State v. Int'l Bus. Machs. Corp.

4 N.E.3d 696

STATE of Indiana, acting on behalf of the INDIANA FAMILY & SOCIAL SERVICES ADMINISTRATION, Appellant–Defendant,

v.INTERNATIONAL BUSINESS MACHINES CORPORATION, Appellee–Plaintiff.

No. 49A02–1211–PL–875.

Court of Appeals of Indiana.

Feb. 13, 2014.

Peter J. Rusthoven, John R. Maley, Barnes & Thornburg, LLP, Indianapolis, IN, Attorneys for Appellant.

Jay P. Lefkowitz, Steven J. Menashi, Kirkland & Ellis, LLP, New York, NY, Steven D. McCormick, Douglas G. Smith, Kirkland & Ellis, LLP, Chicago, IL, Andrew W. Hull, Daniel K. Burke, Hoover Hull, LLP, Indianapolis, IN, Attorneys for Appellee.

OPINION

VAIDIK, Chief Judge.

Case Summary

Indiana's poorest residents live hand-to-mouth trusting that they will receive food stamps to eat and Medicare or other state health insurance in order to receive basic medical care. These citizens do not have the luxury of being able to wait to eat or go to a doctor while a phone goes unanswered, an appointment cannot be scheduled, or an application sits on a desk. The needs of the poor are immediate.

Indiana entered into an arrangement with the federal government to distribute federal funds to those in greatest need. Part of the State's responsibility was to make certain that only the poorest received aid and to help welfare recipients find work. If the State failed to comply with federal guidelines, then it would be penalized by the federal government, resulting in less federal aid for our citizens.

By all accounts, the State was failing in performing its duties. As a result, in December 2006, the State, on behalf of its agency the Indiana Family and Social Services Administration (FSSA),¹ entered into a ten-year, $1.3 billion contract with International Business Machines Corporation (IBM) to modernize and improve the State's welfare system. IBM agreed to the State's proposal, although it argues that the system design was doomed to fail. Nonetheless, IBM received $437 million while assuring the State that it was up to the task. Less than three years into the ten-year contract, the State terminated the contract citing IBM performance issues, and the parties sued each other for breach of contract on the same day in Marion Superior Court. The State sought over $170 million in damages, and IBM sought almost $100 million. Appellant's App. p. 239–40. The trial court granted IBM summary judgment for $40 million in assignment fees and, after a six-week bench trial in 2012, found no material breach on IBM's part and awarded IBM an additional $9,510,795 in Equipment fees, $2,570,621 in Early Termination Close Out Payments, and $10,632,333 in prejudgment interest, totaling $62,713,749.

While IBM's software, computers, and employee training aided in delivering welfare services, the primary focus of the contract was to provide food and medical care to our poorest citizens in a timely, efficient, and reliable manner within federal guidelines, to discourage fraud, and to increase work-participation rates. In the most basic aspect of this contract—providing timely services to the poor—IBM failed. We therefore reverse the trial court's finding that there was no material breach.

Despite finding a material breach on IBM's part, we affirm the trial court's award of $40 million in assignment fees and $9,510,795 in Equipment fees to IBM. We do so because the State and IBM agreed under the terms of the contract that the State would pay these fees. Further, the State would be unjustly enriched if it were to keep IBM's equipment and to assume IBM's subcontracts without paying IBM. We further affirm the trial court's denial of Deferred Fees to IBM, reverse the trial court's award of $2,570,621 in Early Termination Close Out Payments and $10,632,333 in prejudgment interest to IBM, and remand the case to the trial court to determine the amount of fees IBM is entitled to for Change Orders 119 and 133. Finally, we remand the case to the trial court to determine the State's damages for IBM's material breach of the contract and to offset any damages awarded to IBM. We therefore affirm in part, reverse in part, and remand the case to the trial court.

Facts and Procedural History

The facts in this case are largely undisputed.² During Governor Mitch Daniels's first term as governor, he declared Indiana's welfare system “broken.” Appellant's App. p. 166. It was “plagued by high error rates, fraud, wasted dollars, poor conditions for its employees, and very poor service to its clients.” Id. Indiana's welfare-to-work record was the worst in the country. Id. at 167. Consequently, Governor Daniels dubbed Indiana's welfare system “America's worst welfare system.” Press Release, Governor accepts recommendation to modernize FSSA eligibility processes (Nov. 29, 2006), http:// goo. gl/ Tfbas 4 (Ex. 612).

