Indiana Supreme Court hears dispute between state, IBM over canceled $1.3B welfare contract

Indiana's supreme court justices grilled attorneys for the state and IBM Corp. on Thursday about the company's failed attempt to privatize Indiana's welfare services, which prompted the state to cancel IBM's $1.3 billion state contract less than three years into the 10-year deal.

Four of the five justices peppered the attorneys with questions about details of the contract's terms and whether IBM had breached that while automating much of Indiana's welfare system. Justice Mark Massa recused himself because he was then-Gov. Mitch Daniels' general counsel when the contract was signed in 2006.

Peter Rusthoven, an Indianapolis attorney who is representing the state, told the justices that IBM had failed to meet the "prime objective" of the contract, which he said on the first page calls for IBM to improve the state's delivery of welfare services.

"There is zero issue in the case that IBM breached the contract," he told the court.

Under the contract, an IBM-led team of vendors had worked to process applications for food stamps, Medicaid and other public safety-net benefits using call centers, the Internet and fax machines as means by which residents could apply for those benefits. But Daniels canceled the contract in 2009, prompting IBM and Indiana to sue each other, after complaints from welfare clients about long wait times, lost documents and improper rejections.

A Marion County judge ruled in 2012 that Indiana had failed to prove IBM breached its contract and awarded the company $52 million. Indiana appealed that ruling and the state Court of Appeals found in February that IBM had committed a material breach of its contract by failing to deliver improvements to the state's welfare system. Despite that, the court also found IBM was entitled to nearly $50 million in state fees.

Jay Lefkowitz, an attorney for Armonk, New York-based IBM, told the justices the company had not breached its contract. He added that IBM and its vendors were meeting 19 of the contract's 24 key performance metrics for welfare services at the time of the contract termination and was delivering tens of millions of dollars in administrative savings and fraud reduction.

But Chief Justice Loretta Rush said in questioning Lefkowitz that IBM's failures had threatened federal funding tied to performance standards for delivery of welfare services.

"When they came in and said you weren't meeting those standards that was a pretty big issue with default under the contract, wasn't it?" Rush asked.

Lefkowitz replied that IBM and its vendors were doing an overall good job and compared their performance to a contractor hired to paint rooms in a big building.

"If I'm hired to paint 100 rooms in an office building and 90-some odd rooms are painted very well and one or two of the rooms aren't painted very well, that may be a breach of some performance metric of a contract but that's not a material breach of the contract as a whole," he said.

Rush said the court would review the arguments and court briefs, but did not indicate when the justices might rule on the matter.