U.S. District Judge Gray Miller has a lot to ponder.
After an eight-day bench trial in Houston’s federal courthouse featuring hundreds of exhibits, complicated issues and an army of “persuasive” lawyers, Judge Miller is weighing whether to side with KKR-owned BMC Software and potentially award the $700-plus million in damages BMC seeks, side with worldwide IT giant IBM and award BMC nothing, or, perhaps, something in between.
At issue is whether IBM committed fraud and misappropriated BMC’s trade secrets when it displaced 19 BMC mainframe software products from the systems of their mutual client, AT&T, between 2015 and 2016 without paying additional licensing fees.
The parties both provide mainframe software to customers, but only IBM offers outsourcing services. This means that in some contexts IBM and BMC are in a customer-vendor dynamic, while in others they are competitors. To add to the complexity, hundreds of customers that use BMC’s software also use IBM as an outsourcer. Until IBM performed an outsourcing project for AT&T in 2015 nicknamed “Project Swallowtail” that replaced a majority of BMC’s mainframe software with IBM’s own, AT&T was BMC and IBM’s largest mutual client.
BMC argued at trial that the contract (and BMC’s position to IBM during heavy negotiations) was always “crystal clear” that IBM could not displace BMC’s software without paying additional licensing fees because the parties reached an outsourcing agreement — the latest version from 2015 — that said so. Because IBM did the opposite of what was laid out in the agreement, BMC argues, the Houston-based mainframe software provider is entitled to big damages.
During closing arguments Thursday, BMC lead lawyer Sean Gorman gave Judge Miller a menu of damages options to order IBM to pay:
- Option one: $717 million for breaching section 5.4 of the outsourcing agreement (the non-displacement provision), which IBM argues also amounts to fraud;
- Option two: $791 million for breaching section 5.1 of the outsourcing agreement, which governed the parameters of how IBM could access and use BMC’s products during outsourcing projects. BMC argues IBM went beyond the scope of what was allowed (accessing for the sole purpose of supporting AT&T) because IBM accessed BMC’s products to hurt its business;
- Option three: $109 million for misappropriating BMC’s trade secrets for contacting BMC support to obtain proprietary information that assisted IBM with the displacement. $109 million accounts for part of the $791 million damages model, but it could be awarded separately without a finding of breach of section 5.1.
BMC has also asked Judge Miller to consider awarding unspecified punitive damages if he finds IBM committed fraud.
Gorman said BMC is entitled to these damages because evidence revealed IBM has a pattern of engaging in this displacement behavior and settling resulting disputes for “pennies on the dollar.”
He highlighted IBM’s ability to afford paying these damages with the company’s $80 billion in annual revenue combined with the notion that it intended all along to breach their agreement. He said IBM agreed to perform Project Swallowtail at a loss — contrary to what other outsourcers would agree to — because IBM had a “strategic initiative” to “take out” BMC products.
“IBM used rights they didn’t pay for,” said Gorman, a partner at Bracewell. “They just took it. They saw what they wanted and they took it. It’s time to connect consequences to actions.”
Despite a pre-trial finding by Judge Miller that IBM had breached two parts of its outsourcing agreement with BMC, IBM’s lead lawyer, Paul Yetter, said during closing arguments his client is not liable because AT&T would have eliminated BMC’s products regardless, IBM never misrepresented its interpretation of the contract, BMC failed to perform its end of the deal and IBM was simply carrying out AT&T’s wishes.
“This case is really about options, not obligations … choices, not commands,” said Yetter, founding partner of Yetter Coleman.
One of the principal reasons IBM should not be held liable, Yetter said, is because BMC failed to inform IBM of all of its rights while the parties were negotiating their outsourcing agreement. According to IBM, AT&T had purchased special rights in its own contract with BMC that permitted IBM to do exactly what it had done with BMC’s software during Project Swallowtail at no additional cost, and IBM only found this out after the parties got in a similar spat with another mutual client, the National Bank of Australia, and the bank informed IBM of these rights.
To this point, Yetter said, BMC’s courtroom objectives ignore the realities of the business world.
“The parties believed they could lose any mainframe business, including AT&T’s,” Yetter said. “Instead, what BMC has done is ignored the question. They simply wont’ look at the real world scenarios.”
After closings concluded, Judge Miller declined to say when he would rule. He said he’d reach a ruling “as expeditiously” as he can. At the very least, he promised, half-jokingly, he will reach a ruling before he retires.
“Having good lawyers on both sides is always a pleasure,” Judge Miller said. “The downside is … you have all been persuasive.”