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State, IBM contest $62 million award for canceled welfare contract

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Indiana Court of Appeals judges spent the better part of a 90-minute oral argument Nov. 25 focused on whether a trial judge’s order applied the proper legal standards in awarding $62 million to IBM after the state canceled its $1.3 billion contract to overhaul Indiana’s welfare administration.

Marion Superior Judge David Dreyer in July 2012 awarded IBM $52 million plus about $10 million in prejudgment interest after the state negated the 10-year deal involving the Family and Social Services Agency after just three years.

apb-il-ibm03-15col.jpg Arguing for the state, Peter Rusthoven tells the Court of Appeals a $62 million judgment for IBM should be vacated. (IL Photo/Aaron P. Bernstein)

In State of Indiana v. IBM, 49D10-1005-PL-021451, Barnes & Thornburg LLP partner Peter Rusthoven argued for the state – to the sometimes skeptical appellate judges – that the record was replete with evidence that the contract was canceled for cause.

“The trial court ruling was clearly erroneous,” Rusthoven said. He argued that IBM officials promised more than they could deliver in promoting an advanced, totally computerized welfare-intake system, then later claimed, “We’re just the Geek Squad from Best Buy” taking orders from the state.

Before the trial court, the state sought the maximum it could recover from IBM – $125 million of the $437 million it paid during the first three years of its contract. IBM sought more than $100 million – claims it restated to the appeals panel during oral arguments.

“During the early part of the contract, IBM was being underpaid,” said IBM attorney Jay

Lefkowitz of the New York firm Kirkland & Ellis LLP. “… Our costs were going to be significantly more than $10 million a month” that the state was paying at the outset.

IBM’s efforts to upgrade the state’s computer systems for screening and processing claims for welfare, food stamps and Medicaid was “plagued with problems from the start,” Rusthoven told the Court of Appeals panel. He argued the judges would have to determine whether Dreyer’s opinion was “infected from top to bottom with legal errors,” beginning with the ruling that IBM was not in material breach.

Judge Nancy Vaidik countered Rusthoven’s assessment of IBM’s performance. The trial court made particular findings of fact, for instance, that “IBM was curing these problems” at the time the contract was nixed, Vaidik said.

Rusthoven said that was among the clear errors in the trial court ruling. He pointed to language in the IBM contract saying the state had to be satisfied with the company’s overall performance. He said the court had to look at IBM’s performance under the contract in totality. “The state was not satisfied in 2009,” he said.

apb-il-ibm02-15col.jpg Company attorney Jay Lefkowitz argues the state should pay more than $100 million for canceling its contract to upgrade Indiana’s welfare system. (IL Photo/Aaron P. Bernstein)

“You paid $437 million for something,” Judge Ezra Friedlander interjected. “You had to be satisfied with something.” Presiding Judge John Baker also pointed to the amount the state paid before canceling the contract and arguing breach.

Rusthoven said the state never argued that IBM did nothing, but rather that the company wasn’t hitting performance goals. And just because the state continued paying IBM roughly $10 million a month under the contract, “That doesn’t give (IBM) a blank ‘no-material-breach’ check,” he said.

Rusthoven answered Vaidik’s query of what he would have the court do by urging the panel to vacate the awards.

He also told the panel key IBM witnesses and the company’s internal documents showed that some of the claimed damages IBM sought under the contract were “arbitrary” and unenforceable.

But Lefkowitz dismissed testimony of “arbitrary” claims as coming from “a much more junior member of the team.” He said his client was entitled to sums in addition to those awarded by the trial court. Lefkowitz pushed for total damages of about $106.6 million.

That increased amount would include an additional $43 million in deferred fees – a “true-up” or “make-whole payment” reflecting the greater amount of upfront work IBM performed at the outset of the contract, plus compensation for lost revenue.

The trial court ruled the state failed to show IBM in material breach despite evidence of poor performance under the contract. The state also received benefits including improved FSSA performance as a result of the contract, a ruling the trial court also found precluded a determination of material breach.

The court’s $52 million in damages includes $40 million in assignment fees Indiana owes IBM because the state retained the company’s subcontractors after it dropped IBM. Another $9.5 million in equipment expenses was awarded to pay for computers, monitors, furniture and other assets procured under the contract, and an additional $2.5 million was awarded in early termination close-out payments. That includes actual costs to IBM that were incurred as a result of the state’s cancellation of the contract.

apb-il-ibm01-15col.jpg Presiding Court of Appeals Judge John Baker addresses a question to counsel in State v. IBM during oral arguments Nov. 25. Panelists flanking Baker are Judges Ezra Friedlander and Nancy Vaidik. (IL Photo/Aaron P. Bernstein)

Lefkowitz said the state received clear benefits from hiring the same subcontractors IBM lined up to do the work, and that when Gov. Mitch Daniels canceled the contract, IBM experienced a tangible loss that can only be compensated by the additional $43 million award. “We were going to make $4.7 million a year just from one of the subcontractors,” Lefkowitz told the panel.

