBM during the two years prior to his departing the company.

Papermaster denies the allegations, claiming the noncompete is "overly broad" and that "Apple and IBM are not significant or major competitors." Papermaster said in a court filing, that "IBM primarily provides business enterprise services, while Apple's primary business is the design, manufacturing and marketing of consumer electronic products."

Are Apple and IBM competitors? At one time, IBM could have made a compelling argument in the consumer sphere, but Big Blue sold off the last parts of its PC business to Lenovo in 2005. In addition, Apple does have an enterprise footprint -- albeit a relatively small one selling its storage-focused software (Xsan) and hardware (Xserve). Still, IBM's November 21 filing acknowledges that Apple "designs, manufactures, and markets consumer consumer electronic products, among other business activities."

More controversially, Papermaster also claims the noncompete is unenforceable because though the contract says it is "governed by, and construed in accordance with, the laws of the State of New York," Papermaster "has no substantial relationship to New York," having resided in Texas for 17 years and because Apple is based in California. Both those states generally refuse to recognize noncompete agreements.

However, Papermaster may have a tough time getting the court to use CA or TX law. "The forum selection and choice of law clauses will be very difficult to get around," one lawyer told The Standard. "There's a lot of precedent in federal law for enforcing them."

"You can, within reason, pick the law that applies to a contract," he explained. "He, and IBM, picked New York law when he signed that noncompete -- but now he wants Texas law or California law, because those are unfriendly to noncompetes and advantageous to him."

Unfortunately for Papermaster and Apple, he said, "there's federal precedent that all but demands the court enforce the clauses that demand the application of New York law. The court will probably apply New York law, rather than the more favorable California or Texas regulations."

Aside from the legal arguments, why is Mark Papermaster such a big deal?

Sure, he was an important guy at IBM, heading up teams responsible for Big Blue's blade servers and was on an "elite" team of managers called the Integration and Values Team which focused on solving the "thorniest" problems that IBM's customers are having integrating technology into their businesses."

But there may be another reason why IBM is making waves about Papermaster, according to a report by CNET's Tom Krazit.

He quoted John Siegal, a partner with Baker Hostetler in New York in an article about the case. "These cases are prosecuted as a deterrent to others," said Siegal. "In case people are going to be following a high-level executive, [a company] is going to impose limitations to get the rest of the staff to think twice or three times [about leaving]."

Apple is treating Papermaster as special, too.

For the first time since 2002, Apple issued a press release solely to announce the hiring of a senior vice president (the only other hiring announcements in the last five years have related to C-level and board personnel moves). This is despite the fact that Apple went out on a limb hiring Papermaster for a job in which he had little direct experience -- but the company clearly hopes he can hit the ground running.

For the time being though, Papermaster won't be doing much of anything. The judge in the case has ordered him to not perform any work for Apple while the case is litigated.

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IBM vs. Apple: Why is Big Blue so upset over Mark Papermaster's departure?