Long-running IBM suit against state back before COA

The latest installment in a years-long legal saga between the state and IBM, Inc. came before the Indiana Court of Appeals on Tuesday, when the parties argued over the awards of damages and what, if any, significant changes were made to the state’s welfare system after Indiana terminated its contract with IBM and developed its own claims-processing system.

Tuesday’s oral argument focused largely on the difference between the two welfare systems that were implemented in 2006 and 2009, respectively, which were colloquially known as the modernization and hybrid systems. Modernization was developed by IBM as a move toward a centralized call center that could handle customer requests. Hybrid, as the name implies, combined the call center with the prior model that emphasized face-to-face contact as a way of meeting varied customer needs.

According to IBM, the difference between the two systems is significant and dispositive. Paul Clement, a Washington, D.C.-based attorney representing IBM, told judges Patricia Riley, Melissa May and Robert Altice that hybrid was a significant departure from the model IBM agreed to develop in its contract with the state because of its use of face-to-face contact. Thus, even though IBM was found to have breached the contract in its implementation of modernization, the company cannot be required to pay damages to the state for the costs of implementing the Hybrid system that system was never contemplated by the contract.

But according to Peter Rusthoven, the Barnes & Thornburg attorney representing the state, the original contract always called for IBM to develop a system that offered both the call center and face-to-face contact.  The only difference between the two systems, Rusthoven said, is that hybrid worked, while modernization did not.

Thus, Marion Superior Judge Heather Welch did not err in determining the state was entitled to $128 million for IBM’s breach of the master services contract, offset by the $49.5 million IBM is entitled to for the costs of equipment and assignment fees, Rusthoven said. Welch made the damages determination in August 2017 on remand from the Indiana Supreme Court, which found IBM breached the welfare system contract.

Welch’s ruling on remand occurred after the Supreme Court reversed a ruling from Marion Superior Judge David Dreyer, who did not find any breach on IBM’s part. The lawsuit came to Dreyer’s court after the state terminated the contract in 2009 and began implementing hybrid on its own, but Dreyer was later removed from the case.

The Supreme Court did uphold the portion of Dreyer’s ruling that awarded $49.5 million in damages to IBM, a fact that proved to be a sticking point in Tuesday’s argument. Referring to the Supreme Court’s decision as a “partial affirmation” of Dreyer’s ruling, Clement said Tuesday Welch should have looked to Dreyer’s findings when entering her judgment.

When Welch took over the case, she dismissed Dreyer’s findings and reviewed the evidence on her own before deciding the question of damages, which was the only issue before her on remand. Clement and IBM faulted that decision, noting Welch did not have the benefit of a six-week trial involving live witnesses, as Dreyer did.

But emphasizing the fact that the only issue on remand was the calculation of damages, Rusthoven said Welch was under no obligation to adhere to Dreyer’s findings because his ruling on that issue had been reversed. Further, because Dreyer did not find a breach by IBM, he did not make any findings regarding the damages they owe, Rusthoven said.

Returning to the issue of whether IBM should have to pay any damages on the costs of implementing hybrid, May asked Clement when the company was considered “off the hook.”  If IBM was found to have breached the master services contract, then shouldn’t it have to pay for that breach?

In response, Clement said IBM was off the hook at the time of the termination of the contract in October 2009. From there, the court could measure damages consistent with common law and the terms of the contract, he said, but hybrid, which did not yet exist, would not factor into the equation.

Rusthoven, however, maintained that because there was no significant difference between hybrid and modernization – aside from the fact that, as he put it, hybrid actually worked – IBM remains liable for the costs of implementing a welfare system that replaced its failed system.

Setting IBM’s breach aside, Clement told the court his client was entitled to post-judgment interest on the $49.5 million it was awarded by Dreyer. Welch denied IBM’s request for post-judgment interest, but Clement said because the damages award was not overturned on appeal, IBM was entitled to interest dating back to 2012.  

For its part, the state argued the Supreme Court affirmed only the award of damages, not a final judgment awarding damages. Thus, because final judgment has not yet entered, IBM cannot collect post-judgment interest, the state said.

In a cross appeal, the state argued Welch erred in one regard in her August 2017 order: by departing from the “benefit of the bargain” standard in denying the state’s request for $36.5 million in damages for the costs of hiring new staff to manage modernization. Further, the state argued Welch erred by believing the contract “direct damages” cap was set at $125 million, when it was actually “the greater” of $125 million and fees paid to IBM during the last 12 months.

Clement, however, noted the last 12 months standard is measured from “the most recent Claim,” not the date of termination of the contract. That distinction, he said, defeated the state’s argument that it should be compensated for the $158 million it paid to IBM in the 12 months leading up to the termination of the contract.

The full oral argument in International Business Machines Corporation v. State, 49A02-1709-PL-02006, can be viewed here.

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