Ruling for IBM likely first act in legal epic

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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.

page Page

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-DAvid-mug 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 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.”•


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  1. 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.

  2. 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.

  3. 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.

  4. rensselaer imdiana is doing same thing to children from the judge to attorney and dfs staff they need to be investigated as well

  5. Sex offenders are victims twice, once when they are molested as kids, and again when they repeat the behavior, you never see money spent on helping them do you. That's why this circle continues