BMC Software, Inc. vs International Business Machines Corporation

Filing 586

MEMORANDUM OPINION AND ORDER adopting in part #561 Memorandum and Recommendation regarding #385 SEALED MOTION BMC's Motion for Partial Summary Judgment on Construction of Damage Limitations Provisions, #387 SEALED MOTION BMC's Motion for Partial Summary Judgment on IBM's Affirmative Defenses, #391 SEALED MOTION BMC's Motion for Partial Summary Judgment on IBM's Counterclaim for Breach of the Most Favored Customer Provision, #381 SEALED MOTION for Partial Summary Judgment on IBM's Breach of Outsourcing Attachment Sections 1.1 and 5.4, #396 SEALED MOTION for Summary Judgment on BMC's Claims, #394 SEALED MOTION for Partial Summary Judgment on IBM's Breach of Contract Counterclaim (Signed by Judge Gray H Miller) Parties notified.(rguerrero, 4)

Case 4:17-cv-02254 Document 586 Filed on 09/09/21 in TXSD Page 1 of 12
United States District Court
Southern District of Texas

ENTERED
September 09, 2021

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
BMC SOFTWARE, INC.,
Plaintiff,
v.
INTERNATIONAL BUSINESS MACHINES
CORPORATION,
Defendant.

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Nathan Ochsner, Clerk

CIVIL ACTION NO. H-17-2254

MEMORANDUM OPINION AND ORDER
On June 7, 2021, United States Magistrate Judge Christina A. Bryan issued a Memorandum
and Recommendation (“M&R”) on multiple motions for summary judgments. Dkt. 561. The
parties filed objections and responses to objections. Dkts. 567, 569, 577, 580. After considering
the M&R, objections, responses, related documents in the record, and applicable law, the court
finds that the parties’ objections should be overruled in part and sustained in part and the M&R
should be ADOPTED IN PART. 1
I. LEGAL STANDARD
The court conducts a de novo review of those conclusions of a magistrate judge to which
a party has specifically objected. See 28 USC § 636(b)(1)(C); United States v. Wilson, 864 F. 2d
1219, 1221 (5th Cir. 1989). To accept any other portions to which there is no objection, the court
need only satisfy itself that no clear error appears on the face of the record. See Guillory v. PPG
Indus. Inc., 434 F. 3d 303, 308 (5th Cir. 2005), citing Douglass v. United Servs. Auto. Ass’n, 79 F.

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The facts of this case have been set forth in detail in prior rulings of the court. The facts
recited in the M&R (Dkt. 561 at 1–3) are fully adopted and incorporated herein.

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3d 1415, 1420 (5th Cir. 1996); see also Fed. R. Civ. P. 72(b) Advisory Comm. Note (1983). After
conducting this de novo review, the court may “accept, reject, or modify, in whole or in part, the
findings or recommendations made by the magistrate judge.” 28 U.S.C. § 636(b)(1)(C); see also
Fed. R. Civ. P. 72(b)(3).
II. DISCUSSION
The court rejects the Magistrate Judge’s recommendations regarding certain breach of
contract issues related to the 2015 Outsourcing Attachment (“2015 OA”). The court denies IBM’s
motion for summary judgment on BMC’s claim for breach of § 5.4 of the 2015 OA and grants
BMC’s motion for summary judgment on its claim for breach of § 5.4 of the 2015 OA. It relatedly
denies IBM’s motion for summary judgment on BMC’s claim for breach of § 5.1 of the 2015 OA.
Because the court grants BMC’s motion for summary judgment on its claim of breach of § 5.4 of
the 2015 OA and denies IBM’s motion on BMC’s claim for breach of § 5.1, it rules on the
competing motions for summary judgment on BMC’s claim for breach of § 1.1. To that end, the
court grants IBM’s motion and denies BMC’s. Next, though the court adopts the M&R’s
recommendations regarding the parties’ 2008 Master Licensing Agreement, it clarifies its
reasoning. Finally, the court rejects the M&R’s recommendation that IBM’s motion for summary
judgment as to its counterclaim for breach of the most favored customer provision in § 18 of the
2015 OA be denied and that BMC’s motion for summary judgment as to IBM’s counterclaim be
granted only as to the remedy of reformation. Instead, the court grants BMC’s motion in full.
A.

