IBM awarded post-judgment interest to 2017 in long-running dispute

In its second opinion issued in the years-long dispute between Indiana and IBM Corp. over the failed contract to create a new Hoosier welfare system, the Indiana Supreme Court has allowed IBM to collect post-judgment interest on its $49.5 million damages award. However, that interest will date back only to a 2017 judgment on remand, not the original judgment entered in the company’s favor in 2012, and only serves as an offset to the greater sum IBM owes the state.

Justice Steven David wrote for the court in the Wednesday opinion in International Business Machines Corporation v. State of Indiana, acting on behalf of the Indiana Family & Social Services Administration, 19S-PL-19. The justices, excluding Justice Mark Massa, heard their second round of arguments in the case in February.

At issue in the litigation is a contract between IBM and the state requiring IBM to develop a new welfare system that utilized a centralized call center to handle customer requests. The new system, colloquially known as “modernization,” was meant to be a shift away from the prior welfare system that emphasized face-to-face contact with customers.

But the state terminated the IBM contract in 2009 after modernization began experiencing problems. Instead, the state created its own welfare system, known as “hybrid,” that combined the call center with the former face-to-face model.

Both parties filed breach complaints, and the Marion Superior Court initially determined modernization’s failure was not a breach of IBM’s contract. Instead, the state was ordered in 2012 to pay IBM $49.5 million for the costs of equipment and assignment fees.

But the appellate courts, including the Indiana Supreme Court, determined IBM had breached the contract and, in 2016, remanded the case for a damages assessment.

Judge Heather Welch determined in 2017 that IBM owed the state $128 million, offset by the $49.5 million previously awarded to the company, for a net damages award of $78 million for the state. Welch also declined to award post-judgment interest on IBM’s $49.5 million in damages, but the COA reversed that decision after hearing oral arguments last August.

The parties raised multiple issues on appeal when they returned to the Supreme Court in February, but the justices chose to address only the question of post-judgment interest. In determining the interest should date back only to 2017, David rejected the Court of Appeals’ reliance on Beam v. Wausau Ins. Co., 765 N.E.2d 524 (Ind. 2002), to award post-judgment interest because the $49.5 million damages award had been the “one constant” of the case lasting roughly a decade.

Beam relied on Indiana Code section 24-2.6-1-101, but David said the controlling statute here is I.C. 34-13-1-6 “because we are dealing with a sum of money due from the State.” The inquiry under the latter statute, he said, is “whether there was a final decree or judgment.”

“Case law is clear that a final judgment disposes of ‘all issues as to all parties,’” David wrote. “… Not all the issues as to all parties were resolved at the time of remand and further, what was due and owed to IBM was necessarily contingent upon what damages were due the State for the breach.”

“… Here, there is no money that rightfully belonged to IBM as the amount awarded to it may have been and ultimately was, only an offset to what IBM owes the State,” he continued. “Accordingly, looking at the statute, our case law and the facts of this case, post-judgment interest going back to the original judgment is inappropriate.”

The court summarily affirmed the COA in all other respects and affirmed the trial court in all respects, which would include the $78 million damages award to the state.

Barnes & Thornburg attorneys John Maley and Peter Rusthoven, counsel for the state in the IBM litigation, released a statement Wednesday afternoon saying they are pleased with the court’s ruling.

“Hoosiers will finally benefit from IBM’s multi-million-dollar payment of this judgment,” the statement said, referring to the $78 million owed to the state.

But Justice Geoffrey Slaughter dissented from the summary affirmance of the Court of Appeals, because one of the COA’s central premises in its ruling was that the modernization system was “essentially the same” as the hybrid system.

“It is telling that the State initially asked IBM to implement Hybrid via change order,” Slaughter wrote in his partial dissent. “By entering into the change-order process, the State all but admits that Hybrid is outside the scope of contracted services. Parties do not negotiate proposed changes to an agreement that already requires those things.”

Thus, Slaughter said the COA wrongly determined the costs the state incurred through hybrid were “procurement costs.” He would classify those costs as consequential damages subject to a $3 million cap.

“It will come as little surprise if prospective vendors respond to today’s ruling in one of two ways,” Slaughter continued. “Either they will not do business with the State at all, thus reducing the supply of those willing to contract with the State. Or they will include a risk premium in their contracts to cover the unknown costs of fulfilling obligations beyond what they agreed to.”

Slaughter concurred with the court’s ruling on post-judgment interest.

Massa did not participate in the case because he previously worked for former Gov. Mitch Daniels, who led the state to contract with IBM for the new welfare system.