BMC Software, Inc. v. International Business Machines Corporation was a dispute over an outsourcing agreement between two competing mainframe software vendors. IBM, as AT&T’s IT outsourcer, carried out AT&T’s project to replace BMC mainframe software with software from other vendors, including IBM. BMC sued in 2017, and after a bench trial the U.S. District Court for the Southern District of Texas entered judgment for BMC of USD 1,603,705,597.29 in May 2022, based on fraudulent inducement and including punitive damages.[2] On 30 April 2024 the Fifth Circuit reversed and rendered judgment. It held that the agreement’s “non-displacement” clause allowed IBM to replace BMC software with IBM software at AT&T’s own request, so IBM had not breached it.[1] The Supreme Court denied BMC’s petition for certiorari on 10 March 2025.[3]
Background
BMC develops and licenses mainframe software. IBM also makes mainframe computers and software, and provides IT outsourcing services. The Fifth Circuit noted that the two companies compete in mainframe software, while IBM provides outsourcing services to BMC’s customers, including AT&T, which was not a party.[1]
In 2008 the parties signed a Master Licensing Agreement (MLA) and an Outsourcing Attachment authorising IBM to use BMC software in its outsourcing business for customers that licensed BMC software. They amended the attachment in 2013 and 2015. Three provisions of the 2015 Outsourcing Attachment (OA) were central:[1]
- Section 1.1 gave IBM five options for using BMC software. IBM chose “Access and Use”.
- Section 5.1 allowed IBM to use, access, install and have operational responsibility for a customer’s BMC licences “for no fee”, provided the licences were used “solely for the purposes of supporting the BMC Customer who owns such licenses”.
- Section 5.4, for 54 listed customers including AT&T, provided that “while [IBM] cannot displace any BMC Customer Licenses with [IBM] products, [IBM] may discontinue use of BMC Customer Licenses for other valid business reasons.”
The court noted that earlier versions of the attachment had nearly identical non-displacement wording, and that the parties had been unable to agree to change it in each negotiation.[1]
In April 2013 AT&T and IBM began to explore a project, codenamed Project Swallowtail, to replace BMC software on AT&T’s mainframe with software from other providers, including IBM. The district court found that IBM did not initiate the project and that AT&T wanted to replace BMC’s products “primarily out of cost considerations”.[1]
The dispute
BMC filed suit on 21 July 2017.[4] Its claims included breaches of contract, fraudulent inducement of the 2015 OA, trade secret misappropriation and unfair competition by misappropriation.[2]
On summary judgment the district court held that Section 1.1 merely put IBM to an election, which IBM had made, and ruled for IBM on that claim. It held that Section 5.4 unambiguously barred IBM from displacing BMC products with IBM products, and granted partial summary judgment to BMC because IBM had done so at AT&T.[1] After a bench trial from 14 to 24 March 2022, the court issued findings in BMC’s favour. Its final judgment dismissed with prejudice BMC’s claims under MLA section 8 and OA section 5.1, its trade secret and misappropriation claims, and its lost profits claim. It awarded BMC, on the fraudulent inducement claim, USD 717,739,615 in actual contractual damages, the same amount again in punitive damages, and USD 168,226,367.29 in prejudgment interest.[2] The actual damages were the unpaid licence fees that the court held were the direct damages contemplated by the contract. The Fifth Circuit noted that to reach this result the district court had found the MLA’s damage disclaimers and limitations unenforceable. It also recorded awards of about USD 16.3 million in attorneys’ fees and USD 4.1 million in costs.[1] IBM appealed.
Decision or outcome
The Fifth Circuit (Judges Jones, Stewart and Duncan; opinion by Judge Jones) held that the interpretation of the 2015 OA under New York law was dispositive, and so did not reach IBM’s other arguments on fraudulent inducement and damages.[1] It agreed that Section 5.4 was unambiguous but read it differently:
- The whole sentence. BMC’s reading treated “displace” and “discontinue” as wholly distinct, which would make the words “for other valid business reasons” superfluous, contrary to New York law. Read as a whole, the clause stopped IBM from using its outsourcing position to gain inside knowledge of how BMC customers used BMC software and then sell them IBM software. It did not stop IBM from discontinuing BMC software, even in favour of IBM software, for a valid business reason that was not unfairly competitive.[1]
- The rest of the agreement. None of the five restrictions on IBM’s use of BMC software in the 2008 MLA barred replacing BMC software at a customer’s request. Section 5.1 allowed IBM to use the licences “solely for the purposes of supporting the BMC Customer”, which is what IBM did in carrying out AT&T’s decision. The district court itself had found no breach of Section 5.1.[1]
- Absurd results. BMC’s reading would have let IBM install any competitor’s software at AT&T’s request except its own, or would have forced AT&T to dismiss IBM as outsourcer if it chose IBM software. Either way, once AT&T decided to leave BMC, BMC had lost the customer.[1]
- Restraint of competition. Read as BMC urged, the clause risked being an unenforceable restrictive covenant under New York law. Because AT&T decided independently to switch, BMC had “lost out to IBM fair and square”, and there was no legitimate reason to enforce the clause against IBM.[1]
The court concluded that IBM could not, on its own accord, supplant BMC software at AT&T with IBM software, but could do so at AT&T’s request. It reversed the judgment and rendered judgment for IBM.[1] The Fifth Circuit denied rehearing on 17 September 2024. BMC petitioned the Supreme Court, which requested a response from IBM and then denied the petition on 10 March 2025.[3]
Significance for software licensing and SAM practice
The case concerns the licence terms under which an outsourcer operates software that its client has licensed from a third party. Such “third-party access” or outsourcing terms are common in enterprise software agreements, and this dispute shows how much can depend on them. The Fifth Circuit’s holding rests on the specific wording of the 2015 OA, New York contract law and the finding that AT&T made its own decision.[1]
For customers, the decision supports the view that a licensee’s choice to move away from a vendor’s software is its own, and that restrictions a vendor places on the licensee’s outsourcer will be read in that light. For outsourcers that also sell software, it shows the value of evidence that a migration was the client’s decision and that access to the incumbent’s software was used only to support the client. BMC’s own licensing terms are covered in BMC Software licensing.
Lessons learned
- Read the outsourcing terms. The dispute turned on the “Access and Use” and non-displacement provisions that governed IBM’s use of BMC licences owned by BMC’s customers.[1] Before an outsourcer takes over, or helps migrate away from, a vendor’s software, check what the vendor’s agreements allow a third party to do with your licences.
- Document who decided to migrate. The appeal was decided on the finding that AT&T independently decided to replace BMC software and that IBM did not initiate the project.[1] Keep business cases and decision records that show a replacement was the customer’s choice.
- Clauses that limit competition are read narrowly. The court declined a reading of the clause that would restrict IBM’s service to its client with no legitimate purpose and said such a reading risked making the clause an unenforceable restraint.[1] A multi-year dispute and a trial award of USD 1.6 billion nonetheless preceded that result, so clear drafting is cheaper than litigation.[2]