BMC’s Claims for Breach of the 2015 OA
BMC sued IBM for breach of sections 1.1, 5.1 and 5.4 of the 2015 OA, a contract governed

under New York law. Both parties moved for summary judgment on BMC’s claims for breach of
sections 1.1 and 5.4. See Dkts. 381, 396. IBM also moved for summary judgment on BMC’s

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claim for breach of section 5.1. The relevant provisions are as follows:
Section 1.1: IT Services Options.
Customer must elect one of the following five options regarding its use of the
Products in relation to its provision of IT Services: (a) Access and Use– (Sections
5.1, 5.2, 5.3 and 5.4), (b) License Suspension – (Section 5.5), (c) Customer owned
Products – (Sections 6, 7 and 8), (d) Mirror Order –(Section 11 ), or (e) Shared
Hosting – (Section 12).
Section 5.1: Access and Use.
BMC will allow Customer to use, access, install and have operational
responsibility of the BMC Customer Licenses (together, “Access and Use”) under
the terms of the BMC Customer’s license agreement with BMC for no fee,
including on Computers owned or leased by BMC Customer and at BMC
Customer’s facility, provided that the BMC Customer Licenses are used solely for
the purposes of supporting the BMC Customer who owns such licenses.… Except
as set forth herein, the BMC Customer Licenses will continue to be governed by
the terms, conditions and discounts of the BMC license agreement between BMC
and the BMC Customer; notwithstanding the terms of the Agreement and the OA,
Customer shall be bound by such terms of such license agreement.…
Section 5.4: Non-Displacement.
This Non-Displacement provision applies only to Customer’s Access and Use of
BMC Customer Licenses by Customer’s strategic outsourcing division (or its
successor) for the BMC Customers listed on Exhibit K (the “Exhibit K
Customers”). Subject to the foregoing, Customer agrees that, while Customer
cannot displace any BMC Customer Licenses with Customer products, Customer
may discontinue use of BMC Customer Licenses for other valid business reasons.
All terms of Sections 5.1, 5.2 and 5.3 apply to Customer’s use of BMC Customer
licenses belonging to any Exhibit K Customers. BMC and Customer agree to update
the Information contained on Exhibit K as part of the reporting requirements in
Section 5.3.
Dkt. 382, Ex. 2 at 1–3 (emphasis in bold and italics added).
Having reviewed the parties’ objections to the M&R, the court agrees with BMC that, as a
matter of law, the above provisions of the 2015 OA are unambiguous. See Sarinsky's Garage Inc.
v. Erie Ins. Co., 691 F. Supp. 2d 483, 486 (S.D.N.Y. 2010) (providing that, under New York law,
the question of whether contract language is ambiguous is a question of law to be decided by the
court). Therefore, the court will not look to extraneous evidence to determine the intentions of the
parties or the meaning of the contract. See Greenfield v. Philles Recs., Inc., 98 N.Y.2d, 562, 569,

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750 N.Y.S.2d 565, 780 N.E.2d 166, 170 (2002) (providing that extrinsic evidence may be
considered to interpret a contract only if the agreement is ambiguous).
The court’s conclusion rests upon foundational tenets of contract interpretation. First, a
contract should be interpreted in accordance with the plain meaning of its terms. Id. Contract
language is ambiguous if it is susceptible to more than one reasonable interpretation. Id.; see also
Ellington v. EMI Music, Inc., 24 N.Y.3d 239, 244, 997 N.Y.S.2d 339, 21 N.E.3d 1000 (2014)
(stating that ambiguity arises when “specific language is susceptible of two reasonable
interpretations.”). Moreover, in interpreting contracts, “a court must strive to ‘give meaning to
every sentence, clause, and word.’” Zurich Am. Ins. Co. v. ABM Indus., Inc., 397 F.3d 158, 165
(2d Cir. 2005) (quoting Travelers Cas. & Sur. Co. v. Certain Underwriters at Lloyd's of London,
96 N.Y.2d 583, 594, 734 N.Y.S.2d 531, 760 N.E.2d 319 (2001)). That is, “surplusage is a result
to be avoided.” In re Viking Pump, Inc., 27 N.Y.3d 244, 261, 33 N.Y.S.3d 118, 52 N.E.3d 1144
(2016).
1.

