Indiana court: IBM breached contract, still due $50M

INDIANAPOLIS (AP) - IBM Corp. breached its state contract in the company's failed attempt to privatize Indiana's welfare services but is still entitled to nearly $50 million in state fees, the state Supreme Court said Tuesday in a ruling that also opens the door for Indiana to seek up to $175 million in damages.

The high court's ruling in the long-running case upholds a February 2014 state Court of Appeals ruling and reverses a trial court judge's finding that Indiana had failed to prove IBM breached the $1.3 billion state contract it won in 2006. Under that contract, an IBM-led team of vendors had worked to process applications for food stamps, Medicaid and other public safety-net benefits through the call centers, the Internet and fax machines that residents could use to apply for those benefits.

Then-Gov. Mitch Daniels canceled the 10-year contract in 2009 following complaints from welfare clients, lawmakers and others about long wait times, lost documents and improper rejections. IBM and Indiana then countersued each other, setting off the complicated court fight.

Justice Mark Massa recused himself from the case because he was Daniels' general counsel when the contract was signed.

The high court's four other justices unanimously found Tuesday that IBM had breached its contract by failing to meet "timeliness metrics" and to "assist the State in achieving its policy objectives" - thus reversing a 2012 Marion County trial court finding - and said the state can seek damages. However, the justices also affirmed the trial court's award of nearly $50 million to IBM in assignment and equipment fees.

The ruling reversed the trial court's award of $13 million to IBM in pre-judgment interest claims and early contract termination close-out payments, yet agreed with the trial court's denial of about $43 million in deferred fees that IBM had sought, said Peter Rusthoven, a private attorney representing Indiana's Family and Social Services Administration in the dispute.

Rusthoven said Tuesday that the FSSA was "very pleased," because the justices directed the trial court to determine how much IBM owes Indiana in damages for its contract breach, a figure he says is about $175 million.

"This means that our Court of Appeals and now our Supreme Court have recognized, as we maintained from the beginning, that IBM materially breached its contract as a matter of law. And therefore it must compensate the state for the damages it's cost," Rusthoven said.

IBM spokesman Clint Roswell said in a statement that the Armonk, New York-based technology company is disappointed. "Creation of the State's current system would not have been possible without building on IBM's technology," he said.

The justices heard arguments in the case in October 2014. Attorneys for IBM and the state later tried mediation to settle their differences, at the suggestion of Chief Justice Loretta Rush, but informed the court in August that those efforts had failed.