The state is still using equipment provided under the IBM contract, according to Lefkowitz. “It makes perfect sense you’ve got to buy this equipment if you want to use it.”

Rusthoven countered to the panel that the argument for deferred fees would set a dangerous precedent. “IBM is claiming it had a right to make a loan to the state which the state now has to repay.”

While Rusthoven also argued the state has sovereign immunity from paying prejudgment interest, Lefkowitz disagreed, claiming “the state stands on the same footing as any other party.”

A day after oral arguments in State v. IBM, a separate appeals court panel affirmed Dreyer’s rulings in a suit IBM filed against a subcontractor, ACS Human Services Inc. That appeals panel upheld a ruling that IBM owed ACS $709,398.95 in costs related to discovery and costs of production of documents as a nonparty in the state suit. Also affirmed was the trial court’s grant to IBM of $425,178.85 in sanctions against ACS.

The Court of Appeals will rule in State v. IBM at a later date.•

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  1. A high ranking Indiana supreme Court operative caught red handed leading a group using the uber offensive N word! She must denounce or be denounced! (Or not since she is an insider ... rules do not apply to them). Evidence here: http://m.indianacompanies.us/friends-educational-fund-for-negroes.364110.company.v2#top_info

  2. A high ranking bureaucrat with Ind sup court is heading up an organization celebrating the formal N word!!! She must resign and denounce! http://m.indianacompanies.us/friends-educational-fund-for-negroes.364110.company.v2#top_info

  3. ND2019, don't try to confuse the Left with facts. Their ideologies trump facts, trump due process, trump court rules, even trump federal statutes. I hold the proof if interested. Facts matter only to those who are not on an agenda-first mission.

  4. OK so I'll make this as short as I can. I got a call that my daughter was smoking in the bathroom only her and one other girl was questioned mind you four others left before them anyways they proceeded to interrogate my daughter about smoking and all this time I nor my parents got a phone call,they proceeded to go through her belongings and also pretty much striped searched my daughter including from what my mother said they looked at her Brest without my consent. I am furious also a couple months ago my son hurt his foot and I was never called and it got worse during the day but the way some of the teachers have been treating my kids they are not comfortable going to them because they feel like they are mean or don't care. This is unacceptable in my mind i should be able to send my kids to school without worry but now I worry how the adults there are treating them. I have a lot more but I wanted to know do I have any attempt at a lawsuit because like I said there is more that's just some of what my kids are going through. Please respond. Sincerely concerned single parent

