Fifth Circuit Judge Edith H. Jones recently asked counsel for International Business Machines what exactly he was asking the court to do in an appeal where the company is challenging BMC Software’s $1.6 billion award stemming from a ruling that IBM committed fraud and breached its contract.
“In your previous argument, you said it’s ambiguous,” Judge Jones told Paul D. Clement of Clement & Murphy about the contract between his client, IBM, and BMC. “What do you want this court to do? You want us to remand for a new trial on how to interpret the ambiguous contract? Or do you want us to vacate everything on the basis that the contract is ambiguous?”
Clement began to answer during oral arguments last week.
“Well, I think … ,” he said.
Judge Jones interrupted.
“Your brief doesn’t even … your original brief doesn’t clearly say,” Judge Jones said.
“Like most lawyers, I’d like to have my cake and eat it, too. But I think the right way to decide this actually is that the contract is ambiguous and that, essentially, you need to have a new trial on that,” Clement told the panel that included Judges Carl E. Stewart and Stuart Kyle Duncan.
The case received significant amicus attention and was argued before the Fifth Circuit Sept. 5. It got there after U.S. District Judge Gray Miller, who presided over a bench trial, determined in May 2022 that IBM committed fraud in a dispute involving IBM’s removal of BMC’s mainframe products from their largest mutual client, AT&T.
Judge Miller found IBM made a “material misrepresentation” that it wouldn’t displace BMC’s products from AT&T’s mainframe systems but did so anyway, entitling BMC to $1.6 billion in damages. He called out IBM’s “routine eschewal of rules” in handing down the massive award that included $717 million in contractual damages and $717 million in punitive damages.
“IBM is one of the largest technology companies in the world — and it 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.”
Clement told the court he believes the contract between IBM and BMC, which was subject to five years of intense negotiations, is ambiguous on its face, but he said his argument is bolstered when the language of the contract is read against the backdrop of governing New York law, which prohibits anticompetitive covenants not to compete.
“If you were to say the contract was unambiguous in their favor, but they basically failed to prove any damages, that’s actually a better result for me and my client,” Clement argued. “They swung for the fences with this theory that they’re entitled to $717 million.
“But if you send it back because you think the contract is ambiguous, I would say in your opinion there’s no basis under the language of the contract to say they’re entitled to $717 million.”
Judge Jones interjected again.
“Well, see, you’re totally confusing us,” she said. “Your blue brief didn’t really say what you wanted. The conclusion of the gray brief is the court should reverse, alternatively vacate and remand with instructions to apply contractual damage limitations, which you’re arguing is $5 million. So, now you’re arguing maybe you should send it back for a new trial?”
Clement said he and his client “will be satisfied with any relief.”
“It does occur to me that if you say the contract is ambiguous, there probably needs to be a new bench trial,” Clement said. “If you say that, and you say that the contract does not entitle them to $717 million … then this case will settle. But if you just send it back for a new trial and they think they can still knock it out of the park and get $717 million, I think they’re going to play their lottery card and we’ll have another bench trial and we’ll be back here in a couple years.”
“And if they win on remand, I’ll be saying there’s no way this contract provides for $717 million,” he said. “So, whatever else you do, I think you’d be doing us all a favor if you said this contract, as Judge Stewart suggested, doesn’t say if you violate 5.4 then you are entitled to the full amount of the licenses under 8.1. It just doesn’t say that.”
Judge Miller found IBM fraudulently induced BMC into signing a 2015 revision of their outsourcing agreement. Section 5.4 of the deal included a list of mutual customers that used BMC products and barred IBM from replacing those with its own products unless it paid additional licensing fees, which were detailed in section 8.1.
Jeffrey L. Oldham of Bracewell, who represents BMC, told the court Judge Miller’s ruling should stand.
“IBM made promises to BMC that it never intended to keep,” he said.
Judge Jones asked whether Oldham was arguing that contract provision 5.4 was unambiguous.
“We think it is absolutely unambiguous,” he said. “The one thing that the contract says IBM cannot do is displace BMC products. What it clearly says is you cannot do one thing, and that is displace BMC products for IBM products. The language is crystal clear. Full stop. No exceptions.”
Judge Jones noted that the contentious negotiations over the contract spanned five years.
“And now you’re saying it’s so clear nobody could possibly object?” she asked.
If the court were to agree with IBM and find the contract was ambiguous, Judge Jones asked Oldham how the fraud finding against IBM could stand.
“Because there’s evidence that goes far beyond breach here,” he said. “They lied. Those things they said were smokescreens.”
IBM is also represented by Erin E. Murphy, Andrew C. Lawrence and Joseph J. DeMott of Clement & Murphy and Paul Yetter, Constance H. Pfeiffer and Reagan W. Simpson of Yetter Coleman.
BMC is also represented by Warren W. Harris and Walter A. Simons of Bracewell, Sean Gorman and Christopher L. Dodson of White & Case, Jeffrey B. Wall, Morgan L. Ratner and Daniel J. Richardson of Sullivan & Cromwell and Harriet O’Neill of Austin.
The case number is 22-20463.