In the high-profile, high-dollar fight between IBM and BMC Software, plenty of interested bystanders have lodged opinions in amicus briefs as to whether the $1.6 billion award against IBM should stand on appeal, throwing support behind both parties and revealing a split in the business community.
Just last week, IBM filed a reply brief in the case, which is pending in the U.S. Court of Appeals for the Fifth Circuit. IBM let the court know it was pursuing an appeal in September 2022, not long after U.S. District Judge Gray Miller, who presided over a bench trial, determined IBM committed fraud when it removed BMC’s mainframe software products from their largest mutual client, AT&T, during an outsourcing project several years ago.
IBM fraudulently induced BMC to enter the contract and “exploited BMC’s justifiable reliance for its own gain, cementing its abdication of good faith and fair dealing in the service of its own self-reliance,” Judge Miller wrote.
“IBM’s conduct vis-à-vis BMC offends the sense of justice and propriety that the public expects from American businesses,” Judge Miller held, awarding BMC $717 million in breach damages and the exact same amount in punitive damages. Including interest, IBM is currently on the hook for more than $1.6 billion.
BMC initially filed a cross appeal but in March, before filing its initial brief, decided to drop that fight to “simplify and shorten the proceedings.”
In its appellate brief filed in January, IBM told the court that the damages awarded in this case are among the most in a commercial business dispute in U.S. history and that the judgment is “deeply flawed” and “riddled with errors.”
“While the court acknowledged that BMC could not recover the same compensatory damages twice, it nonetheless awarded BMC the second $717 million as punitive damages, even though the parties’ agreement prohibits punitive damages,” IBM argued. “The ultimate result is an eye-popping $1.6 billion judgment (after prejudgment interest) for the loss of an AT&T account that, by BMC’s own calculations, generated just $5.6 million in profits annually and at most $100 million in perpetuity, and that the district court found BMC would have lost inevitably because the decision to replace BMC software was initiated by AT&T, not IBM.”
Because the contract between IBM and BMC bars punitive damages, IBM told the Fifth Circuit the most it can possibly recover in this case is $5 million.
BMC characterized IBM’s arguments and version of events presented on appeal as “pure fiction” that “bears no resemblance to what unfolded before Judge Gray Miller” during the two-week bench trial that featured more than 1,200 exhibits, 28 hours of depositions and eight live witnesses.
“IBM complains about the damages award by comparing it to the relatively modest profits that BMC or IBM might expect to generate by licensing software to AT&T,” BMC wrote in the April brief. “But as the district court explained, Texas and New York law say that the right measure of damages is what these parties bargained for.”
“IBM agreed to pay BMC license fees for the right to perform displacements. And it agreed to a formula that depended on the product and the client: the more products involved, and the bigger the client’s mainframe environment, the greater the fees,” BMC wrote. “The license fees are supposed to be large when the formula is applied to 14 products and one of the largest mainframe environments. This was a massive displacement, and the damages simply reflect what IBM agreed it would pay BMC for the rights it used. IBM has only its own contract and misconduct to blame.”
In its reply brief filed in May, IBM argued that BMC had not presented any “valid theory why the $1.6 billion award can stand when the parties agreed to limit compensatory damages to $5 million and to foreswear punitive damages altogether.”
“The parties’ entire agreement, including these freely negotiated damages caps, must be enforced,” IBM wrote. “BMC’s effort to defend the tortification of contract law and windfall justice should be squarely rejected.”
Jeff C. Dodd of Hunton Andrews Kurth and Lorin Brennan of Reiter Dye & Brennan, co-editors of the treatises Information Law and The Law of Computer Technology, filed a joint amicus brief in April in support of BMC.
“In short, we believe that the district court correctly applied relevant principles of contract law consistent with the particular agreement between IBM and BMC in assessing the enforceability of the non-displacement provision and in the award of ‘lost license fees’ as general damages for breach of that provision,” they wrote. “While this damage award may seem large, it was based on the negotiated terms and metrics of the parties.”
A contracts law professor at Georgetown University Law Center, Gregory Klass, filed an amicus brief in April saying this case is of particular interest to him because it involves the intersection of contract law and contract-related fraud, which he has studied throughout his career.