Section 5.4 of the 2015 OA

Read against these principles, § 5.4 of the 2015 OA is unambiguous. Pursuant to § 5.4,
IBM could not “displace any BMC Customer [AT&T] Licenses with Customer [IBM] products.”
The phrase “displace any BMC Customer Licenses with Customer product” is not susceptible to
more than one reasonable interpretation. As BMC points out in its objections, “displace means
[t]o move, shift, or force from the usual place or position, and [t]o take the place of; supplant;”
while “discontinue means [t]o stop doing or providing (something); end or abandon.” Dkt. 567 at
36 (citations omitted, changes in original). IBM’s argument requires the court to construe
“displace” and “discontinue” as synonymous, which they are not, and to ignore the words that
follow “displace” in § 5.4 — “any BMC Customer Licenses with Customer products.” (emphasis

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added). In effect, IBM’s reading creates the very surplusage that “cannot be countenanced under
New York principles of contract interpretation.” See Olin Corp. v. OneBeacon Am. Ins. Co., 864
F.3d 130, 143 (2d Cir. 2017).
The summary judgment record establishes that IBM displaced BMC Customer Licenses
with IBM products when it implemented Project Swallowtail at AT&T. See Dkt. 381 at 30–31
(evidence cited); Dkt. 382, Exs. 99, 102. Therefore, IBM breached § 5.4 of the 2015 OA.
Accordingly, IBM’s motion for summary judgment on BMC’s claims (Dkt. 396) is DENIED as to
the issue of breach of § 5.4 of the 2015 OA, and BMC’s motion for summary judgment on BMC’s
claim for breach of § 5.4 of the 2015 OA (Dkt. 381) is GRANTED.
2.

Section 5.1 of the 2015 OA

The court similarly concludes that § 5.1 of the 2015 OA is unambiguous. Section 5.1
allows IBM to have access, use, and operational responsibility for BMC Customer Licenses,
including the AT&T license, “provided that the BMC Customer Licenses are used solely for the
purposes of supporting the BMC Customer who owns such licenses.” Section 5.1 governs IBM’s
“access,” “use,” and “operational responsibility” for BMC Customer Licenses, while § 5.4 governs
IBM’s “displacing” and “discontinuing” BMC Customer Licenses.
The court agrees with BMC’s objections to the M&R. IBM’s interpretation of the phrase
“operational responsibility” would allow it “to take all actions that the customers themselves could
take under their licenses,” including displacing BMC product with its own. This is not a viable
interpretation of the contract and cannot render the language of § 5.1 ambiguous. See Dkt. 561 at
10 (citing common definitions of “operational responsibility”). Reading the contract as a whole,
“operational responsibility” cannot be interpreted so broadly that it renders the entire purpose of
Exhibit K and the non-displacement provision meaningless. See In re Viking Pump, Inc., 33

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N.Y.S.3d at 257; FCI Grp., Inc. v. City of New York, 54 A.D.3d 171, 176, 862 N.Y.S.2d 352, 356
(N.Y. App. Div. 2008) (noting that “a contract is to be construed so as to give effect to each and
every part”). Therefore, the court concludes that § 5.1 is unambiguous and must be interpreted to
preclude access and use of Customer licenses to displace BMC products. Thus, IBM’s motion for
summary judgment on BMC’s claims (Dkt. 396) is DENIED as to the breach of § 5.1 of the 2015
OA. 2
3.

