Indiana high court: IBM breached state welfare contract

March 22, 2016

IBM breached its agreement with the state in its failed bid to privatize and modernize Indiana’s welfare systems, the Indiana Supreme Court ruled Tuesday, more than six years after the state sued the tech giant over the $1.3 billion contract.

The high court accepted the case in August 2014 after both sides appealed a state Court of Appeals ruling. The court voted 4-0 to affirm the appeals court decision, with Justice Mark Massa, a former Daniels adviser, not participating.

The decision opens the door for the state to collect damages from IBM, whose administration of welfare programs led to excessive delays in meeting with applicants and processing applications, document mismanagement, high staff turnover and poor internal and external communications, among dozens of problems the state identified.

The high court remanded the case to the trial court for calculation of the parties’ damages.

Peter Rusthoven, a private attorney representing Indiana's welfare services agency, said Indiana claims about $175 million in damages from IBM's contract breach.

The Court of Appeals ruled in Feburary 2014 that IBM breached its contract to modernize the welfare system—an effort that was undertaken beginning 10 years ago in the administration of former Gov. Mitch Daniels. In October 2009, the state terminated IBM’s contract for cause, and litigation ensued.  

While the state will be entitled to calculated damages, justices affirmed some of the awards previously made to IBM. Affirmed in the decision were trial court awards upheld by the Court of Appeals of $40 million in assignment fees and $9.5 million in equipment fees for IBM.

The court reversed the trial court’s award of $2.6 million in early termination close-out payments and $10.6 million in prejudgment interest to IBM, but remanded for determination of change-order fees in the company’s favor.

The high court heard arguments in the case in October 2014 and later recommended mediation between parties.

In writing for the Supreme Court, Justice Steven H. David said the trial court "ignored uncontroverted evidence and made several legal errors" in favoring IBM.

Among those errors were "failing to consider the state’s dissatisfaction with IBM’s performance as required by the [agreement]," and "adopting IBM’s excuses for non-performance."

The IBM contract dispute was the longest pending case that remained before the state Supreme Court.


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