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State appeals court sets hearing on IBM welfare lawsuit

September 3, 2013

The Indiana Court of Appeals has set a November hearing in the state's legal fight with IBM Corp. over a failed attempt to overhaul the state's welfare system.

The state is appealing a Marion County judge's ruling last year awarding $52 million to IBM after then-Gov. Mitch Daniels canceled what was a 10-year, $1.37 billion contract to process applications for food stamps, Medicaid and other programs.

A three-judge appeals court panel is scheduled to hear oral arguments in the case Nov. 25.

State officials sought to recoup roughly $170 million from IBM, but the judge ruled last July Indiana failed to prove the company breached its contract.

Marion County Judge David Dreyer said in his 75-page order that neither side deserved to win the dispute.

"Overall, both parties are to blame and Indiana's taxpayers are left as apparent losers," Dreyer wrote, blaming "misguided government policy and overzealous corporate ambition."

A team of vendors led by IBM in 2006 was awarded a 10-year, $1.37 billion contract to process applications for food stamps, Medicaid, and other public safety net benefits. The deal introduced call centers, the Internet and fax machines as means to apply for benefits and removed specific state case workers assigned to each household.

The changes drew fire from lawmakers, welfare clients and their advocates, who claimed the new system lost necessary documents, left telephone callers on hold for long periods, reduced or eliminated face-to-face contact with case workers. Daniels killed the deal in 2009, after less than three years.

Indiana initially sued IBM for $437 million, which was later reduced to about $170 million. IBM countersued for about $100 million that it claimed it was owed.

Dreyer said Indiana set out to fix the previous welfare system, which Daniels called the worst in the nation, by "inserting an untested theoretical experiment, and substitute personal caseworkers with computers and phone calls.

"This is now admitted to be an error, and there is nothing in this case, or the court's power, that can be done to correct it, or remedy the lost taxpayer money or personal suffering of needy Hoosiers," he wrote.

Indiana failed to prove that IBM breached its contract, Dreyer said, and he denied the state the money it sought.

Dreyer also found that most of IBM's claims for damages were "unreasonable" but awarded the Armonk, N.Y.-based company $12 million, mostly for equipment the state kept. IBM previously had previously received $40 million in a summary judgment ahead of the trial.

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