After nearly five years of litigation, a large-dollar showdown between two IT giants, Houston-based BMC Software and New York-based IBM, began Monday in Houston federal court.
At issue is whether IBM’s displacement of BMC mainframe software from mutual client AT&T’s systems misappropriated trade secrets, constituted fraud by IBM, and justifies damages north of $700 million as BMC claims.
U.S. District Judge Gray Miller is presiding over an expected two-week bench trial. Houston lawyers at Bracewell, for BMC, and Yetter Coleman, for IBM, are trying the case. IBM also has a team of New York lawyers from Quinn Emanuel. Lawyers on both sides declined to comment on the case.
KKR-owned BMC and IBM both license mainframe software to customers. In addition, IBM provides IT outsourcing services. Hundreds of customers that use BMC’s software also use IBM as an outsourcer. Until events leading to the litigation, their largest mutual client was AT&T.
BMC sued IBM in July 2017 after discovering IBM had replaced AT&T’s BMC-licensed mainframe software with AT&T’s own software during an IT outsourcing project nicknamed “Project Swallowtail.” BMC alleges, among other legal claims, that IBM violated its contract that IBM could not displace (a legalese-riddled term for “replace”) BMC’s products with its own while providing outsourcing to mutual clients — unless IBM paid BMC for the software licenses.
IBM contends that it was simply furthering AT&T’s wishes and that the non-displacement provision of its agreement with BMC is not applicable.
The trial follows a summary judgment from last September that initially — at least seemingly — didn’t leave much for debate when it came to breach of contract, a key element of BMC’s claims. In the order, Judge Miller found IBM breached two separate provisions of an outsourcing agreement between BMC and IBM but found that IBM did not breach a third. He also tossed IBM’s counterclaim that BMC breached the most favored customer provision of the contract because it offered better terms to other customers that were IBM competitors.
Judge Miller ordered the parties to brief remaining issues to be determined at trial, and the parties greatly differed in their answers — so much so that in a Feb. 7 order he reminded them that “the court’s request for memoranda was not an invitation to re-open summary judgment.”
Although BMC begins trial with a breach-of-contract finding already in the bag, Judge Miller made clear in his February order that BMC still has much to prove before it’s considered a win.
In the four elements that must be proved under New York law, applicable to the contract in this case, two have been established – that a contract existed and IBM breached it. Judge Miller ruled that BMC will still have to prove that IBM’s breach caused damages and that BMC upheld its end of the contract. In addition, BMC must prove that the contract was enforceable.
According to the parties’ joint pretrial motion, BMC and IBM expect to call 11 total live witnesses during the two-week trial. Judge Miller will review video deposition and prior court testimony of nearly three dozen more witnesses on his own time. In addition, BMC listed two rebuttal witnesses whom the company may call.
For a detailed previous report that explains more about the case background, click here.
Editor’s Note: Natalie Posgate is in the courtroom and will have more updates of Day 1 of trial. Check back later for another report.