Klass supported BMC, writing that in his view Judge Miller was right to allow BMC to “pursue tort remedies, including exemplary damages, against a counterparty who fraudulently induced it to enter the contract, notwithstanding contractual limitations on liability.”
“Limiting liability for promissory fraud to contract-based remedies, which often do not fully compensate the non-breaching party, would reward promissory fraud, erode confidence in the marketplace, discourage good faith reliance on parties’ contract-related representations, and increase the cost and burdens of contractual bargaining,” Klass wrote. “The way to deter promissory fraud ex ante is to permit fraud victims to recover more than standard contract remedies allow ex post.”
An Austin-based software company, Versata Software Inc., also weighed in as an amicus, telling the court it depends on predictability from the courts when it comes to enforcing licensing agreements that, like BMC, are essential to its business model.
Versata has software licensing agreements with both AT&T and IBM. It threw support behind BMC in its brief. IBM, it argued, had made a calculated bet as to whether it was “cheaper to pay for these rights, or just take them” and the answer to that question depends on how courts enforce written contracts and award punitive damages.
“Only the prospect of punitive damages protects enterprise software companies from unscrupulous actors who seek not just to breach their contracts, but to commit outright fraud or engage in other independently wrongful conduct,” Versata told the court. “Here, the district court’s award was large. Rightly so. That is the fair and predictable result of IBM’s broken promises and fraudulent conduct.”
Dow and Energy Transfer teamed up to file a joint amicus brief in January arguing Judge Miller had “refused to enforce the parties’ bargain at every turn” and “misread many contractual provisions.”
The companies took aim in particular at Judge Miller’s award of $717 million in punitive damages “despite an express provision in the parties’ agreement prohibiting punitive damages.
“If the district court’s contrary holding stands, it will create serious problems for businesses, which routinely rely on liability limitations in their contractual dealings,” the companies told the court. “Future litigants will cite the opinion as support for the idea that fraud renders liability limitations unenforceable. That means businesses will lack certainty that such clauses will be enforced, even if they bargained for them. Worse yet, the holding leaves businesses with no reliable way to insulate themselves from punitive damages.”
The former longtime president of Rice University, David Leebron, who recently retired and subsequently served as a visiting professor at both Harvard Law School and Columbia Law School, filed an amicus brief in January.
Leebron sided with IBM, telling the court that Judge Miller had allowed “tort concepts” to govern “what is a fundamentally contract-based case” and in doing so ignored the nuance of the relationship between the companies that are both competitors and business partners and their “long negotiating history.”
In this dispute, Leebron said the parties unsurprisingly disagreed about the non-displacement provision in the contract, how the contract should be interpreted and the “legal limitations on the contract’s anti-competitive provisions.” That’s common in complex business relationships where parties often “deliberately leave terms unresolved, trusting future negotiations or social norms to fill any problems that emerge.”
“In the end, the touchstone of contractual interpretation under New York law is to consider the nature of the relationship and the ‘reasonable expectations of a businessperson,’” he wrote. “That is what the district court failed to do here, and in the process created an unpredictable and massive liability out of all proportion to both the contract itself and the economics of the relationship.”
Frequent amicus brief contributor, the U.S. Chamber of Commerce, filed a brief in this case in January, telling the court that while it wasn’t taking sides in this dispute, it wanted to express the importance of “preserving the line between contracts and torts and its interest in encouraging courts to resist the application of principles of tort law to contract disputes.”
Courts generally prohibit plaintiffs from recovering in tort for contract breaches, the Chamber wrote, subject to certain exceptions that must be carefully applied.
“If the line between contracts and torts becomes too blurred — if predictable contract disputes routinely morph into unpredictable tort actions with windfall recoveries — the results will be a chilling of commercial activity and a gradual erosion of the legal norms underpinning contract law,” the Chamber argued.
BMC is represented by Sean Gorman and Christopher L. Dodson of White & Case, Jeffrey L. Oldham, Warren W. Harris and Walter A. Simons of Bracewell, Jeffrey B. Wall, Morgan L. Ratner and Daniel J. Richardson of Sullivan & Cromwell and Harriet O’Neill of Austin.
Leebron is represented by Raffi Melkonian and Landon J. Francois of Wright Close & Barger.
The case number is 22-20463.