  5. California Sex Offender Management Board (CASOMB) End of Year Report 2014. (page 13) Under the current system many local registering agencies are challenged just keeping up with registration paperwork. It takes an hour or more to process each registrant, the majority of whom are low risk offenders. As a result law enforcement cannot monitor higher risk offenders more intensively in the community due to the sheer numbers on the registry. Some of the consequences of lengthy and unnecessary registration requirements actually destabilize the life’s of registrants and those -such as families- whose lives are often substantially impacted. Such consequences are thought to raise levels of known risk factors while providing no discernible benefit in terms of community safety. The full report is available online at. http://www.casomb.org/index.cfm?pid=231 National Institute of Justice (NIJ) US Department of Justice Office of Justice Programs United States of America. The overall conclusion is that Megan’s law has had no demonstrated effect on sexual offenses in New Jersey, calling into question the justification for start-up and operational costs. Megan’s Law has had no effect on time to first rearrest for known sex offenders and has not reduced sexual reoffending. Neither has it had an impact on the type of sexual reoffense or first-time sexual offense. The study also found that the law had not reduced the number of victims of sexual offenses. The full report is available online at. https://www.ncjrs.gov/app/publications/abstract.aspx? ID=247350 The University of Chicago Press for The Booth School of Business of the University of Chicago and The University of Chicago Law School Article DOI: 10.1086/658483 Conclusion. The data in these three data sets do not strongly support the effectiveness of sex offender registries. The national panel data do not show a significant decrease in the rate of rape or the arrest rate for sexual abuse after implementation of a registry via the Internet. The BJS data that tracked individual sex offenders after their release in 1994 did not show that registration had a significantly negative effect on recidivism. And the D.C. crime data do not show that knowing the location of sex offenders by census block can help protect the locations of sexual abuse. This pattern of noneffectiveness across the data sets does not support the conclusion that sex offender registries are successful in meeting their objectives of increasing public safety and lowering recidivism rates. The full report is available online at. http://www.jstor.org/stable/full/10.1086/658483 These are not isolated conclusions but are the same outcomes in the majority of conclusions and reports on this subject from multiple government agencies and throughout the academic community. People, including the media and other organizations should not rely on and reiterate the statements and opinions of the legislators or other people as to the need for these laws because of the high recidivism rates and the high risk offenders pose to the public which simply is not true and is pure hyperbole and fiction. They should rely on facts and data collected and submitted in reports from the leading authorities and credible experts in the fields such as the following. California Sex Offender Management Board (CASOMB) Sex offender recidivism rate for a new sex offense is 0.8% (page 30) The full report is available online at http://www.cdcr.ca.gov/Adult_Research_Branch/Research_Documents/2014_Outcome_Evaluation_Report_7-6-2015.pdf California Sex Offender Management Board (CASOMB) (page 38) Sex offender recidivism rate for a new sex offense is 1.8% The full report is available online at. http://www.google.com/url?sa= t&source=web&cd=1&ved= 0CCEQFjAA&url=http%3A%2F% 2Fwww.cdcr.ca.gov%2FAdult_ Research_Branch%2FResearch_ documents%2FOutcome_ evaluation_Report_2013.pdf&ei= C9dSVePNF8HfoATX-IBo&usg=AFQjCNE9I6ueHz-o2mZUnuxLPTyiRdjDsQ Bureau of Justice Statistics 5 PERCENT OF SEX OFFENDERS REARRESTED FOR ANOTHER SEX CRIME WITHIN 3 YEARS OF PRISON RELEASE WASHINGTON, D.C. Within 3 years following their 1994 state prison release, 5.3 percent of sex offenders (men who had committed rape or sexual assault) were rearrested for another sex crime, the Justice Department’s Bureau of Justice Statistics (BJS) announced today. The full report is available online at. http://www.bjs.gov/content/pub/press/rsorp94pr.cfm Document title; A Model of Static and Dynamic Sex Offender Risk Assessment Author: Robert J. McGrath, Michael P. Lasher, Georgia F. Cumming Document No.: 236217 Date Received: October 2011 Award Number: 2008-DD-BX-0013 Findings: Study of 759 adult male offenders under community supervision Re-arrest rate: 4.6% after 3-year follow-up The sexual re-offense rates for the 746 released in 2005 are much lower than what many in the public have been led to expect or believe. These low re-offense rates appear to contradict a conventional wisdom that sex offenders have very high sexual re-offense rates. The full report is available online at. https://www.ncjrs.gov/pdffiles1/nij/grants/236217.pdf Document Title: SEX OFFENDER SENTENCING IN WASHINGTON STATE: RECIDIVISM RATES BY: Washington State Institute For Public Policy. A study of 4,091 sex offenders either released from prison or community supervision form 1994 to 1998 and examined for 5 years Findings: Sex Crime Recidivism Rate: 2.7% Link to Report: http://www.oncefallen.com/files/Washington_SO_Recid_2005.pdf Document Title: Indiana’s Recidivism Rates Decline for Third Consecutive Year BY: Indiana Department of Correction 2009. The recidivism rate for sex offenders returning on a new sex offense was 1.05%, one of the lowest in the nation. In a time when sex offenders continue to face additional post-release requirements that often result in their return to prison for violating technical rules such as registration and residency restrictions, the instances of sex offenders returning to prison due to the commitment of a new sex crime is extremely low. Findings: sex offenders returning on a new sex offense was 1.05% Link to Report: http://www.in.gov/idoc/files/RecidivismRelease.pdf Once again, These are not isolated conclusions but are the same outcomes in the majority of reports on this subject from multiple government agencies and throughout the academic community. No one can doubt that child sexual abuse is traumatic and devastating. The question is not whether the state has an interest in preventing such harm, but whether current laws are effective in doing so. Megan’s law is a failure and is destroying families and their children’s lives and is costing tax payers millions upon millions of dollars. The following is just one example of the estimated cost just to implement SORNA which many states refused to do. From Justice Policy Institute. Estimated cost to implement SORNA Here are some of the estimates made in 2009 expressed in 2014 current dollars: California, $66M; Florida, $34M; Illinois, $24M; New York, $35M; Pennsylvania, $22M; Texas, $44M. In 2014 dollars, Virginia’s estimate for implementation was $14M, and the annual operating cost after that would be $10M. For the US, the total is $547M. That’s over half a billion dollars – every year – for something that doesn’t work. http://www.justicepolicy.org/images/upload/08-08_FAC_SORNACosts_JJ.pdf. Attempting to use under-reporting to justify the existence of the registry is another myth, or a lie. This is another form of misinformation perpetrated by those who either have a fiduciary interest in continuing the unconstitutional treatment of a disfavored group or are seeking to justify their need for punishment for people who have already paid for their crime by loss of their freedom through incarceration and are now attempting to reenter society as honest citizens. When this information is placed into the public’s attention by naive media then you have to wonder if the media also falls into one of these two groups that are not truly interested in reporting the truth. Both of these groups of people that have that type of mentality can be classified as vigilantes, bullies, or sociopaths, and are responsible for the destruction of our constitutional values and the erosion of personal freedoms in this country. I think the media or other organizations need to do a in depth investigation into the false assumptions and false data that has been used to further these laws and to research all the collateral damages being caused by these laws and the unconstitutional injustices that are occurring across the country. They should include these injustices in their report so the public can be better informed on what is truly happening in this country on this subject. Thank you for your time.

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