Shortly after Governor Daniels was elected in November 2004, he and senior officials—including former Indianapolis Mayor Stephen Goldsmith and FSSA Secretary Mitch Roob—set out to modernize and improve Indiana's welfare system. The new system was modeled after the system in Texas. Under the new model, Indiana citizens would apply for benefits “via web and call center” without the need for a face-to-face meeting with a case worker, and eligibility determinations would be made on a centralized, statewide basis rather than in the local county welfareoffices. Appellant's App. p. 167. One of the State's requirements for the new system was to “reduce the number of mandatory visits to local offices” by “giving clients more avenues to interact with the agency,” such as “the Internet, an automated and interactive phone system, and local organizations in the community.” Id. at 168. Analysts had found that citizens most in need of FSSA's help were forced to make more than two million unnecessary trips a year. Id.

In October 2005, FSSA began seeking vendors for the project. Id. at 169. IBM and a group of twelve coalition companies, including Dallas, Texas-based ACS Human Services, submitted a bid. In May 2006, the State announced its intention to award the contract to the IBM Coalition.³

After months of negotiations, on December 27, 2006, the State of Indiana and IBM signed a ten-year, $1.3 billion Master Services Agreement (“MSA”). Specifically, the MSA sought to “transform and modernize the process by which information needed or related to making eligibility determinations is collected, organized, and managed ... in order to improve access to, and responsiveness of, that system and process, and to assure the integrity, reliability and efficiency of the public assistance contemplated by such programs[.]” Id. at 566. During the process of negotiating and drafting the agreement, the State was represented by outside counsel as well as the Office of the Attorney General, which reviewed the contract as it was being drafted and approved it for “form and legality.” Id. at 172. Governor Daniels signed the MSA for the State. Id. The MSA contains more than 160 pages plus extensive attachments, including 10 exhibits, 24 schedules, and 10 appendices. Id.

As part consideration for the MSA, a Memorandum of Understanding (“MOU”) was also signed on the same day as the MSA. According to the MOU—which was executed by IBM, the Indiana Economic Development Corporation, Purdue University, and Indiana University—IBM agreed to undertake collaborative activities designed to promote economic activity in the state, including creating 1000 full-time new jobs. Ex. 1709.

The MSA incorporated the various goals that were important to the State in deciding to overhaul Indiana's welfare system. MSA § 1.1(1) identified the following “Policy Objectives”:

(1) The overarching policy objectives of the Modernization Project and this Agreement are (i) to provide efficient, accurate and timely eligibility determinations for individuals and families who qualify for public assistance, (ii) to improve the availability, quality and reliability of the services being provided to Clients ⁴ by expanding access to such services, decreasing inconvenience and improving response times, among other improvements, (iii) to assist and support Clients through programs that foster personal responsibility, independence and social and economic self-sufficiency, (iv) to assure compliance with all relevant Laws, (v) to assure the protection and integrity of Personal Information gathered in connection with eligibility determination, and (vi) to foster the development of policies and procedures that underscore the importance of accuracy in eligibility determinations, caseload integrity across all areas of public assistance and work and work-related experience for Clients in the Programs.

(5) Vendor recognizes that (i) the Services to be performed under this Agreement are vital to the State and its citizens who currently are and in the future will be legally eligible for and reliant upon the assistance available under the Programs and must be continued without interruption and (ii) upon Termination, a Successor must be able to continue to provide the Services in as seamless a transition from Vendor as possible.

Appellant's App. p. 567. In addition, MSA § 1.4, entitled Construction and Interpretation, provided that the agreement “shall be” construed in a manner consistent with the Policy Objectives:

(5) In the event of any uncertainties regarding the interpretation of any particular provision or term used in this Agreement, or in the event of any ambiguity, vagueness or inconsistency therein or thereof, such provisions and terms shall be read in a manner consistent with the Policy Objectives. In all events, the provisions and terms of this Agreement shall be interpreted with a view toward achieving those objectives. Notwithstanding the foregoing, in no event shall the Policy Objectives change or expand Vendor's obligations hereunder unless expressly agreed to by the Parties pursuant to a Change.

Id. at 571.

Under the terms of the MSA, IBM would assist the State in processing...