A ruling that ordered the state to pay more than $52 million to IBM due to cancellation of its contract to privatize social service claims processing certainly will have a second, and most likely a third, act.

The first act closed with unusually superlative language in a judge’s order and a harsh critique of the ruling from a key attorney representing the state.

Marion Superior Judge David Dreyer released his final order July 18, and Gov. Mitch Daniels quickly vowed the state would appeal. Dreyer awarded IBM $12 million for early termination closeout payments and equipment, an amount that was added to the judge’s earlier order awarding the company $40 million in subcontractor assignment fees. The state was granted nothing on its claim that IBM was in breach of contract.
 

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The case is “almost certainly” bound for appeal to the Indiana Supreme Court regardless of how the Indiana Court of Appeals rules when an appeal is filed, said contract law expert Antony Page, vice dean and professor of law at the Indiana University Robert H. McKinney School of Law.

“I would be surprised if either party would let the appellate court decision stand,” Page said.

“Normally with contract disputes the parties are able to reach an approximate valuation among themselves and are able to settle,” he said. But in State of Indiana v. IBM, 49D10-1005-PL-021451, “both parties are relatively entrenched.”

Dreyer

IBM argued it was entitled to $100 million in early-termination fees; the state claimed IBM was in breach and owed $125 million. The state originally wanted more than $437 million, but Dreyer previously ruled $125 million was the max the state could recover in damages.

Dreyer wrote in his order, “Neither party deserves to win this case. 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.”

Rusthoven

Barnes & Thornburg LLP attorney Peter Rusthoven, who represents the state, seized on the tone of Dreyer’s order. “The ruling contains regrettable, unnecessary political commentary that is neither accurate nor relevant,” Rusthoven said in a statement when the order was issued.

Later, Rusthoven said, “It is beyond unusual for commentary like that to be in an opinion. This is a contract case. It has nothing to do with whether the state made a good decision.”

In a media availability in his courtroom after issuing his order, Dreyer declined to explain why he used the ‘perfect storm’ language. He later said in an email that he had no comment on Rusthoven’s criticism, and that no political commentary had been intended in the order.

Rusthoven, whose firm has collected more than $9 million in fees litigating the IBM case, said Dreyer didn’t seriously consider state claims that IBM was in breach of contract for repeated failure to meet performance indicators. “There was a staggering amount of evidence that was not even discussed.”

IBM representatives did not respond to requests for interviews and stood by a statement issued the day of Dreyer’s order.

“This case was all about whether the state would fulfill its clear and explicit contractual promises,” said Robert Weber, IBM senior vice president and general counsel. “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.”

IBM said the order “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 order awarded IBM $42.5 million in contract termination payments; about $9.5 million in compensation for equipment; and interest that IBM estimates at about $10 million, plus costs, for the period of time that the state withheld payment to IBM.

The state and IBM agreed that Family and Social Services Administration claims processing and accuracy had improved, but Daniels, in a statement, said IBM had little to do with that.

“The state’s case backlog has dropped 81 percent since the IBM contract was terminated,” according to Daniels’ statement.

“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,” the statement said. “That was always the goal, and changing vendors was essential to achieving it.”

Page called Dreyer’s ruling a “pretty impressive piece of work” and read the order as critique of the performance of duties taxpayers entrust to the government.

“It is unusual in a case like this to see language like that,” Page said of the “perfect storm” reference. “I think this just reflects the judge’s frustration with both parties. … He wants to make it clear on the record that both parties are at fault here.

“For the typical taxpayer in Indiana, it’s useful to know this is what the impartial judge thinks of both parties,” he said.

The state failed to demonstrate that IBM was in breach, Page explained, which is the burden of proof in contractual cases. He added that Dreyer in his order clearly defined what material breach is.

“The real problem lies in the initial contract that they signed,” Page said of the state.

Rusthoven, meanwhile, said “We are quite confident of our chances of success on appeal … much, much higher than the average case.” He said the basis of appeal will include assertions that Dreyer misread the contract.

But Page predicted the ruling will be upheld in the Court of Appeals.

“It seems pretty well-reasoned,” he said. “It’s hard to see this being overturned on appeal.” With the standard for reversal on appeal being that a judge’s ruling was clearly erroneous, Page said, “he seems to have plenty of support in the record for his conclusions of fact.”•