IBM Owes $1.6 Billion to BMC Over Disputed Software Contract

When does a legal dispute constitute fraud? A federal judge ruled Monday that International Business Machines Corp must pay mainframe-software competitor BMC Corp $1.6 billion after finding IBM improperly replaced BMC’s mainframe software at AT&T Corp with its own.

U.S. District Judge Gray Miller said IBM convinced software company BMC through fraud to sign a contract that allowed IBM to “exercise rights without paying for them, secure other contractual benefits, and ultimately acquire one of BMC’s core customers.”

IBM’s conduct “offends the sense of justice and propriety that the public expects from American businesses,” the court said.

Armonk, New York-based IBM said in a statement that the ruling is “entirely unsupported by fact and law” and it intends to appeal. The company said the decision to replace BMC’s software “rested solely with AT&T.” IBM and BMC are competitors in the software industry, but have an agreement for IBM to maintain and operate mainframes running BMC software. As part of their contract, BMC had agreed to let IBM service its software on client mainframes for free, and IBM said it would not convince BMC clients to replace its software.

Miller said IBM believed that it could settle a dispute over the provision for “pennies on the dollar.”

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