A federal appeals court on Tuesday reversed a ruling that obligated International Business Machines Corp. (IBM) to compensate BMC Software Inc. one billion six hundred million dollars in 2022 after a judge determined that IBM had unlawfully substituted BMC's mainframe software with its own at AT&T Inc.

Federal Court Reversing IBM's Verdict

In one of the most significant judgments in a commercial dispute, the 5th US Circuit Court of Appeals in New Orleans concluded that a lower court judge's ruling on liability was incorrect. According to the findings of the three-judge panel, IBM had not breached any agreement between the firms and did not encourage AT&T, its mutual client, to switch to its product line. Circuit Judge Edith Jones, writing for the panel, stated that AT&T, one of BMC's major clients, had transitioned to IBM software independently and that BMC had fairly and squarely lost out to IBM.

A spokesperson for BMC chose not to comment. Meanwhile, an IBM spokesperson stated in a release that the company acted in good faith in every aspect of the engagement and expressed gratitude that the court concurred. Representatives for AT&T, who are not involved in the case, did not respond immediately to a request for comment.

IBM-BMC's Non-Displacement Lawsuit

According to the ruling, Houston-based BMC specializes in developing and licensing proprietary mainframe software products. The agreement between BMC and IBM includes a provision known as non-displacement, which permits IBM to maintain and operate mainframes running BMC software while restricting it from replacing BMC clients' software with IBM's own.

AT&T enlisted IBM to oversee its mainframe operations. In a 2017 lawsuit filed in a Houston federal court, Houston-based BMC alleges that IBM violated a longstanding agreement that prohibited IBM from persuading mutual clients to switch to its competing software product line while acting as an IT outsourcer. IBM argues that AT&T switched to its product line independently, without influence or pressure from IBM.

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Federal Court Judges Concurring IBM's Appeal

The appeals court judges concurred with this assessment, highlighting that although the agreement barred IBM from leveraging its position to gain insights into BMC's customers to sell IBM software, it did permit IBM to assist customers in discontinuing the use of BMC licenses for other valid business reasons.

Jones wrote that AT&T decided to switch independently and without any lobbying or influence from IBM. IBM argued that it did not breach the provision's non-displacement clause because it did not compete for or seek AT&T's decision.

The ruling on Tuesday overturned US District Judge Gray Miller's 2022 decision, which had determined that IBM was liable to pay BMC one billion six hundred million dollars in damages for breaching their agreement by covertly agreeing to replace BMC's software at AT&T during the contract negotiation in 2015.

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