4 N.E.3d 696
Ind. Ct. App.2014Background
- In 2006 Indiana (FSSA) signed a 10-year, $1.3 billion Master Services Agreement (MSA) with IBM to modernize statewide welfare eligibility, call centers, and related services; IBM was paid ≈$437 million before termination.
- The MSA set Policy Objectives focusing on timely, accurate eligibility determinations, expanded access, legal compliance, fraud deterrence, and improved work participation; Performance Standards (Schedule 10) and liquidated-damage mechanisms were incorporated.
- Rollout proceeded regionally; implementation problems (unanswered calls, delayed processing, data issues) arose early, worsened by the 2007–09 recession, large disaster relief workloads, and scope expansions (e.g., Healthy Indiana Plan). CMS found federal eligibility-processing deficiencies in 2009.
- State demanded Corrective Action Plan (July 2009); parties agreed one, but the State adopted a hybrid model and terminated the MSA for cause in October 2009. Both parties sued; six-week bench trial followed.
- Trial court found no material breach by IBM, awarded IBM $40M in subcontractor assignment fees, ~$9.51M for equipment, ~$2.57M Early Termination Close Out Payments, denied Deferred Fees, and awarded prejudgment interest (~$10.6M). Appellate court reversed material-breach holding, affirmed some awards, reversed others, and remanded for damages and certain fee calculations.
Issues
| Issue | State (Plaintiff) Argument | IBM (Defendant) Argument | Held |
|---|---|---|---|
| Was IBM’s failure a material breach of the MSA? | IBM’s repeated failures (timeliness, Help Center, case processing), CMS warnings, and Schedule 10 misses went to the contract’s heart and justified termination for cause. | IBM performed substantially, produced important benefits (fraud reduction, improved participation, systems/platforms), paid liquidated damages for KPI misses, and was curing problems. | Court: IBM materially breached the MSA — failures on core Policy Objectives (timely, reliable services complying with federal law) went to the essence. Reversed trial court’s no-material-breach finding; remanded for State damages and offsets. |
| Are the $40M subcontractor assignment fees enforceable or an unenforceable penalty? | State: fees are fixed-sum cancellation penalties contingent on termination; unenforceable liquidated damages/penalty. | IBM: fees were bargained consideration for valuable rights (State’s ability to assume IBM’s subcontracts and associated benefits). | Court: Fees are valid consideration (not liquidated damages) because contingent on State’s assumption of subcontracts and confer measurable benefit; award of $40M affirmed. |
| Are Deferred Fees / Early Termination Close Out Payments and Equipment payments payable after termination for cause? | State: where termination is for cause Deferred Fees and ET Close Out Payments are excluded; cannot be recovered. Equipment likewise not payable if termination for cause. | IBM: some Close Out payments and Deferred Fees are payable on termination generally; Equipment value is due because State kept IBM property per Disengagement Plan. | Court: Deferred Fees and Early Termination Close Out Payments not payable where contract terminated for cause (affirming denial of Deferred Fees and reversing $2.57M award). But Equipment — State kept IBM equipment and must pay fair market value — $9.51M award affirmed. |
| Change Orders and prejudgment interest: entitlement to fees for Change Orders 119/133; is prejudgment interest recoverable from the State? | State: Change Orders pre-dated MSA or were IBM’s responsibility; prejudgment interest barred by sovereign immunity and MSA language. | IBM: executed Change Orders entitle it to negotiated fees (at least for 119,133); MSA permits recovery of interest and IBM preserved claim. | Court: Trial court erred denying fees for COs 119 and 133 — remanded to calculate amounts; COs 71 and 102 lacked executed change orders so no recovery. Prejudgment interest award reversed — State did not waive sovereign immunity or clearly bind itself to pay prejudgment interest under the MSA/statutes cited. |
Key Cases Cited
- Citimortgage, Inc. v. Barabas, 975 N.E.2d 805 (Ind. 2012) (contract interpretation starts with plain language; ambiguity allows extrinsic evidence)
- Collins v. McKinney, 871 N.E.2d 363 (Ind. Ct. App. 2007) (factors to assess whether a breach is material)
- Ream v. Yankee Park Homeowner’s Ass’n, Inc., 915 N.E.2d 536 (Ind. Ct. App. 2009) (material-breach principles and damages consequences)
- Steve Silveus Ins., Inc. v. Goshert, 873 N.E.2d 165 (Ind. Ct. App. 2007) (material breach goes to the heart of the contract)
- Ind. Dep’t of Pub. Welfare v. Chair Lance Serv., Inc., 523 N.E.2d 1373 (Ind. 1988) (sovereign immunity bars prejudgment interest against the State unless waived by statute or contract)