« Ind. Decisions - Supreme Court issues opinion in Wabash College hazing case | Main | Courts - "Kentucky gay marriage ruling looks to precedents" »

Thursday, February 13, 2014

Ind. Decisions - Court of Appeals rules in IBM contract case

In State of Indiana, acting on behalf of the Indiana Family & Social Services Administration v. International Business Machines Corporation, a 93-page, 2-1 opinion, Chief Judge Vaidik writes [emphasis by ILB]:

Indiana’s poorest residents live hand-to-mouth trusting that they will receive food stamps to eat and Medicare or other state health insurance in order to receive basic medical care. These citizens do not have the luxury of being able to wait to eat or go to a doctor while a phone goes unanswered, an appointment cannot be scheduled, or an application sits on a desk. The needs of the poor are immediate.

Indiana entered into an arrangement with the federal government to distribute federal funds to those in greatest need. Part of the State’s responsibility was to make certain that only the poorest received aid and to help welfare recipients find work. If the State failed to comply with federal guidelines, then it would be penalized by the federal government, resulting in less federal aid for our citizens.

By all accounts, the State was failing in performing its duties. As a result, in December 2006, the State, on behalf of its agency the Indiana Family and Social Services Administration (FSSA), entered into a ten-year, $1.3 billion contract with International Business Machines Corporation (IBM) to modernize and improve the State’s welfare system. IBM agreed to the State’s proposal, although it argues that the system design was doomed to fail. Nonetheless, IBM received $437 million while assuring the State that it was up to the task. Less than three years into the ten-year contract, the State terminated the contract citing IBM performance issues, and the parties sued each other for breach of contract on the same day in Marion Superior Court. The State sought over $170 million in damages, and IBM sought almost $100 million. Appellant’s App. p. 239-40. The trial court granted IBM summary judgment for $40 million in assignment fees and, after a six-week bench trial in 2012, found no material breach on IBM’s part and awarded IBM an additional $9,510,795 in Equipment fees, $2,570,621 in Early Termination Close Out Payments, and $10,632,333 in prejudgment interest, totaling $62,713,749.

While IBM’s software, computers, and employee training aided in delivering welfare services, the primary focus of the contract was to provide food and medical care to our poorest citizens in a timely, efficient, and reliable manner within federal guidelines, to discourage fraud, and to increase work-participation rates. In the most basic aspect of this contract—providing timely services to the poor — IBM failed. We therefore reverse the trial court’s finding that there was no material breach.

Despite finding a material breach on IBM’s part, we affirm the trial court’s award of $40 million in assignment fees and $9,510,795 in Equipment fees to IBM. We do so because the State and IBM agreed under the terms of the contract that the State would pay these fees. Further, the State would be unjustly enriched if it were to keep IBM’s equipment and to assume IBM’s subcontracts without paying IBM. We further affirm the trial court’s denial of Deferred Fees to IBM, reverse the trial court’s award of $2,570,621 in Early Termination Close Out Payments and $10,632,333 in prejudgment interest to IBM, and remand the case to the trial court to determine the amount of fees IBM is entitled to for Change Orders 119 and 133. Finally, we remand the case to the trial court to determine the State’s damages for IBM’s material breach of the contract and to offset any damages awarded to IBM. We therefore affirm in part, reverse in part, and remand the case to the trial court. * * *

BAKER, J., concurs.
FRIEDLANDER, J., concurs in part and dissents in part with separate opinion. [which begins on p. 85; here from p. 86] My primary point of disagreement with the Majority concerns the standard to be employed in deciding whether IBM’s breach was “material”.

Posted by Marcia Oddi on February 13, 2014 01:08 PM
Posted to Ind. App.Ct. Decisions