Indiana Court Finds IBM Botched $1.3 Billion State Contract

, The Litigation Daily


An appeals court has ruled that International Business Machines botched an assignment to privatize Indiana's welfare benefits system, putting the computing giant on the hook for as much as $177 million in damages. The ruling is a major reversal of fortune for the state and its lawyers at Barnes & Thornburg, who were up against high-powered opponents at Kirkland & Ellis.

Overturning a trial judge, the Indiana Court of Appeals ruled on Thursday that IBM didn't hold up its end of a 10-year, $1.3 billion contract with the state. The appeals court remanded the case for a hearing on damages. The state is seeking $177 million.

"In the most basic aspect of this contract—providing timely services to the poor—IBM failed," the court wrote.

The silver lining for IBM is that the appeals court also upheld a ruling by the trial judge that the state improperly withheld about $50 million in fees from IBM. The state would be unjustly enriched if it retained the fees, the court ruled.

Indiana entered into the partnership with IBM in 2006. The state terminated that deal just three years later after receiving complaints from federal recipients unable to access their benefits. Indiana retained Peter Rusthoven and John Maley of Barnes & Thornburg to bring claims that IBM breached its duties. IBM, represented by a Kirkland team including Jay Lefkowitz and Steven McCormick, countered that the state improperly terminated the deal and withheld fees.

The case culminated in a six-week bench trial before Marion Superior Court Judge David Dreyer in Indianapolis. Dreyer awarded IBM about $50 million, but both sides took a beating. "This story represents a 'perfect storm' of misguided government policy and overzealous corporate ambition," the judge wrote. "Overall, both parties are to blame and Indiana's taxpayers are left as apparent losers."

In an interview, Barnes & Thornburg's Rushoven called Thursday's ruling a "vindication" for the state.

Kirkland's Lefkowitz referred us to an IBM spokesperson, who said in a statement that the company is disappointed in the ruling but will continue to seek relief in the Indiana courts.

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