A Fifth Circuit panel ruled Tuesday that a federal court improperly awarded $1.6 billion to BMC Software, a Houston-based software company, over a licensing and competition dispute with tech giant IBM.

Both companies had worked on AT&T’s mainframe systems, with BMC licensing its software to the telecommunications company and IBM providing the hardware. In 2008, the two companies agreed to let IBM use BMC’s licensed software for its own IT business when working with BMC’s customers. The two companies amended a key part of their contract regarding outsourcing in 2013 and 2015.

As part of that 2015 amendment, BMC laid out a provision that said that IBM couldn’t replace BMC’s licensed software on AT&T’s system with their own. The provision also stated 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.”

Following a federal court ruling in favor of BMC that left IBM on the hook for $1.6 billion, IBM’s attorney argued before the Fifth Circuit last September that because AT&T had initiated the project to switch from BMC’s software to IBM’s, rather than IBM themselves, IBM did not violate the provision.

The panel sided with IBM in a ruling authored by U.S. Circuit Judge Edith H. Jones, based on a holistic reading of the language used in IBM-BMC contract.

“IBM could replace BMC software with IBM software in AT&T’s mainframe at AT&T’s request. The phrase ‘other valid business reasons’ unambiguously requires this result,” Jones wrote in deciding at IBM did not violate the contract as the agreement does not unequivocally prevent IBM from replacing the BMC software.

“Because the client made that decision without unfair influence from IBM, BMC lost out to IBM fair and square. Under these circumstances, there is no legitimate reason to enforce Section 5.4 against IBM,” Jones wrote.

According to the panel, BMC’s interpretation of the “other valid business reasons” phrase in the provision would have either rendered it superfluous or far too narrow. Beyond that, the panel found that BMC’s narrow interpretation of the difference between “displace” and “discontinue” did not fully explain the non-displacement provision’s meaning.

In 2017, BMC sued IBM in the Southern District of Texas for breach of contract — including violation of that non-displacement provision — after learning of a 2013 project between AT&T, IBM, and other partners to replace BMC’s mainframe software in AT&T’s systems with competing products, including IBM’s own software.

Though the project did not get completed, as AT&T opted to renew its contract with BMC, the Houston company sued after learning about IBM’s involvement.

IBM appealed a May 2022 ruling from U.S. District Judge Gray Miller that focused on the non-displacement provision and had determined the project had “displaced BMC Customer Licenses with IBM products when it implemented Project Swallowtail at AT&T” in violation of the contract between BMC and IBM.

Miller ordered IBM to pay BMC $718 million in license fees for actual damages, an equal sum in punitive damages and $168 million in prejudgment interest, for a total judgment of just over $1.6 billion.