In the News Law360

IBM Wins Battle Over $1.4B Ind. Welfare Contract

18 July 2012

An Indiana state judge on Wednesday rejected the state's effort to recoup $125 million from International Business Machines Corp. in a battle over a canceled $1.4 billion welfare system modernization contract.

Marion Superior Court Judge David Dreyer, in a harshly worded opinion, instead awarded $12 million to IBM, bringing the total amount Indiana owes the company to $52 million.

"Neither party deserves to win this case," Judge Dreyer said. "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."

But the judge said the state failed to meet its burden to show that IBM committed a material breach of the contract.

"Certainly the state showed that IBM did not perform well in some respects," the judge said. "But the record is too laden with too much evidence of political factors, the overwhelming difficulty of attempting such a project, and the state's own inconsistent performance to not allow a conclusion that unsatisfactory results were not caused as much by the state as IBM."

The judge also shot down IBM's request to collect $43 million in other damages.

"Most of IBM's claimed damages at trial ... are unreasonable and cannot be collected," the judge said.

IBM already had been awarded $40 million before the trial for other fees, and the $12 million awarded Wednesday was mostly for equipment that Indiana has retained, the judge said.

The state's counsel, John Maley and Peter Rusthoven of Barnes & Thornburg LLP, said the state will 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," the attorneys said in a statement. "We are confident Indiana's appellate courts will now set aside most if not all of the IBM claims that still remain."

IBM said the ruling showed it did its job for the state properly.

"In denying the state's ill-founded $400 million claim for damages in its entirety, the court explicitly recognized the numerous and substantial benefits IBM delivered to the state during its leadership of the welfare modernization program," the company said in a statement.

Indiana Gov. Mitch Daniels emphasized the improvements in the system since IBM was taken off the job.

"Here's what matters: Indiana, which eight years ago had the nation's worst welfare system, now has its most timely, most accurate, most cost effective and fraud free system ever," Daniels said in a statement.

The suit, brought in 2010, revolves around a 10-year, $1.4 billion contract struck between IBM and Indiana in December 2006 aimed at improving food and welfare assistance in Indiana.

Indiana slapped IBM with the suit on behalf of the Indiana Family and Social Services Administration to recover the $437 million it paid for the project. IBM also filed suit against the state for more than $53 million in contractual fees and equipment expenses, according to court documents.

In January, Judge Dreyer found that IBM was entitled to $40 million in subcontractor assignment fees from Indiana, and capped Indiana's possible award at $125 million.

The state is represented by Peter Rusthoven, John Maley, J. Curtis Greene and Patrick Price of Barnes & Thornburg LLP.

IBM is represented by Steven McCormick, Douglas Smith and Aaron Charfoos of Kirkland & Ellis LLP and by Andrew Hull, Daniel Burke and Jason Fulk of Hoover Hull LLP.

The cases are State of Indiana v. International Business Machines Corp. and International Business Machines Corp. v. State of Indiana, case number 49D10-1005-PL-021451, in the Marion (Ind.) Superior Court.

Steven D. McCormick

Practices