What Sparked the Dispute?
Broadcom never seems to be far away from technology headlines these days, whether it be a botched portal upgrade, a change to licensing terms or yet another legal battle the company has either initiated or, more commonly, been dragged into by an unhappy customer. With regards to the latter, news broke at the beginning of September that Tesco, one of the biggest retailers, is suing Broadcom.
This case stands out for a couple of reasons. Firstly, it marks the first time Broadcom has faced legal action under English and Welsh law, with Tesco filing its claim in the High Court. Secondly, Tesco has also named its reseller, Computacenter, as a co-defendant. In this blog, our VMware specialist, having read the legal filing, breaks down the exact nature of the suit and what might happen next.
The Story So Far: Inside the VMware Agreement
In January 2021, Tesco agreed a five-year enterprise license agreement (ELA) with VMware, worth £24 million, with Computacenter acting as the channel partner. The agreement included perpetual licenses for the VMware Cloud Foundation suite, which included a whole host of the vendor’s products for managing a virtual platform in a software-defined datacentre (SDDC) instance, along with subscriptions to a couple of Tanzu products to run through the full term of the agreement.
The ELA is due to expire in a little over 3 months, and as has been the case with most customers, Broadcom wants Tesco to replace its licenses with subscriptions under its new contractual arrangements.
Tesco has cited an agreement from 2021 (not the ELA but more about this later) to continue support at pre-agreed prices for an additional four years, which Broadcom has, perhaps predictably, refused to honour. What makes the case even more interesting is that Tesco has also cited the UK Competition Act, claiming that Broadcom has breached it in two ways. Before we investigate the particulars of the claim further, let’s look briefly at what that means.
Understanding the Legal Basis: The Competition Act 1998 in Play
The Competition Act is the major source of competition law in the UK, providing a framework for identifying and addressing restrictive trading practices. Within it are two sets of prohibited behaviours (entitled Chapter I Prohibitions and Chapter II Prohibitions), both of which Tesco has cited in its claim. We’ll look at the latter one first, as it is more relevant:
- Chapter II under the act covers the abuse of a dominant position by a company which uses restrictive practices like refusal to supply goods and services and excessive pricing, among other things. Part of Tesco’s claim is that Broadcom has breached Chapter II by imposing unfair trading conditions, refusing to supply, bundling and excessively pricing software and support services.
- Chapter I deals with practices to distort, restrict or prevent competition, mainly through the use of horizontal agreements between companies in the supply chain colluding together. An example of such collusion could be wholesalers and retailers but in the software industry, that could potentially translate into software vendors, distributors and resellers. Tesco contends that, to the best of its knowledge, Broadcom and / or VMware has entered into an anticompetitive agreement with Computacenter to fix the resale prices and terms of supply.
A point to note is that the Competition and Markets Authority (CMA) is responsible for investigating and prosecuting breaches of the Act by companies operating in the UK. If the High Court establishes merit in Tesco’s claims, Broadcom may find itself in a spot of bother. Its also worth noting that the CMA had already checked and cleared Broadcom’s acquisition of VMware in 2023, though that investigation mainly focused on the dominance of a hardware manufacturer owning the world’s most popular virtualisation platform.
Inside Tesco’s Case: The Main Allegations
Leaving aside the breaches of competition law, Tesco is also claiming that Broadcom has committed an “anticipatory breach” of contract with the supermarket giant and / or Computacenter by refusing to supply software support and services and by inducing Computacenter to breach its own contract with Tesco.
This is a concept in contract law whereby a contracting party, through its words or actions, reveals a future intent to not perform its obligations or be bound by the provisions of an agreement.
The CC Agreement and Renewal Terms
According to Tesco, it entered a contract with Computacenter, referred to in its claim as the “CC Agreement”, allowing the supermarket to make staggered payments for the ELA products and services over the life of the agreement. Included within that CC agreement were the “Renewal Provisions”, as cited by Tesco, which allowed for 4 years additional support and maintenance for its perpetual licenses at pre-agreed pricing.
The renewal provisions were, it seems, agreed by VMware – Tesco has quoted emails from representatives of VMware referring to the renewal pricing and cited the ELA proposal from VMware which stated it “protects Tesco’s cost for support and maintenance for perpetual licenses in years 6, 7, 8 & 9”.
The Braganza Duty Duty Argument
It appears that when Tesco attempted to invoke this agreement in 2024, VMware informed the company that its legacy Support and Subscription (SnS) services for perpetual licenses were no longer available, citing clause 2.2 from the SnS terms and conditions: “End of Availability. VMware may, at its discretion, decide to retire any Software and / or Services offering from time to time”.
Now this is where it gets even more interesting. There is another concept in English contract law known as the “Braganza duty”. This is effectively a requirement, set by legal precedent, for parties to exercise contractual discretion rationally, reasonably and in good faith, rather than arbitrarily. Tesco’s argument is that Broadcom has breached this duty by simply refusing to sell support any longer for existing perpetual licenses with no reasonable explanation for doing so.
Pricing and Support Concerns
Another point worth exploring is Tesco’s claim that support and maintenance services for the products it uses are not actually end of availability; it’s just that Broadcom will only offer them now if a customer purchases a subscription, including a license to use a product, which Tesco has already done when it bought its perpetual licenses.
Lastly, many will recall the original announcement from Broadcom on its “portfolio simplification” stating that the vendor “would work with customers to help them “trade in” their perpetual products in exchange for the new subscription products, “with upgrade pricing incentives”. To the best of our knowledge, no customer has received any pricing incentives so far, nor the opportunity to trade in perpetual licenses, and Tesco’s own renewal offer came in at an eye-watering 237% increase over its previous payments.
What Could Happen Next?
This case has the potential to rumble on and have some far-reaching consequences for Broadcom’s business model in the UK. The case could result in substantial damages (Tesco are claiming £100 million) against the vendor, but more importantly, it may also push Broadcom to review the way it transacts renewals to offer some real business value to its customer base.
It has been well established that Broadcom is only really interested in enterprise customers, so you’d expect it to want to maintain a strong relationship with Tesco. We believe that the case will most likely result in an out of court compromise settlement between the two companies, which enables both to walk away with a semblance of dignity.
On the face of it, however, Tesco appears to have a strong case, although we haven’t yet seen any legal response from Broadcom – at the time of writing, the vendor is yet to file a defence with the High Court. It would certainly be interesting to see Tesco pursue this all the way through the courts, as apart from anything else, the precedent would probably end up helping far smaller enterprises who don’t perhaps have the financial resources available to Tesco to make a case like this.
How bedigital Can Support You
If you want to understand your current VMware license position, need support with your renewal or are being audited by Broadcom, bedigital’s experts can help you before issues escalate.
Get in touch with our team to see how we can help you navigate the challenges of VMware by Broadcom licensing and stay compliant, without the courtroom drama.