Section 1.1 of the 2015 OA

The M&R recommends denial of both IBM’s and BMC’s motions for summary judgment
on BMC’s claim for breach of § 1.1 because § 1.1 is “specifically linked to §§ 5.1 and 5.4.” Dkt.
561. Having concluded that §§ 5.1 and 5.4 are not ambiguous, the court need not defer ruling on
the claim for breach of § 1.1.
The court agrees with IBM that § 1.1 merely puts IBM to an election regarding how it
would use BMC products in relation to its provision of IT Services at AT&T. IBM elected to
proceed pursuant to § 1.1(a): “Access and Use– (Sections 5.1, 5.2, 5.3 and 5.4).” The fact that
IBM then breached § 5.4, and possibly § 5.1, does not demonstrate that IBM breached § 1.1 by
electing “Access and Use.” However, the fact that BMC cannot proceed on an independent claim
for breach of § 1.1 does not preclude BMC from arguing that § 1.1 provides the framework for
benefit-of-the-bargain damages for IBM’s breach of § 5.4.
Therefore, IBM’s motion for summary judgment on BMC’s claims (Dkt. 396) is
GRANTED as to the issue of breach of § 1.1, and BMC’s motion for partial summary judgment
on breach of the outsourcing attachment §§ 1.1 and 5.4 (Dkt. 381) is DENIED as to the issue of

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BMC did not move for summary judgment on its claim for breach of § 5.1 of the 2015 OA.
See Dkt. 381.
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breach of § 1.1.
B.

Damages Limitations
The Parties’ 2008 Master Licensing Agreement (“MLA”) contains the following

provisions:
9.
DISCLAIMER OF DAMAGES. EXCEPT FOR VIOLATION OF
PROPRIETARY RIGHTS AND CONFIDENTIALITY (SECTION 8) AND
INFRINGMENT CLAIMS (SECTION 12), NEITHER PARTY, ITS
AFFILIATES OR BMC’S LICENSORS ARE LIABLE FOR ANY SPECIAL,
INDIRECT, INCIDENTAL, PUNITIVE OR CONSEQUENTIAL DAMAGES
RELATING TO OR ARISING OUT OF THIS AGREEMENT, SUPPORT, THE
PRODUCT OR ANY THIRD PARTY CODE OR SOFTWARE PROVIDED
WITH THE PRODUCT (INCLUDING, WITHOUT LIMITATION, LOST
PROFITS, LOST COMPUTER USAGE TIME, AND DAMAGE TO OR LOSS
OF USE OF DATA), EVEN IF ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES, AND IRRESPECTIVE OF NEGLIGENCE OF A PARTY OR
WHETHER SUCH DAMAGES RESULT FROM A CLAIM ARISING UNDER
TORT OR CONTRACT LAW.
THE FOREGOING LIMITATION OF
LIABILITY WILL APPLY UNLESS OTHERWISE REQUIRED BY THE
LOCAL LAW OF THE COUNTRY WHERE THE PRODUCTS ARE
ORDERED.
Dkt. 396-2 at 12 (MLA § 9).
10.
LIMITS ON LIABILITY. EXCEPT IN THE CASE OF BMC’S
OBLIGATIONS WITH RESPECT TO INFRINGEMENT CLAIMS (SECTION
12), OR EITHER PARTY’S BREACH OF PROPRIETARY RIGHTS AND
CONFIDENTIALITY (SECTION 8), EACH PARTY’S LIABILITY ARISING
OUT OF OR RELATED TO THIS AGREEMENT, THE PRODUCT, OR THE
USE OF THE PRODUCT SHALL BE LIMITED TO THE GREATER OF
$5,000,000 OR THE AMOUNT PAID OR PAYABLE BY THE CUSTOMER
FOR THE LICENSE TO THE APPLICABLE PRODUCT GIVING RISE TO THE
CLAIM. THE FOREGOING LIMITATION OF LIABILITY WILL APPLY
UNLESS OTHERWISE REQUIRED BY THE LOCAL LAW OF THE
COUNTRY WHERE THE PRODUCTS ARE ORDERED.
Id. (MLA § 10). The court adopts the M&R’s recommendations regarding §§ 9 and 10 and clarifies
its rulings.

