Appeals court: IBM materially breached contract with state

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The Indiana Court of Appeals has reversed a Marion County judge’s finding that IBM did not materially breach the contract it had with the state to modernize its welfare system. As a result, the appeals court ordered a determination of damages to the state.

The state and IBM entered into a billion-dollar contract to update and modernize Indiana’s welfare system in December 2006. But the process was plagued with problems and the state ended the 10-year contract in October 2009 “for cause,” in part because of IBM’s “numerous and repeated quality and timeliness failures.”

When the contract was terminated, Indiana had paid IBM nearly $437 million, plus $4.4 million for disengagement services.

The state and IBM sued each other – the state sought $170 million; IBM wanted at least $52 million. Marion Superior Judge David Dreyer in July 2012 awarded IBM $52 million, plus $10 million in prejudgment interest. He found that IBM did not materially breach the contract.

But two of the three judges on the appeals panel found this was an error, that he should have considered IBM’s failures to meet federal program targets in determining whether to terminate the contract for cause. They also held that the economic downturn and flooding that hit Indiana in 2008 should not have been considered as reasons to excuse IBM’s performance because the contract provided IBM with a remedy in the event of these issues.

“We find that the heart of this contract was to provide services to the poor in a way that complied with federal law,” Chief Judge Nancy Vaidik wrote in State of Indiana, acting on behalf of the Indiana Family & Social Services Administration v. International Business Machines Corporation, 49A02-1211-PL-875. “In this respect IBM’s performance, as the trial court explained, ‘consistently missed the mark.’ This substandard performance by IBM, $437 million and 36 months later, went to the essence of this contract.”

The COA upheld that IBM is entitled to the $40 million in assignment fees, despite the material breach because these fees represent value to the state in the ability to assume certain subcontracts, as well as that deferred fees are not payable to IBM in the event the contract was terminated for cause.

The state no longer has to pay the $2.5 million in early termination close out payments because of IBM’s breach, but it must pay the $9.5 million for the equipment it kept after cancelling the contract.

IBM is not entitled to $10.6 million prejudgment interest, the court held. The judges remanded for a determination of the amount of fees IBM is entitled to for change orders 119 and 133 and to determine the state’s damage and offset any damages awarded to IBM as a result of its material breach.  

Judge Ezra Friedlander dissented in part, believing that IBM did not materially breach the contract and that IBM can recover transition fees.



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  1. I think the cops are doing a great job locking up criminals. The Murder rates in the inner cities are skyrocketing and you think that too any people are being incarcerated. Maybe we need to lock up more of them. We have the ACLU, BLM, NAACP, Civil right Division of the DOJ, the innocent Project etc. We have court system with an appeal process that can go on for years, with attorneys supplied by the government. I'm confused as to how that translates into the idea that the defendants are not being represented properly. Maybe the attorneys need to do more Pro-Bono work

  2. We do not have 10% of our population (which would mean about 32 million) incarcerated. It's closer to 2%.

  3. If a class action suit or other manner of retribution is possible, count me in. I have email and voicemail from the man. He colluded with opposing counsel, I am certain. My case was damaged so severely it nearly lost me everything and I am still paying dearly.

  4. There's probably a lot of blame that can be cast around for Indiana Tech's abysmal bar passage rate this last February. The folks who decided that Indiana, a state with roughly 16,000 to 18,000 attorneys, needs a fifth law school need to question the motives that drove their support of this project. Others, who have been "strong supporters" of the law school, should likewise ask themselves why they believe this institution should be supported. Is it because it fills some real need in the state? Or is it, instead, nothing more than a resume builder for those who teach there part-time? And others who make excuses for the students' poor performance, especially those who offer nothing more than conspiracy theories to back up their claims--who are they helping? What evidence do they have to support their posturing? Ultimately, though, like most everything in life, whether one succeeds or fails is entirely within one's own hands. At least one student from Indiana Tech proved this when he/she took and passed the February bar. A second Indiana Tech student proved this when they took the bar in another state and passed. As for the remaining 9 who took the bar and didn't pass (apparently, one of the students successfully appealed his/her original score), it's now up to them (and nobody else) to ensure that they pass on their second attempt. These folks should feel no shame; many currently successful practicing attorneys failed the bar exam on their first try. These same attorneys picked themselves up, dusted themselves off, and got back to the rigorous study needed to ensure they would pass on their second go 'round. This is what the Indiana Tech students who didn't pass the first time need to do. Of course, none of this answers such questions as whether Indiana Tech should be accredited by the ABA, whether the school should keep its doors open, or, most importantly, whether it should have even opened its doors in the first place. Those who promoted the idea of a fifth law school in Indiana need to do a lot of soul-searching regarding their decisions. These same people should never be allowed, again, to have a say about the future of legal education in this state or anywhere else. Indiana already has four law schools. That's probably one more than it really needs. But it's more than enough.

  5. This man Steve Hubbard goes on any online post or forum he can find and tries to push his company. He said court reporters would be obsolete a few years ago, yet here we are. How does he have time to search out every single post about court reporters and even spy in private court reporting forums if his company is so successful???? Dude, get a life. And back to what this post was about, I agree that some national firms cause a huge problem.