It’s been 1,480 days since a megasuit began between BMC Software and IBM over BMC mainframe software that the KKR portfolio company says IBM illegally displaced while performing an IT outsourcing project for the parties’ mutual client, AT&T.
Since the case entered the Houston division of the Southern District of Texas’ system Sept. 21, 2017, there have been 587 docket entries, 16 hearings, several summary judgment motions and at least two dozen lawyers on the case.
But no document has packed in as much punch and moved the case along as quickly as docket entry 586: U.S. District Judge Gray Miller’s recent memorandum opinion and order on the parties’ summary judgment arguments.
Don’t let the 12-page order fool you: It’s tiny, but mighty. In it, Judge Miller adopts parts of U.S. Magistrate Judge Christina Bryan’s findings in a memorandum and recommendation order from June. But Judge Miller also took things a step further by ruling on issues Magistrate Judge Bryan said should be determined at trial. Most notably, Judge Miller found for BMC on its breach of contract claims and green-lighted BMC’s ability to seek up to $791 million in damages at trial — a damages model that had not before been public.
In the Sept. 8 order, Judge Miller found IBM breached two separate provisions of a 2015 outsourcing agreement with BMC but found IBM did not breach a third.
Judge Miller also tossed IBM’s counterclaim, leaving the IT giant strictly on the defense for trial instead of partially on the offense. Over the next couple of weeks, BMC and IBM will iron out how many days they’ll need for trial and what the remaining issues are and provide those answers in a joint status report due Oct. 29. Judge Miller will then set a trial date.
BMC’s lawyers declined to comment on the case, as did IBM and its lawyers, but court documents filed by both sides lay out the history and nature of the dispute. Much of the documents contain redactions, but most of the story can still be pieced together.
Bracewell partners Sean Gorman, Chris Dodson and Tim Geiger are leading BMC’s legal team, while Yetter Coleman founding partner Paul Yetter and Quinn Emanuel partners Rick Werder, Andrew Berdon and Rachel Epstein are leading IBM’s legal team.
The complexity of the IBM-BMC relationship juxtaposes them as competitors despite having a quasi-vendor-customer dynamic.
Based in Houston and founded in 1980, BMC supports its customers, including 93 of the Forbes Global 100, through mainframe software and other IT services and products. Like BMC, New York-headquartered IBM licenses its own mainframe software products to customers, but unlike BMC, IBM also provides outsourcing services. Hundreds of customers that use BMC’s software also use IBM as an outsourcer.
One of those mutual customers is AT&T, one of the largest customers of both BMC and IBM. Until events driving this lawsuit, the Dallas-based telecommunications giant had been a customer of BMC since 1989. AT&T has been an outsourcing customer of IBM since 1999.
To navigate the tricky waters of their relationship, BMC and IBM entered a master licensing agreement in 2008, which governed IBM’s licensing of BMC software products. Included in that agreement was an outsourcing attachment, which governed IBM’s use of BMC products when providing outsourcing services to other companies.
The outsourcing attachment allowed IBM to access and use BMC products that were licensed by mutual customers without paying an additional fee, as long as IBM was using the products exclusively to provide IT services to the mutual customer. The agreement prohibited IBM from displacing customer-owned BMC products with IBM’s own products, however, the agreement allowed IBM to do so if IBM purchased licensing of the products.
The parties revised the outsourcing attachment in 2013 and again in 2015. In both years, IBM was either in discussions with or doing work for AT&T’s Project Swallowtail, an effort that involved streamlining AT&T’s three mainframe computer systems (the product of three large mergers) and eliminating redundant and overlapping systems. One of the outcomes of the project was that BMC’s software was eliminated from AT&T’s systems.
During IBM and BMC’s OA negotiations in 2015, the year that IBM and AT&T moved forward with Project Swallowtail, the parties agreed to shrink the list of mutual customers affected by the nondisplacement language to a list of 54 potential customers. This agreement followed six months of heavy negotiation — a period, as BMC characterizes it, that involved IBM unsuccessfully attempting to get rid of the nondisplacement provision entirely, get AT&T removed from the 54-customer list and add in an exception to skirt the nondisplacement provision in the instance that a customer requested the displacement of BMC software.
