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IBM Has to Pay BMC $1.6 Billion for Poaching AT&T Account

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(Bloomberg) -- International Business Machines Corp. must pay $1.6 billion to BMC Software Inc. for swapping in its own software while servicing their mutual client, a federal judge ruled.

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US District Judge Gray Miller in Houston on Monday rejected IBM’s claim that it acquired the mainframe software account of one of BMC’s core customers, AT&T Corp., fair and square. Miller awarded damages based on his earlier determination that IBM’s role in AT&T’s decision to dump BMC “smacked of intentional wrongdoing.” His ruling came after a seven-day non-jury trial in March.

The judgment is one of the largest ever to arise from a commercial dispute, Sean Gorman, a partner with Bracewell LLP who represented BMC in the case, said in a statement.

While IBM has moved toward cloud and artificial intelligence services in recent years, mainframes are still an important part of its information technology portfolio. The Armonk, New York, company unveiled a new mainframe model in April, reflecting the continued relevance of the decades-old computing systems even amid growing cloud adoption.

‘Pennies on the Dollar’

IBM and BMC had long operated under a carefully negotiated agreement that forbade IBM to encourage mutual clients to switch to its own competing software product line. BMC sued IBM in 2017 claiming its rival planned to breach their agreement and poach AT&T’s software business when the two companies renewed their power-sharing deal in 2015.

IBM countered that AT&T declined BMC’s products and jumped to IBM for its own reasons, which it claimed was fair game under its pact with BMC.

In his ruling, Miller said IBM “believed -- especially in light of BMC’s reluctance to engage in litigation -- that it could ‘always settle for a small percentage of the claim’ or for ‘pennies on the dollar,’” citing trial evidence. The judge said “IBM’s conduct vis-à-vis BMC offends the sense of justice and propriety the public expects from American business.”

IBM said it had “acted in good faith in every respect in this engagement” and vowed to appeal.

‘Unsupported’ Verdict

“This verdict is entirely unsupported by fact and law, and IBM intends to pursue complete reversal on appeal,” the company said in a statement. “The decision to remove BMC Software technology from its mainframes rested solely with AT&T, as was recognized by the court and confirmed in testimony from AT&T representatives admitted at trial.”

BMC said it was “pleased” with the ruling.

“The integrity of our business and contracts is critical to being a strategic vendor and partner to our customers,” Senior Vice President and General Counsel Patrick Tagtow said in a statement.

The Houston-based software company had asked the court to award $791 million for IBM’s breach of their agreement and $104 million for lost profits on the AT&T contract. It also asked Miller to consider tripling the damages if he found that IBM intentionally interfered with BMC’s client relationship.

Fraudulent Inducement

Miller agreed that IBM fraudulently induced BMC to sign the 2015 power-sharing agreement barring IBM from poaching mutual clients. He awarded $717.7 million in actual contractual damages, $168.2 million in prejudgment interest and an additional $717.7 million in punitive damages “based on fraud by clear and convincing evidence.” He tacked on post-judgment interest of roughly 2%, compounding annually.

“IBM’s business practices -- including the routine eschewal of rules -- merit a proportional punitive damages award,” he explained.

He rejected BMC’s bid for findings of lost profits, additional breaches of contract and unfair competition but said that if a reviewing court finds that BMC isn’t entitled to the judgment he issued, the company could come back and seek recovery under one of its alternative legal theories.

The judge said he calculated damages using BMC’s fraudulent-inducement theory because it “affords BMC the greatest recovery” of several plausible damages arguments it presented.

The case is BMC Software Inc. v. International Business Machines Corp., 17-cv-02254, US District Court, Southern District of Texas (Houston).

(Adds context in first section and BMC reaction in third. Earlier versions of this story incorrectly stated judge’s finding in second paragraph and his fraudulent-inducement finding in fourth section.)

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