Indiana Must Pay IBM $12M for Canceled Contract, Judge Rules

A Marion County judge ruled that the state owes IBM $12 million in a dispute over the state's canceled welfare-modernization contract, but the victory falls short of the money IBM had sought.
by | July 18, 2012

By Jon Murray, The Indianapolis Star

A Marion County judge today ruled that the state owes IBM $12 million in a dispute over the state's canceled welfare-modernization contract, but the victory falls short of the money IBM had sought.

That amount is in addition to $40 million that Judge David Dreyer previously ruled IBM deserved for subcontractor fees. The bulk of the new $12 million judgment covers $9.5 million in equipment it left in the state's possession when the contract was canceled and $2.5 million for contract termination payments, plus interest.

The state gets nothing out of the ruling -- a blow for Gov. Mitch Daniels -- and plans an appeal.

"Neither party deserves to win this case," Dreyer wrote in a 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."

The matter was the subject of a five-week trial earlier this year before Dreyer, with no jury. Today he issued an opinion that reviews the evidence and makes findings assigning damages.

IBM signed a 10-year contract in which the state agreed to pay more than $1 billion for the company to create an automated application system for benefits distributed by the Family and Social Services Administration. Gov. Mitch Daniels pulled the plug in 2009, three years in, because of complaints with the system.

The state had sought more than $150 million in damages. Its attorneys disagreed with Dreyer's earlier finding that the contract limits the state's damages to $125 million. IBM, in turn, sought $113 million to cover fees and equipment the state is still using. The state's attorneys promised an appeal.

"We believe the court's view that IBM's concededly bad performance did not materially breach the contract is wrong, and cannot be squared with the overwhelming evidence of poor performance," wrote attorneys John Maley and Peter Rusthoven of Barnes & Thornburg. "IBM continually missed key performance measures. Federal regulators found performance abysmal. IBM's own senior executive called it an 'abomination,' and IBM executives repeatedly admitted the State had good reasons to be dissatisfied."

They added: "The main victory for Hoosier taxpayers and the Hoosier families FSSA serves was the Governor's decision to fire IBM for its failed performance and put an end to a contract under which IBM wanted to be paid another half a billion dollars. The extraordinary success of the program the State put in place after firing IBM is the strongest possible proof that IBM failed to do what it promised, and that the Governor made the right call in sending them packing."

A statement from IBM pointed out that the court's ruling also allows the company to recoup interest and other costs, which it says will amount to about $10 million. The court will rule on the exact amount later.

In IBM's view, the decision "confirms the essential role IBM played in reducing fraud and laying the framework for the welfare eligibility system that is currently serving Indiana's neediest citizens. ... The Court's recognition of these accomplishments is a testament to the creativity and commitment of the many IBM employees who worked on behalf of the State of Indiana."

Robert Weber, IBM's senior vice president and general counsel, said: "This case was all about whether the State would fulfill its clear and explicit contractual promises. The Court's decision is an important one for all companies who do business with the State because it makes clear that the State is not above the law."

While the ruling gave IBM a lukewarm victory, the state's appeal assures that the case is not over.

(c)2012 The Indianapolis Star


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