State of Indiana, Acting on Behalf of the Indiana Family & Social Services Administration v. International Business Machines Corporation
2016 Ind. LEXIS 210
| Ind. | 2016Background
- Indiana (FSSA) entered a 10-year, $1.3 billion Master Services Agreement (MSA) with IBM (Dec. 2006) to modernize the state welfare eligibility system (centralized, remote eligibility model).
- Rollout began with pilot counties, expanded to 59 of 92 counties, but experienced persistent performance problems (call center issues, untimely application processing, data errors, high turnover). CMS and the State demanded corrective actions; a Corrective Action Plan (CAP) was adopted in July 2009.
- The MSA included detailed performance standards, KPIs, service-level metrics (Schedule 10), liquidated-damage provisions, a materiality test for termination (breach is material “considering this Agreement as a whole”), change-order and force-majeure procedures, and Policy Objectives incorporated into contract interpretation.
- The State terminated the MSA for cause in Oct. 2009, alleging numerous and repeated quality and timeliness failures; both parties sued for breach and damages.
- Trial court found IBM had not materially breached and that IBM substantially performed; the Court of Appeals reversed on material breach; Indiana Supreme Court granted transfer on material-breach issue.
Issues
| Issue | Plaintiff's Argument (State) | Defendant's Argument (IBM) | Held |
|---|---|---|---|
| Whether IBM materially breached the MSA | IBM’s repeated failures (timeliness, quality, State dissatisfaction, CAP noncompliance) collectively were a material breach under MSA’s “as a whole” standard | Failures were not material; State benefited from system and paid IBM; liquidated damages covered certain metric shortfalls; external events excuse performance | Held: IBM materially breached. The MSA’s contract standard governs; collective breaches were material in light of the MSA as a whole. |
| Whether the MSA or common-law (Restatement §241) governs materiality | The MSA expressly defines materiality (“material considering this Agreement as a whole”); that clause controls | Restatement factors should guide the analysis of materiality | Held: Contractual standard controls. Restatement §241 applies only where contract is silent. |
| Role of Policy Objectives in assessing breach | Policy Objectives reflect the contract’s purpose and inform interpretation and performance evaluation | Policy Objectives cannot expand IBM’s obligations (MSA §1.4(5)); they should not be treated as independent obligations | Held: Policy Objectives do not independently create obligations, but where incorporated into measurable performance standards or interpretive provisions they are relevant to materiality analysis. |
| Whether external events, liquidated damages, State motive, or benefits received preclude material breach | Recession, floods, surge in HIP applications, payment of liquidated damages, or State motives do not excuse or negate material breach where MSA provided procedures (change orders, force majeure notice) and preserved termination rights | These factors mitigate IBM’s liability; liquidated damages were intended to be sole remedy for some metrics; State’s public statements and benefits received show non-material failure | Held: IBM’s failure to pursue contract remedies (change orders, force majeure notice) or to rely on them precludes these excuses; liquidated damages did not bar termination rights; State’s motives and benefits received were irrelevant to materiality. |
Key Cases Cited
- Menard, Inc. v. Dage–MTI, Inc., 726 N.E.2d 1206 (Ind. 2000) (standard of review for findings of fact and conclusions of law)
- Zoeller v. E. Chicago Second Century, Inc., 904 N.E.2d 213 (Ind. 2009) (express contract terms preclude implication of contradictory terms)
- Collins v. McKinney, 871 N.E.2d 363 (Ind. Ct. App. 2007) (materiality of breach is usually a question of fact and often described as going to the "heart of the contract")