BMC argues that despite what later surfaced as the backstory behind its intense negotiations with IBM over the OA, IBM never told BMC about Project Swallowtail during the negotiation period. BMC also alleges IBM pushed these negotiations to remove the contractual restrictions that would have prevented it from completing Project Swallowtail without paying for the required licenses.
In its own court filings, IBM said when the parties agreed to the 54-customer list compromise, BMC knew that IBM interpreted the language as allowing IBM to perform customer directed projects to replace BMC software with IBM products.
“It is unreasonable to read the 2015 OA as preventing IBM from carrying out AT&T’s directives, especially since IBM was entitled by [section] 5.4 to remove BMC software for ‘valid business reasons,’” IBM said in one of its motions for summary judgment. “Surely one valid business reason is carrying out a customer’s directive.”
During Project Swallowtail, IBM’s strategic outsourcing division displaced AT&T’s BMC products with IBM products between late December 2015 and early 2016. BMC sued IBM in July 2017.
Because many of the documents in the case are sealed, the full scope of the parties’ legal claims against one another is not entirely clear. But redacted versions of certain court filings make it apparent that BMC lodged multiple claims against IBM, including breach of contract, trade secret misappropriation, unfair competition and fraudulent inducement.
It’s also clear that IBM lodged its own counterclaim alleging that BMC breached the most favored customer provision of the parties’ contract because it offered better terms to other customers that were IBM competitors. As a response to some of BMC’s arguments, IBM also argued that the language in the OA included a general release of all claims, which would clear IBM of any liability.
Summary judgment rulings
Because Magistrate Judge Bryan’s memorandum and recommendation order ruled on some motions sealed from the public record, the order was also published under seal. But according to the subsequent objections to Judge Bryan’s order filed by both sides and Judge Miller’s order, it’s apparent that Judge Bryan recommended preserving much more of the case for trial than what Judge Miller ultimately decided to leave on the table.
According to the documents, Judge Bryan found the provisions at issue in the 2015 OA ambiguous, leaving the legal arguments of breach open for debate at trial. She also left IBM’s counterclaim intact.
Judge Miller’s order, on the other hand, rejected those recommendations, siding with BMC by finding that the language in two sections of the contract at issue were unambiguous “and must be interpreted to preclude access and use of customer licenses to displace BMC products.
“The phrase ‘displace any BMC customer licenses with customer product’ is not susceptible to more than one reasonable interpretation,” Judge Miller wrote.
With respect to IBM’s counterclaim concerning the most favored customer provision, Judge Bryan rejected IBM’s arguments and granted BMC’s arguments “only as to the remedy of reformation,” Judge Miller’s order said. Instead of a partial approval, Judge Miller decided to grant BMC’s motion in full in relation to this issue.
Judge Miller explained that IBM “failed to raise a genuine issue of material fact as to the existence of a comparable competitor or its damages” because IBM’s expert on this issue, Paul Pinto, based his opinion “on assumptions about how large IT companies operate in general” instead of providing more concrete information.
The judge rejected the damages tied to IBM’s claim because IBM’s damages expert, Christopher Gerardi, “failed to present evidence of the difference between the value of the pricing and terms of the 2015 OA and the pricing and terms contained in BMC’s contract with a competitor.” Gerardi had argued that IBM had suffered more than $12.47 million in damages due to the better terms that BMC allegedly provided to IBM competitors.
Both Judge Miller and Judge Bryan approved two damages models brought by BMC, siding with the company’s arguments that certain damages limitations in parts of the master licensing agreement are inapplicable. One model is for consequential damages for $717 million, “or alternatively, for $791 [million],” Judge Miller’s order says, while the other is for up to $5 million per displaced product.