UPDATE: IBM to appeal $78M breach of contract award to state

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IBM said Monday it will appeal a judge’s ruling that the computer services giant owes Indiana a net of nearly $78.2 million in damages for breaching a contract to modernize and privatize the state’s welfare systems.

Marion Superior Judge Heather Welch ruled Friday the state was entitled to $128 million for IBM’s breach of its master services contract signed more than 10 years ago to modernize the welfare eligibility computer system used by the Family and Social Services Administration.

Welch noted IBM is entitled to $49.5 million in equipment fees and assignment fees from the state, an amount previously affirmed by the Indiana Supreme Court. The parties have also stipulated that IBM is entitled to around $311,000 for two change orders.

“IBM worked diligently and invested significant resources in its partnership with FSSA to help turn around a welfare system described at the time by Indiana’s governor as one of the worst in the nation,” IBM spokesman Clint Roswell said in a statement. “IBM will appeal this decision which is contradicted by the facts and the law.”

“We’re just going to battle this out for the people of Indiana who were really let down” by IBM, said Barnes & Thornburg LLP partner Peter Rusthoven, a member of the legal team representing the state. “We’re very pleased,” he said of the ruling. “We have felt from the beginning there were some serious performance problems that caused the state a lot of damage.

“We’ll defend the judgment on appeal,” he said. “It’s a very careful decision by a very good judge.”

The ruling is the latest chapter in litigation stemming from the state’s cancellation of the contract to privatize and upgrade welfare systems. Welch’s ruling comes on remand from the Indiana Supreme Court’s decision in March 2016. Justices reversed an earlier trial court decision by Marion Superior Judge David Dreyer that found IBM had not breached the contract and that the company was entitled to about $62 million in damages from the state.

The $1.3 billion, 10-year contract executed by former Gov. Mitch Daniels in 2006 was plagued with problems and terminated for poor performance in October 2009, but not before the state had paid IBM more than $440 million. The ensuing litigation also was fraught with trouble.

After the Supreme Court remanded the matter to Dreyer with instructions to calculate damages the state was entitled to for IBM’s breach, the Supreme Court later removed Dreyer from the case.  The court ruled Dreyer exceeded his authority for issuing orders again denying damages for the state on the day the Supreme Court opinion on remand was certified. Lawyers for the state petitioned for Dreyer’s removal for what they called his “surprise” ruling taken without hearing, briefing, argument or notice to the state.

Welch has had the decision under advisement since February.

In a statement, Barnes & Thornburgh said, “This has been a long, tough battle with a big corporation that refused all along to take responsibility for its poor performance. This hurt Hoosier families most in need, who depend upon the help of the Family and Social Services Administration.” The ruling, the law firm said, “is another victory for those families, for our State, and for all our citizens and taxpayers. It also vindicates the consistent determination of former Governors Mitch Daniels and Mike Pence and now Governor Eric Holcomb that IBM must be held responsible for not doing what it promised.”

Andrew Hull, Indianapolis counsel representing IBM, did not immediately reply to messages seeking comment Monday.

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