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

• Citation: 112 N.E.3d 1088
• Decision Date: 28 September 2018
• Docket Number: Court of Appeals Case No. 49A02-1709-PL-2006
• Parties: INTERNATIONAL BUSINESS MACHINES CORPORATION, Appellant/Cross Appellee-Defendant/Plaintiff, v. STATE of Indiana, acting ON BEHALF OF the INDIANA FAMILY & SOCIAL SERVICES ADMINISTRATION, Appellee/Cross Appellant-Plaintiff/Defendant.
• Court: Indiana Appellate Court

112 N.E.3d 1088

INTERNATIONAL BUSINESS MACHINES CORPORATION, Appellant/Cross Appellee-Defendant/Plaintiff,

v.STATE of Indiana, acting ON BEHALF OF the INDIANA FAMILY & SOCIAL SERVICES ADMINISTRATION, Appellee/Cross Appellant-Plaintiff/Defendant.

Court of Appeals Case No. 49A02-1709-PL-2006

Court of Appeals of Indiana.

FILED September 28, 2018

Attorneys for Appellant: Jay P. Lefkowitz, Kirkland & Ellis, LLP, New York, New York, Paul D. Clement, Kirkland & Ellis, LLP, Washington, D.C., Andrew W. Hull, Laurie E. Martin, Hoover Hull Turner, LLP, Indianapolis, Indiana

Attorneys for Appellee: Peter J. Rusthoven, John R. Maley, J. Curtis Greene, Meredith Thornburgh White, Barnes & Thornburg, LLP, Indianapolis, Indiana

Riley, Judge.

STATEMENT OF THE CASE

[1] Appellant/Cross-Appellee-Defendant/Plaintiff, International Business Machines Corporation (IBM), appeals the trial court's calculation of damages after materially breaching the Master Services Agreement which IBM had entered into with Appellee/Cross-Appellant- Plaintiff/Defendant,

the State of Indiana, Acting on Behalf of the Indiana Family & Social Services Administration (State).¹

[2] We affirm in part, reverse in part, and remand with instructions.

ISSUES

[3] IBM raises three issues on appeal, which we restate as:

(1) Whether the trial court, on remand for calculation of damages, erred in concluding that the findings of fact issued by the previous trial court, presided over by Judge Dreyer after a six-week bench trial, are not part of the law of the case and therefore not binding on the trial court;

(2) Whether the trial court erred in awarding damages to the State that arose from the implementation of the Hybrid system, which was purported to be different from the system contracted for under the Master Services Agreement; and

(3) Whether IBM is entitled to post-judgment interest on its $49.5 million damages award.

[4] The State raises two issues on Cross-Appeal, which we restate as:

(1) Whether the trial court correctly applied the direct damages cap specified in the Master Services Agreement; and

(2) Whether the trial court properly rejected the State's request to include the salaries for new state employees as part of its direct damages.

FACTS AND PROCEDURAL HISTORY

[5] The latest installment in the seemingly never-ending saga between the State and IBM comes before us as an appeal from the trial court's Order upon remand from the supreme court to calculate the parties' damages. As this cause has an intricate factual matrix, we will rely extensively on the recitations issued in previous opinions in this matter.

[6] During his first term, Governor Mitch Daniels announced that Indiana's welfare system was "broken" and "plagued by high error rates, fraud, wasted dollars, poor conditions for its employees, and very poor service to its clients." State v. IBM , 51 N.E.3d 150, 153 (Ind. 2016). Governor Daniels called it "America's worst welfare system." Id. The seeds of an overhaul and modernization of the system were sown shortly after Governor Daniels and senior officials began developing the concept of a welfare eligibility upgrade based on a remote eligibility model similar to the one previously instituted in Texas. This new system would allow Indiana citizens to apply for welfare benefits "via web and call center" without the need for face-to-face meetings with a case worker, and eligibility determinations would be done on a centralized, statewide basis rather than in local county welfare offices. Id.

[7] The State commenced the outsourcing process by publishing a Request for Information 6-C (RFI) in 2005, followed by a Request for Proposal 6-58 (RFP) in early 2006, seeking input and recommendations from vendors to improve the distribution of welfare resources. IBM submitted proposals as requested by the RFP, which designated IBM as the prime contractor while working with several subcontractors for operational and subject matter expertise, known as the IBM Coalition.

