IBM Owes BMC $1.6B In Court Case Over Customer Installation

A U.S. District Court judge in Texas rules that IBM fraudulently induced mutual customer AT&T to replace BMC software running on its mainframes.

IBM has been ordered by a federal judge to pay $1.6 billion to BMC Software for allegedly inducing a mutual client to replace BMC software with IBM products.

The court decision, handed down Monday, is the result of a lawsuit brought by BMC in 2017 charging IBM with breach of contract, fraudulent inducement, trade secret misappropriation and common law unfair competition.

The judgment by U.S. District Court Judge Gray Miller, first reported by Bloomberg, followed a bench trial March 14 to March 24 in the U.S. District Court in the Southern District of Texas, Houston Division, according to court documents obtained by CRN.

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In a statement provided to CRN, Armonk, N.Y.-based IBM said it would appeal Miller’s decision. “This verdict is entirely unsupported by fact and law, and IBM intends to pursue complete reversal on appeal,” IBM said. “IBM acted in good faith in every respect in this engagement. The decision to remove BMC Software technology from its mainframes rested solely with AT&T, as was recognized by the court and confirmed in testimony from AT&T representatives admitted at trial.”

The CEO for an SP500 company, who did not want to be identified, said the verdict points to the complexities vendors face when acting as both an “IT outsourcer’ for a customer and also as a software or hardware vendor reselling software licenses or IT equipment.

“This really points to a need for vendors to make sure the agreements are clear with both their software and hardware alliance partners and customers when acting as both an IT outsourcer and a software or hardware vendor,” said the CEO. “There can’t be any shades of grey.”

In the lawsuit, Houston-based BMC charged that the mutual customer, AT&T, removed 14 BMC software products from its mainframe computers and replaced them with IBM mainframe software products under what was known as “Project Swallowtail,” according to Miller’s 106-page Findings of Fact and Conclusions of Law in the case.

Five additional BMC products were replaced with third-party products and one BMC product was retired, according to the documents.

A Complex Relationship

BMC and AT&T had a master purchase agreement going back to 2007 and IBM was the IT outsourcer for AT&T’s mainframe environment for many years, according to the court documents. BMC and IBM also entered into a master licensing agreement in 2008 and subsequently added “outsourcing attachments” agreements to the MLA.

IBM and AT&T inked a contract to perform Project Swallowtail in June 2015 and BMC’s lawsuit stemmed from that initiative. (AT&T was not a party to the suit.)

IBM maintained that AT&T made the decision on its own to switch out the BMC software and replace it with IBM products and software from other vendors.

But in his three-page final judgment Miller said he found BMC’s claim against IBM for fraudulent inducement to be “meritorious” and said BMC was entitled to recover $717,739,615 in contractural damages, and an equal amount in punitive damages, and $168,226,367.29 in interest – a total of $1,603,705,597.29.

Miller, however, dismissed a number of BMC’s other claims including breach of the MLA and the outsourcing attachments, unfair competition through misappropriation, and lost profits claims.

IBM Both An IT Outsourcer And Software Vendor

In the Findings of Fact and Conclusions of Law, Miller wrote that IBM and BMC are “direct competitors in the software development space, but partners when a mutual customer hires IBM as an outsourcer to operate mainframes running BMC software. BMC and IBM have a ‘complex, multifaceted relationship.’”

As “AT&T’s IT outsourcer,” IBM managed and operated AT&T’s mainframe operations – “all the application jobs,” database support requirements, “hardware refreshes,” and other “basic IT stuff”—and the software products on the AT&T mainframe computers, including the BMC products AT&T previously used, Miller wrote.

Miller recognized the “unique nature” of IBM as an IT outsourcer that also sells competing products. “The close access that IBM personnel had to AT&T’s mainframe environment and experience with how BMC products operate in that environment gave IBM exclusive insights into how the software products AT&T used, including BMC products, worked under the operational demands of AT&T’s computing environment,” Miller concluded.

Miller, in his ruling, said that BMC “provided sufficient evidence, under the applicable legal standards, of both the existence (or “fact”) and the amount of damages in the form of its lost licensing fees and associated support services totaling approximately $717 million for IBM’s breach of OA section 5.4 and $717 million for IBM’s fraud.”

As for the punitive damages of $717 million, Judge Miller wrote that the court “considered all evidence relating to the nature of the wrong, the character of the conduct involved, the degree of culpability of IBM, the situation and sensibilities of the parties concerned, the extent to which such conduct offends a public sense of justice and propriety, and IBM’s capacity to pay.”

“The evidence of IBM’s deliberate plan to defraud BMC out of hundreds of millions of dollars to enrich itself justifies an award of exemplary damages that would be meaningful for a company of IBM’s size and based on IBM’s behavior,” Miller wrote.

At the close of trading Monday, IBM shares were down 0.41 percent for the day to $138.70.