Judge says IBM owes $1.6 billion to BMC over software contract

• IBM agreed not to replace BMC clients' software with its own

• Judge finds IBM induced BMC to sign contract through fraud

(Reuters) - A Houston 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."

BMC senior vice president and general counsel Patrick Tagtow said the company was pleased with the decision.

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.

AT&T was one of Houston-based BMC's biggest clients, and hired IBM to manage its mainframe operations. The court said IBM had already agreed to replace BMC's software at AT&T when it negotiated the contract in 2015 and did not intend to comply.

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

AT&T, which was not part of the lawsuit, did not immediately respond to a request for comment.

Miller said Monday that BMC was entitled to $717.7 million in unpaid license fees. He added the same amount in punitive damages for IBM's "fraudulent and malicious" conduct and $168.2 million in interest.

Miller also said IBM did not breach other parts of the agreement or steal BMC trade secrets.

The case is BMC Software Inc v. International Business Machines Corp, U.S. District Court for the Southern District of Texas, No. 4:17-cv-02254.

For BMC: Sean Gorman and Christopher Dodson of Bracewell

For IBM: Richard Werder of Quinn Emanuel Urquhart & Sullivan; and Paul Yetter of Yetter Coleman

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