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UPDATE: IBM to appeal order to pay Indiana $78 million

August 7, 2017

IBM Corp. says it will appeal a recent ruling ordering it to pay Indiana $78 million in damages stemming from the company's failed effort to automate much of the state's welfare services.

New York-based IBM said in an email Monday that it worked "diligently and invested significant resources" toward improving Indiana's system for processing of Indiana's welfare applications.

Made on Friday and published Monday. the ruling from Marion Superior Judge Heather Welch said the state was entitled to $128 million for IBM’s breach of its master services contract signed more than 10 years ago to modernize the welfare eligibility computer system used by the Family and Social Services Administration.

That amount was reduced to about $78.2 million, Welch said, because IBM is entitled to $49.5 million in equipment fees and assignment fees from the state, an amount previously affirmed by the Indiana Supreme Court. The parties have also stipulated that IBM is entitled to around $311,000 for two charge orders.

The ruling is the latest chapter in litigation stemming from the state’s cancellation of the contract to privatize and upgrade welfare systems. Welch’s ruling came on remand from the Indiana Supreme Court’s decision in March 2016. Justices reversed an earlier trial court decision by Marion Superior Judge David Dreyer that found IBM had not breached the contract and that the company was entitled to about $62 million in damages from the state.

The $1.3 billion, 10-year contract executed by former Gov. Mitch Daniels in 2006 was plagued with problems and terminated for poor performance in October 2009, but not before the state had paid IBM more than $440 million.

The ensuing litigation also was fraught with trouble.

After the Supreme Court remanded the matter to Dreyer with instructions to calculate damages, the Supreme Court removed Dreyer from the case.  The court ruled Dreyer exceeded his authority for issuing orders

Welch has had the decision under advisement since February.

Under the deal, an IBM-led team of vendors worked to process applications for food stamps, Medicaid and other benefits. Residents could apply for the benefits through call centers, the internet and fax machines. The contact was pulled in late 2009, less than three years into the 10-year deal, following complaints about long wait times, lost documents and improper rejections.

Peter Rusthoven, one of the state's private attorneys, said Monday that the ruling would be carefully reviewed before deciding on any additional appeals.

"Overall, we are extremely gratified by the result and thinks it really vindicates the position the state took throughout this really long battle," Rusthoven said.

The state argued that IBM owed Indiana for the cost of fixing the company's problematic automation efforts to make the system workable, paying overtime for state staffers to review and correct those problems, and hiring new staff to help oversee that process, among other expenses.

IBM's attorneys argued that the company had delivered "substantial benefits" to the state that undermined Indiana's damages claims.

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