UPDATE 2-IBM wins reversal of $1.6 billion judgment to BMC over software contract

(Adds IBM comment in paragraph 3)

By Jonathan Stempel and Blake Brittain

April 30 (Reuters) - A federal appeals court on Tuesday overturned a judgment requiring IBM to pay rival BMC Software $1.6 billion, after a judge found IBM improperly replaced BMC's mainframe software at AT&T with its own.

The 5th U.S. Circuit Court of Appeals in New Orleans said a lower court judge's determination concerning liability was in error. Writing for a three-judge panel, U.S. Circuit Judge Edith Jones said AT&T, one of BMC's biggest clients, had switched to IBM software "independently" and that BMC had "lost out to IBM fair and square."

A BMC spokesperson declined to comment. An IBM spokesperson said in a statement that the company "acted in good faith in every aspect of this engagement" and is "grateful the court agrees."

Representatives for AT&T, which is not a party to the case, did not immediately respond to a request for comment.

Houston-based BMC develops and licenses proprietary mainframe software products. Under an agreement, IBM can maintain and operate mainframes running BMC software with a "non-displacement" provision that limits IBM from switching BMC clients' software to IBM's, the ruling said.

AT&T hired IBM to manage its mainframe operations. BMC's lawsuit in Houston federal court accused IBM of breaching their contract when AT&T abandoned its software for IBM's.

Tuesday's ruling overturned U.S. District Judge Gray Miller's 2022 decision that IBM owed BMC $1.6 billion in damages for breaking their agreement. Miller said IBM had already secretly agreed to replace BMC's software at AT&T when it negotiated the contract in 2015. (Reporting by Jonathan Stempel in New York and Blake Brittain in Washington Editing by Chris Reese and Richard Chang)