Justices: IBM breached state welfare contract

IBM breached its master services agreement with the state in its failed bid to privatize and modernize Indiana’s welfare systems, the Indiana Supreme Court ruled Tuesday, more than six years after the state sued the tech giant over the $1.3 billion contract.

“We hold that under the facts and circumstances of this case, looking at the performance standards and indicators provided in the MSA, IBM’s collective breaches were material in light of the MSA as a whole. With the exception of its material breach analysis, we summarily affirm the Court of Appeals on all other issues,” Justice Steven H. David wrote in State of Indiana, Acting on Behalf of the Indiana Family & Social Services Administration v. International Business Machines Corporation, 49S02-1408-PL-513.

“We reverse the trial court’s finding that IBM did not materially breach the MSA and we remand to the trial court for calculation of the parties’ damages consistent with this opinion, including any appropriate offsets.”

The decision opens the door for the state to collect damages from IBM, whose administration of welfare programs led to excessive delays in meeting with applicants and processing applications, document mismanagement, high staff turnover and poor internal and external communications, among dozens of problems the state identified.

The Court of Appeals ruled in February 2014 that IBM breached its contract to modernize the welfare system that was undertaken beginning 10 years ago in the administration of former Gov. Mitch Daniels. In October 2009, the state terminated IBM’s contract for cause, and this litigation ensued.  

While the state will be entitled to calculated damages, justices affirmed some of the awards previously made to IBM. Affirmed in the decision were trial court awards upheld by the Court of Appeals of $40 million in assignment fees and $9,510,795 in equipment fees for IBM. The court reversed the trial court’s award of $2,570,621 in early termination close-out payments and $10,632,333 in prejudgment interest to IBM, but remanded for determination of change-order fees in the company’s favor.

The high court heard arguments in the case in October 2014, and later recommended mediation between parties. The court voted 4-0, with Justice Mark Massa, a former Daniels adviser, not participating.

“While we disagree with the standard used by the Court of Appeals majority to determine whether IBM materially breached the MSA, we agree with the Court of Appeals majority that IBM did materially breach the MSA,” David wrote. “The trial court’s determination that IBM did not materially breach the agreement is incorrect as it ignored uncontroverted evidence and made several legal errors. These errors include: a) failing to consider the State’s dissatisfaction with IBM’s performance as required by the MSA; b) determining that IBM’s payment of liquidated damages excused IBM’s performance in contravention of the MSA; c) adopting IBM’s excuses for non-performance; d) considering the State’s motives for terminating the contract; and e) determining that because the State benefited from the MSA, IBM’s breach could not be material.

“Because IBM failed to perform satisfactorily as determined by the State (and by its own admission), consistently failed to meet certain timeliness metrics, and failed to assist the State in achieving its Policy Objectives, we hold that IBM did materially breach the MSA through its collective breaches in light of the MSA as whole,” David wrote.