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1. Section 9 of the MLA
The court ADOPTS the M&R’s recommendation that BMC’s lost profits from AT&T are
consequential damages barred by MLA § 9. Therefore IBM’s motion for summary judgment on
BMC’s claims (Dkt. 396) is GRANTED as to this issue. BMC’s motion for partial summary
judgment on the construction of the damages limitations provision (Dkt. 385) is DENIED.
However, the summary judgment ruling that § 9 bars BMC’s lost profit measure of damages will
not preclude BMC from arguing the damage limitation provisions are unenforceable if it succeeds
on its claim for fraudulent inducement of the 2015 OA. 3
The court ADOPTS the M&R’s recommendation that that BMC’s proposed damages
models for $717,000,000, or alternatively for $791,000,000, are direct damages not barred by the
limitation on consequential damages contained in MLA § 9. Therefore, IBM’s Motion for
Summary Judgment on this issue is DENIED and BMC’s Motion for Summary Judgment on this
issue is GRANTED. However, by adopting the M&R the court is not ruling on the amount of
damages BMC is entitled to recover as direct, benefit-of-the-bargain damages. The proper
measure and amount of BMC’s direct damages remains an issue for trial.
2. Section 10 of the MLA
Further, the court ADOPTS the M&R’s recommendation that § 10 does not impose an
aggregate limit of $5,000,000 on BMC’s damages regardless of the number of BMC products
displaced by IBM as part of Project Swallowtail. However, this ruling does not entitle BMC to
recover an amount over $5,000,000 per displaced product because whether there is some other
amount “PAID OR PAYABLE BY THE CUSTOMER FOR THE LICENSE TO THE
3

As detailed in the M&R, BMC presented strong and clear evidence in support of its claim
for fraudulent inducement of the 2015 OA. Dkt. 561 at 21–26.
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APPLICABLE PRODUCT GIVING RISE TO THE CLAIM” remains to be determined. If at trial
BMC fails to persuade the court as fact-finder that some other amount is “paid or payable” as
described in MLA § 10, BMC’s contract damages would be limited to $5,000,000 per displaced
product. Assuming the evidence supports displacement of 14 products, and in the absence of some
other amount “paid or payable,” BMC’s damages would be limited to $70,000,000.
C.

IBM’s Counterclaim for Breach of the Most Favored Customer Provision
With respect to IBM’s counterclaim that BMC breached the Most Favored Customer

Provision found in § 18 of the 2015 OA, the court concludes that IBM has failed to raise a genuine
issue of material fact as to the existence of a comparable competitor or its damages.
Section 18 of the 2015 OA provides as follows:
MOST FAVORED CUSTOMER. BMC represents that the pricing and terms
granted to [IBM] pursuant to this Order are comparable to or better than the
equivalent pricing and terms currently being offered by BMC to any entity
competing with IBM in the provision of IT Outsourcing Services of BMC for like
transactions and volumes.
Dkt. 381, Ex. 2 at 10 (emphasis in italics added).
To create a fact issue as to BMC’s breach of the MFC, IBM must identify an IBM
competitor that (1) provides IT outsourcing services; (2) of BMC; (3) for like transactions and
volumes. Id. (emphasis added). Rules of contract construction require the court to give effect to
all of the words in this provision—not just the words “any entity competing with IBM.” See In re
Lehman Bros. Holdings Inc., 530 B.R. 601, 608 (Bankr. S.D.N.Y. 2015) (“Courts should, where
possible, interpret a contract in a way that does not place undue emphasis upon particular words
or phrases and gives effect to all words chosen by the parties.”). IBM’s summary judgment
evidence identifies multiple entities that compete with IBM in the IT sector but fails to identify
competitors providing IT outsourcing services of BMC for like transactions and volumes.

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IBM’s expert, Paul Pinto, opined that 24 customers “can reasonably be compared to IBM,
given their (1) Ability to directly compete with IBM; (2) Capabilities to provide IT outsourcing
services to clients; and their (3) Contractual agreements with BMC, that were in effect after March
31, 2013.” Dkt. 391, Ex. 30 at 26. But Pinto did not determine whether the 24 entities compete
with IBM in the provision of IT outsourcing services of BMC for like transactions and volumes.
Pinto’s opinion is based on assumptions about how large IT companies operate in general. IBM
bears the burden to prove that BMC gave better pricing and terms not just to any IBM competitor,
but to a competitor who competes with IBM in the provision of IT outsourcing services of BMC
for like transactions and volumes. Even combined with the statements from BMC witnesses noted
in the M&R, Pinto’s opinion fails to raise a fact issue as to the existence of such a competitor.
In addition, IBM’s damages expert, Christopher Gerardi, failed to present evidence of the
difference between the value of the pricing and terms of the 2015 OA and the pricing and terms
contained in BMC’s contract with a competitor. See Studiengesellschaft Kohle mbh v. Novamont
Corp., 548 F. Supp. 234, 235 (S.D.N.Y. 1981) (stating proper measure of damages for breach of a
most favored customer provision). Gerardi looked at four of the IBM competitors identified by
Pinto as having “better” contract terms and attempted to compare the price IBM paid for those
contract terms under the 2015 OA with what the competitors paid.

