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VMware sues new Nutanix CEO Ramaswami for breach of contract

VMware said Nutanix CEO Ramaswami broke his contractual obligations when he interviewed for top job at its HCI rival while still working as VMware's chief operating officer.

The rivalry between VMware and Nutanix spilled into court this week when VMware filed a lawsuit against Rajiv Ramaswami, weeks after he left VMware to become Nutanix CEO.

VMware on Monday night said it filed suit in Superior Court of the State of California, County of Santa Clara against Ramaswami. VMware did not name Nutanix as a defendant but charged Ramaswami with "material and ongoing breaches of his legal and contractual duties and obligations to VMware."

Nutanix hired Ramaswami as CEO Dec. 9, after a three-month search for a replacement for retiring Nutanix founder Dheeraj Pandey. Pandey helped build the hyper-converged infrastructure (HCI) pioneer into a $1 billion-plus revenue company since its 2009 founding, and Nutanix and VMware have combined for most of the HCI software market. Ramaswami had been VMware COO of products and cloud services since 2016.

Rajiv RamaswamiRajiv Ramaswami

VMware released a statement charging that "Rajiv Ramaswami failed to honor his fiduciary and contractual obligations to VMware. For at least two months before resigning from the company, at the same time he was working with senior leadership to shape VMware's key strategic vision and direction, Mr. Ramaswami also was secretly meeting with at least the CEO, CFO, and apparently the entire board of directors of Nutanix, Inc. to become Nutanix's Chief Executive Officer. He joined Nutanix as its CEO only two days after leaving VMware."

VMware added that Ramaswami showed poor judgment and his negotiations with Nutanix represented a conflict of interest that he should have disclosed to VMware.

"VMware expects all employees to honor their commitments to the company, and executive officers should be held to an even higher standard," VMware added in its statement. "VMware spends billions of dollars on its roadmap and R&D to bring market innovations to our customers and is committed to protecting our brand, the technological innovations behind our brand, and the value we bring to our customers."

VMware added that it filed suit after failing to "resolve this matter without litigation" by reaching out to Ramaswami and Nutanix.

VMware did not disclose the goal of its lawsuit, but a person familiar with the matter said it is seeking monetary damages. He added that VMware made requests in communications with Ramaswami and Nutanix after the hiring was disclosed, but Nutanix claimed those requests fell outside of California law. Nutanix contends that VMware requested Ramaswami limit his role at CEO and agree to not hire any employees from VMware.

"Nutanix and Ramaswami assured VMware that Mr. Ramaswami agreed with his obligation not to take or misuse confidential information, and VMware does not contend otherwise," Nutanix said in a statement released Tuesday. "However, VMware requested that Mr. Ramaswami agree to limit the ordinary performance of his job duties in a manner that would equate to an illegal non-compete covenant, and it requested that Nutanix agree not to hire candidates from VMware in a manner that Nutanix believes would be contrary to the federal antitrust laws."

Nutanix also accused VMware of trying to deny Ramaswami an opportunity to become a CEO.

"VMware's lawsuit seeks to make interviewing for a new job wrongful. We view VMware's misguided action as a response to losing a deeply valued and respected member of its leadership team," it added said in the statement. "Mr. Ramaswami is proud of his tenure at VMware and counts many VMware team members as friends. It is disappointing to see VMware's management sue him just because he chose to pursue an opportunity to become a public company CEO. We believe that VMware's action is nothing more than an unfounded attempt to hurt a competitor and we intend to vigorously defend this matter in court."

California law is generally favorable to job-changers, and does not usually recognize non-compete agreements. The source familiar with the filing said Ramaswami would be prohibited from actions such as sabotaging VMware, recruiting co-workers while still employed there, stealing trade secrets or conducting business with customers on behalf of Nutanix while still working for VMware. But he said an employee is not required to disclose he is seeking a job with another company.

VMware-Nutanix battle over HCI market

The relationship between VMware and Nutanix has evolved from a close partnership to a fierce rivalry. VMware and its current parent company, Dell Technologies, helped Nutanix create the HCI market. Before VMware developed its own vSAN HCI software, its sales and support teams often recommended its customers buy Nutanix HCI systems as a way to manage storage in heavily virtualized data centers. Nutanix sales also received a jolt after it struck an OEM deal with Dell in 2014, a move that significantly expanded the startup's market presence.

Three developments changed the VMware-Nutanix relationship. First, VMware launched vSAN in 2014, putting it in direct competition with Nutanix. The same year, Nutanix released its AHV hypervisor that competes with VMware's ESX. Nutanix makes AHV available for free with its software stack, and allows organizations to migrate from ESX if they want to switch hypervisors.

Then Dell acquired storage giant EMC -- the majority owner of VMware -- in 2016. While Dell has continued its OEM deal with Nutanix, its sales of Nutanix software on Dell servers have dropped. The Dell EMC VxRail HCI system driven by vSAN is Nutanix's main competitor, and Dell pushes that product to its customers over its Nutanix systems.

Nutanix also changed its sales strategy, which is now closer to VMware's. While it continues to sell its own branded HCI systems, Nutanix has made its software available to run on all x86 servers and has built partnerships with HPE and Lenovo, and courted Cisco resellers.

The CEOs of VMware and Nutanix have taken shots at the rivals in public. During his 2019 VMworld keynote, VMware CEO Pat Gelsinger said his company was pulling away from Nutanix, without completely mentioning Nutanix by name.

"We're crushing Nu ... I mean we're winning in the marketplace," Gelsinger said. "We're separating from No. 2. We're winning in the space." 

Pandey countered on a Nutanix earnings call a few days later that VMware "sells a lot of vaporware."

Pandey also said he wanted Nutanix to replace VMWare as the "Switzerland of computing" by running across all major hardware platforms.

Who's No. 1?

Research firm IDC's latest HCI revenue tracker showed VMware leading with $821 million (40.2% share) in HCI software revenue for the third quarter of 2020. IDC listed Nutanix second with $513 million (25.1%).

However, even IDC's research has been caught up in the VMware-Nutanix rivalry. Pandey criticized IDC's numbers for years, calling them "funky accounting" and claiming they did not give Nutanix full credit for its software revenue.

Following IDC's latest HCI release this month, Nutanix COO David Sangster posted a blog on LinkedIn that showed IDC crediting Nutanix with 28.4% of the HCI software market compared to VMware's 14.5%. Those figures, which were not in IDC's release, included sales of storage services not covered in the base HCI revenue.

Next Steps

Nutanix software transition tops new CEO's to-do list

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