[8] On December 27, 2006, after months of negotiations, the State and IBM entered into a ten-year, $1.3 billion Master Services Agreement (MSA) in an effort to modernize and improve Indiana's welfare eligibility system. The MSA is detailed, comprehensive, and contains more than 160 pages plus extensive attachments, including 10 exhibits, 24 schedules, and 10 appendices, encompassing all aspects of the parties' working relationship. "[T]he MSA intended to establish centralized service and call centers for the processing of welfare applications, enable remote electronic access to the system, provide the State a paperless document system, create systems to combat fraud and improve Indiana's poor welfare-to-work record and lower administrative costs." Id. To that end, the MSA set forth the various overarching "Policy Objectives" for the modernization effort, which include, in pertinent part:

(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 by expanding access to such services, decreasing inconvenience and improving response time, 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.

(Appellant's App. Vol. V, p. 21). The MSA also provides that when construing and interpreting contractual provisions and terms, "[i]n the event of any uncertainties" or in the event of any "ambiguity, vagueness, or inconsistency" the "provisions and terms shall be read in a manner consistent with the Policy Objectives." (Appellant's App. Vol. V, p. 24). However, the MSA cautions that:

[n]otwithstanding the foregoing, in no event shall the Policy Objectives change or expand [IBM]'s obligations hereunder unless expressly agreed to by the Parties pursuant to a Change.

(Appellant's App. Vol. V, p. 25).

[9] Pursuant to the terms of the MSA, IBM's first obligation was to assist the State in processing applications under the State's existing procedures in all Indiana counties. Then, the Modernized system was to be rolled out in phases on a region-by-region basis according to a "preliminary," "initial Transition Timeline." (Appellant's App. Vol. V, p. 29). Finally, once Modernization was in place in all counties, the project would reach the final stage, "Steady State." IBM , 51 N.E.3d at 154. The MSA set forth various standards and measurements to assess IBM's performance through the different project stages. Throughout Modernization, the State retained the right to make operational decisions and kept control over all policy-making authority.

[10] Once IBM began to roll out the Modernized version to the 12-county pilot area, the parties immediately noticed implementation issues. Despite these challenges, the State approved rolling out the project to additional Indiana counties. Other disasters also impacted the rollout of Modernization. First, after the rollout to the pilot region, Indiana was faced with the Great Recession, and the State unemployment rate more than doubled. Because of this, benefit applications increased dramatically. Second, Indiana was hit with a series of natural disasters beginning in 2008. As a result, the parties mutually agreed to suspend rollout of Modernization to accommodate disaster relief efforts. The State expanded the scope of IBM's work 11 times during the course of the project. As such, in 2007, the State added a Healthy Indiana Plan (HIP) to provide insurance to uninsured Hoosiers below a certain income level. The volume of HIP applications far exceeded the State's initial projections, causing IBM to fall further behind in application processing.

[11] Despite the State's initial positive feedback of IBM's implementation of Modernization, in March 2009, Family and Social Services Administration (FSSA) Secretary, Anne Murphy (Secretary Murphy), requested a formal corrective action plan from IBM to address 36 enumerated issues. After IBM conducted its own assessment, both parties agreed on a corrective action plan which included both short and long-term goals. Even though IBM made some improvements in technology and staffing requirements, the overall scope and services of Modernization did not improve. In September of 2009, the State decided to change its approach and adopted a Hybrid version to welfare Modernization, referred to as "Plan B." IBM , 51 N.E.3d at 157. Plan B called for a move away from the Centralized Call Center and brought eligibility determinations back to the local office, as well as an increase of face-to-face contact between clients and staff. While the State initially sought IBM's services to implement Plan B, the parties did not reach an agreement regarding the price of the services and no change order was executed.

[12] On October 15, 2009, Secretary Murphy notified IBM that the State was terminating the MSA for cause, effective December 14, 2009, and asserted that IBM's series of breaches were material considering the MSA as a whole and were not curable within 30 days. Following the termination, the State implemented the Hybrid approach that retained the majority of the Coalition's subcontractors, but replaced IBM with the State as the general contractor.

[13] On May 13, 2010, the State filed a Complaint for damages and declaratory relief against IBM, seeking over $170 million in damages. The same day, IBM filed a Complaint against the State, demanding damages in excess of $52...