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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. I have been on this program while on parole from 2011-2013. No person should be forced mentally to share private details of their personal life with total strangers. Also giving permission for a mental therapist to report to your parole agent that your not participating in group therapy because you don't have the financial mean to be in the group therapy. I was personally singled out and sent back three times for not having money and also sent back within the six month when you aren't to be sent according to state law. I will work to het this INSOMM's removed from this state. I also had twelve or thirteen parole agents with a fifteen month period. Thanks for your time.

  2. Our nation produces very few jurists of the caliber of Justice DOUGLAS and his peers these days. Here is that great civil libertarian, who recognized government as both a blessing and, when corrupted by ideological interests, a curse: "Once the investigator has only the conscience of government as a guide, the conscience can become ‘ravenous,’ as Cromwell, bent on destroying Thomas More, said in Bolt, A Man For All Seasons (1960), p. 120. The First Amendment mirrors many episodes where men, harried and harassed by government, sought refuge in their conscience, as these lines of Thomas More show: ‘MORE: And when we stand before God, and you are sent to Paradise for doing according to your conscience, *575 and I am damned for not doing according to mine, will you come with me, for fellowship? ‘CRANMER: So those of us whose names are there are damned, Sir Thomas? ‘MORE: I don't know, Your Grace. I have no window to look into another man's conscience. I condemn no one. ‘CRANMER: Then the matter is capable of question? ‘MORE: Certainly. ‘CRANMER: But that you owe obedience to your King is not capable of question. So weigh a doubt against a certainty—and sign. ‘MORE: Some men think the Earth is round, others think it flat; it is a matter capable of question. But if it is flat, will the King's command make it round? And if it is round, will the King's command flatten it? No, I will not sign.’ Id., pp. 132—133. DOUGLAS THEN WROTE: Where government is the Big Brother,11 privacy gives way to surveillance. **909 But our commitment is otherwise. *576 By the First Amendment we have staked our security on freedom to promote a multiplicity of ideas, to associate at will with kindred spirits, and to defy governmental intrusion into these precincts" Gibson v. Florida Legislative Investigation Comm., 372 U.S. 539, 574-76, 83 S. Ct. 889, 908-09, 9 L. Ed. 2d 929 (1963) Mr. Justice DOUGLAS, concurring. I write: Happy Memorial Day to all -- God please bless our fallen who lived and died to preserve constitutional governance in our wonderful series of Republics. And God open the eyes of those government officials who denounce the constitutions of these Republics by arbitrary actions arising out capricious motives.

  3. From back in the day before secularism got a stranglehold on Hoosier jurists comes this great excerpt via Indiana federal court judge Allan Sharp, dedicated to those many Indiana government attorneys (with whom I have dealt) who count the law as a mere tool, an optional tool that is not to be used when political correctness compels a more acceptable result than merely following the path that the law directs: ALLEN SHARP, District Judge. I. In a scene following a visit by Henry VIII to the home of Sir Thomas More, playwriter Robert Bolt puts the following words into the mouths of his characters: Margaret: Father, that man's bad. MORE: There is no law against that. ROPER: There is! God's law! MORE: Then God can arrest him. ROPER: Sophistication upon sophistication! MORE: No, sheer simplicity. The law, Roper, the law. I know what's legal not what's right. And I'll stick to what's legal. ROPER: Then you set man's law above God's! MORE: No, far below; but let me draw your attention to a fact I'm not God. The currents and eddies of right and wrong, which you find such plain sailing, I can't navigate. I'm no voyager. But in the thickets of law, oh, there I'm a forester. I doubt if there's a man alive who could follow me there, thank God... ALICE: (Exasperated, pointing after Rich) While you talk, he's gone! MORE: And go he should, if he was the Devil himself, until he broke the law! ROPER: So now you'd give the Devil benefit of law! MORE: Yes. What would you do? Cut a great road through the law to get after the Devil? ROPER: I'd cut down every law in England to do that! MORE: (Roused and excited) Oh? (Advances on Roper) And when the last law was down, and the Devil turned round on you where would you hide, Roper, the laws being flat? (He leaves *1257 him) This country's planted thick with laws from coast to coast man's laws, not God's and if you cut them down and you're just the man to do it d'you really think you would stand upright in the winds that would blow then? (Quietly) Yes, I'd give the Devil benefit of law, for my own safety's sake. ROPER: I have long suspected this; this is the golden calf; the law's your god. MORE: (Wearily) Oh, Roper, you're a fool, God's my god... (Rather bitterly) But I find him rather too (Very bitterly) subtle... I don't know where he is nor what he wants. ROPER: My God wants service, to the end and unremitting; nothing else! MORE: (Dryly) Are you sure that's God! He sounds like Moloch. But indeed it may be God And whoever hunts for me, Roper, God or Devil, will find me hiding in the thickets of the law! And I'll hide my daughter with me! Not hoist her up the mainmast of your seagoing principles! They put about too nimbly! (Exit More. They all look after him). Pgs. 65-67, A MAN FOR ALL SEASONS A Play in Two Acts, Robert Bolt, Random House, New York, 1960. Linley E. Pearson, Atty. Gen. of Indiana, Indianapolis, for defendants. Childs v. Duckworth, 509 F. Supp. 1254, 1256 (N.D. Ind. 1981) aff'd, 705 F.2d 915 (7th Cir. 1983)

  4. "Meanwhile small- and mid-size firms are getting squeezed and likely will not survive unless they become a boutique firm." I've been a business attorney in small, and now mid-size firm for over 30 years, and for over 30 years legal consultants have been preaching this exact same mantra of impending doom for small and mid-sized firms -- verbatim. This claim apparently helps them gin up merger opportunities from smaller firms who become convinced that they need to become larger overnight. The claim that large corporations are interested in cost-saving and efficiency has likewise been preached for decades, and is likewise bunk. If large corporations had any real interest in saving money they wouldn't use large law firms whose rates are substantially higher than those of high-quality mid-sized firms.

  5. The family is the foundation of all human government. That is the Grand Design. Modern governments throw off this Design and make bureaucratic war against the family, as does Hollywood and cultural elitists such as third wave feminists. Since WWII we have been on a ship of fools that way, with both the elite and government and their social engineering hacks relentlessly attacking the very foundation of social order. And their success? See it in the streets of Fergusson, on the food stamp doles (mostly broken families)and in the above article. Reject the Grand Design for true social function, enter the Glorious State to manage social dysfunction. Our Brave New World will be a prison camp, and we will welcome it as the only way to manage given the anarchy without it.

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