IBM ordered to pay $1.6 billion to BMC Software for fraud and breach of contract.
IBM has been ordered to pay a staggering $1.6 billion to BMC Software for fraudulently inducing and then violating a software licensing agreement. This contract was under the business unit that was spun off therefore this is why Kyndryl's shareholders are at risk.
The case, which began in 2019, involved a dispute over the rights to use BMC’s proprietary mainframe software products, which are used by large corporations and government agencies to manage and optimize their data and applications.
According to the lawsuit, IBM and BMC entered into a licensing agreement in 2015, which granted IBM limited rights to access and use BMC software when acting as an IT outsourcer to BMC’s software customers. However, the agreement expressly prohibited IBM from displacing BMC software with IBM software at certain customers unless IBM first purchased BMC licenses.
After a two-week bench trial in March 2022, U.S. District Judge Gray Miller in Houston found that IBM had committed fraud and breached its contract with BMC and awarded BMC the full amount of damages it sought, plus interest and attorneys’ fees. Judge Miller also imposed punitive damages of $717 million, equal to the actual damages, finding that IBM’s conduct was “both fraudulent and malicious” and in “bad faith”.
IBM appealed the judgment to the Fifth Circuit Court of Appeals, arguing that the damages were excessive and unsupported by the evidence.
So how did the appeal go?
According to the Court House News Service, BMC lawyers were challenged around three major points.
Is a $717 million award warranted? The contract had a $5 million damage provision and $717 million seemed excessive. BMC argued that it was appropriate and of course IBM focused on the $5 million damage cap in the contract.
What is the basis of awarding an additional $717 million punitive award for a contract dispute. BMC argued and the trial judge agreed that there was fraud in IBM's behavior. The appellant judge questioned how there could be fraud when the parties were negotiating for years over the contract.
Then there was questioning around New York law which was the governing law of the contract. New York law has statutes against restrictive covenants. Basically, did the contract restrict competition between IBM and BMC
Below is the article from the Court House News Service providing more insight on the appeal trial.
www.courthousenews.com/ibm-asks-fifth-circuit-to-toss-1-6-billion-judgment-in-software-license-spat/
For those with 50 minutes of spare time can listen to the appellant trial.
So where do we stand?
The appellant trail appeared positive for IBM, but I have learned in my career that court outcomes are very uncertain and will look to "split the baby" with their decisions. If IBM loses, then the conflict between IBM, Kyndryl, and insurance carriers will begin. Outcome is clearly uncertain, and no liabilities have been recorded on Kyndryl's books except expensing their attorney fees.
The best I can tell is that decisions take 4-6 months from the 5th Circuit Court of Appeals. We are in month four. Kyndryl has the liquidity to cover damages but clearly if the entire burden is placed on them, it will be a clear major setback.
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