However, Girardi’s

methodology rests only on what IBM paid to BMC for certain provisions and fails to compare the
contract terms as a whole.
Gerardi limited his damages calculation to a valuation of one-to-many rights, remote access
rights, and shared hosting and service-provider-to-service-provider rights. Dkt. 391, Ex. 31 at 14. 4
As for one-to-many and remote access rights, Gerardi opines that BMC granted similar but less

4

Gerardi’s analysis did not include non-displacement rights. Dkt. 391, Ex. 31 at 14 n.34.
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restrictive rights to HP, Wipro, HCL, and Dell without charging them any fees while IBM made
an initial payment and a fee for a five-year extension of those rights. Dkt. 39, Ex. 31 at 15, 18–
19.
As to shared hosting and service-provider-to-service-provider rights, Gerardi opined that
some of IBM’s IT outsourcing competitors received better terms than IBM and IBM suffered
actual damages for Shared Hosting and SP-to-SP provisions of greater than $12.466 million, in
just the initial term. Id. at 21. Gerardi’s report demonstrates that he looked only at what IBM paid
for specific rights and assumed, without a reasonable basis, that other competitors paid nothing for
similar rights. Because the terms are compared in isolation without comparing the contracts as a
whole, Gerardi’s opinion does not provide evidence of the difference between the pricing and
terms BMC offered to IBM under 2015 OA and the pricing and terms BMC offered to IBM’s
competitors.
To succeed on its counterclaim for breach of the MFC provision, IBM must show damages
caused by BMC’s alleged breach. See Wilder v. World of Boxing LLC, 310 F. Supp. 3d 426, 445–
46 (S.D.N.Y. 2018). IBM has not met its burden to present a reliable measure of actual damages.
For these reasons, IBM’s motion for summary judgment on its counterclaim for breach of
§ 18 of the 2015 OA (Dkt. 394) is DENIED, and BMC’s motion for summary judgment on IBM’s
counterclaim for breach of § 18 of the 2015 OA (Dkt. 391) is GRANTED.
III. CONCLUSION
With exception to the rejections and clarifications outlined above, the court accepts Judge
Bryan’s memorandum and recommendation dated June 7, 2021, and ADOPTS it as the opinion of
the court. It is therefore ordered that:
(1) Judge Bryan’s memorandum and recommendation (Dkt. 561) is ADOPTED as the

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holding of the court, except as noted;
(2) IBM’s motion for summary judgment on BMC’s claims (Dkt. 396) is DENIED as to
the issue of breach of § 5.4 of the 2015 OA;
(3) BMC’s motion for partial summary judgment on breach of the outsourcing attachment
§§ 1.1 and 5.4 (Dkt. 381) is GRANTED as to the issue of breach of § 5.4;
(4) IBM’s motion for summary judgment on BMC’s claims (Dkt. 396) is DENIED as to
the breach of § 5.1 of the 2015 OA;
(5) IBM’s motion for summary judgment on BMC’s claims (Dkt. 396) is GRANTED as to
the issue of breach of § 1.1;
(6) BMC’s motion for partial summary judgment on breach of the outsourcing attachment
§§ 1.1 and 5.4 (Dkt. 381) is DENIED as to the issue of breach of § 1.1;
(7) IBM’s motion for summary judgment on its counterclaim for breach of § 18 of the 2015
OA (Dkt. 394) is DENIED;
(8) BMC’s motion for summary judgment on IBM’s counterclaim for breach of § 18 of the
2015 OA (Dkt. 391) is GRANTED in full;
(9) IBM’s objections are SUSTAINED IN PART and OVERRULED IN PART; and
(10) BMC’s objections are SUSTAINED IN PART and OVERRULED IN PART

Signed at Houston, Texas on September 9, 2021.

_________________________________
Gray H. Miller
Senior United States District Judge

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