Indiana can seek $177M in IBM suit
The Indiana Court of Appeals’ reversal Thursday of a lower court ruling clears the way for the state to seek up to $177 million in a breach of contract suit against IBM over a failed welfare-services system.
The appellate court sent the case back to Marion Superior Court and ordered it to determine a damage amount for the state.
“In the most basic aspect of this contract — providing timely services to the poor — IBM failed,” Chief Judge Nancy H. Vaidik wrote in the majority opinion.
Marion Superior Court Judge David Dreyer in 2012 awarded IBM $52 million and said the company was not in violation of its contract terms. The state fired IBM in 2009 and claimed breach of contract after hundreds of millions of dollars were spent for a system that generated widespread complaints of delayed benefits.
Although the appellate court on Thursday agreed with Dreyer that IBM was entitled to about $50 million for equipment and services provided, the court reversed the judge on the larger matter over breach of contract.
The ruling means the state could win up to $177 million, an amount based on what it originally sought in its suit against IBM.
“This is huge,” said John Maley, an attorney for Barnes & Thornburg, an Indianapolis law firm hired by the state. “The whole paradigm has shifted.”
The ruling indicated that the services the state did receive were not relevant toward fulfilling the terms of the contract.
“Whether IBM materially breached the contract does not require balancing the number of benefits the State received versus the number of performance standards that IBM failed,” the 92-page ruling said. “Rather, the issue is whether any breach went to the essence of the contract — to provide and expand access to services for welfare recipients in a timely, reliable, and efficient manner.”
Then-Gov. Mitch Daniels outsourced the intake of welfare clients to private contractors led by IBM in 2006. But he canceled the 10-year, $1.37 billion contract with the Armonk, N.Y.-based company in 2009 after a flood of complaints about performance from clients, their advocates and federal officials. At the time, the state had paid IBM $437 million.
The legal wrangling began soon after, and in his earlier ruling, Deyer expressed exasperation with the entire affair.
“Neither party deserves to win this case,” Dreyer wrote in his 65-page ruling. “This story represents a ‘perfect storm’ of misguided government policy and overzealous corporate ambition. Overall, both parties are to blame, and Indiana’s taxpayers are left as apparent losers.”
A spokesman for IBM said the company disagreed with Thursday’s ruling.
“IBM is disappointed with the conclusions in the majority opinion of the appellate court,” IBM spokesman Todd Martin said in a prepared statement. “We feel confident we fulfilled our contractual obligations and will continue to seek relief in the Indiana courts.”
Daniels, now president of Purdue University in West Lafayette, said in a prepared statement that firing IBM was the right decision.
“Today’s emphatic victory confirms both the legality and the soundness of the decision to replace IBM in reforming a broken welfare system,” he said. “Changing from IBM to a different private provider produced an enormous success for welfare recipients, who now receive vastly better and fairer service than ever before, and for taxpayers, who are saving tens of millions every year.”
David Sklar, past president of the Indiana Coalition for Human Services, agreed that welfare services have improved since IBM was fired. But, he said, the state should have seen the problems coming before IBM was hired.
“A lot of questions were raised when the system was privatized,” Sklar said. “Was this the best system? Would they be able to handle it? It became clear to us it was not ready.”
The trial court ruling that the state had to pay IBM had added “insult to injury,” Sklar said.
“The state had spent a lot of money on the system, on litigation, and then had to pay damages,” he said. “It is nice to know that some problems have been placed on the contractor.”
Call Star reporter John Tuohy at (317) 444-6418. Follow him on Twitter: @john_tuohy.