Indiana can’t collect on IBM welfare lawsuit, judge rules

Indiana cannot collect millions of dollars it claims IBM owed after its efforts to overhaul the state's welfare system failed, and the computer giant is entitled to payment for equipment the state kept, a judge said in a Wednesday ruling that condemned both sides.

Marion County Judge David Dreyer said in his 75-page order that neither side deserved to win the dispute.

"Overall, both parties are to blame and Indiana's taxpayers are left as apparent losers," Dreyer wrote, blaming "misguided government policy and overzealous corporate ambition."

A team of vendors led by IBM in 2006 was awarded a 10-year, $1.37 billion contract to process applications for food stamps, Medicaid, and other public safety net benefits. The deal introduced call centers, the Internet and fax machines as means to apply for benefits and removed specific state case workers assigned to each household.

The changes drew fire from lawmakers, welfare clients and their advocates, who claimed the new system lost necessary documents, left telephone callers on hold for long periods, reduced or eliminated face-to-face contact with case workers. Gov. Mitch Daniels killed the deal in 2009, after less than three years.

Indiana initially sued IBM for $437 million, which was later reduced to about $170 million. IBM countersued for about $100 million that it claimed it was owed.

Dreyer said Indiana set out to fix the previous welfare system, which Daniels called the worst in the nation, by "inserting an untested theoretical experiment, and substitute personal caseworkers with computers and phone calls.

"This is now admitted to be an error, and there is nothing in this case, or the court's power, that can be done to correct it, or remedy the lost taxpayer money or personal suffering of needy Hoosiers," he wrote.

Indiana failed to prove that IBM breached its contract, Dreyer said, and he denied the state the money it sought.

Dreyer also found that most of IBM's claims for damages were "unreasonable" but awarded the Armonk, N.Y.-based company $12 million, mostly for equipment the state kept. IBM previously had previously received $40 million in a summary judgment ahead of the trial.

Peter Rusthoven, a private Indianapolis attorney who represented the state in the case, disputed Dreyer's finding that IBM hadn't broken its deal with the state and said the government would appeal the decision.

"We believe the court's view that IBM's concededly bad performance did not materially breach the contract is wrong, and cannot be squared with the overwhelming evidence of poor performance," Rusthoven said in a statement.

He said federal regulators found IBM's performance "abysmal" and the company's own chief executive called it an "abomination."

Rusthoven also said the ruling contained "regrettable, unnecessary political commentary that is neither accurate nor relevant."

IBM said in a statement that the ruling "confirms the essential role IBM played in reducing fraud and laying the framework for the welfare eligibility system that is currently serving Indiana's neediest citizens."

Robert Weber, IBM Senior Vice President and General Counsel, said the case was about the need for Indiana to fulfill its contractual promises.

"The court's decision … makes clear that the state is not above the law," Weber said.

A group of subcontractors led by the Family and Social Services Administration has introduced a new hybrid welfare system that maintains elements of the IBM project but includes more face-to-face caseworker interaction with clients during the application process.

"Modernization is the foundation on which the state hybrid system now stands. For better or worse, and through much transition difficulty, the contract, including IBMs efforts, conferred the overall aggregate benefit sought by the State: a new welfare system that works better," Dreyer said in the ruling.

Daniels said the state's new welfare intake system is the "most timely, most accurate, most cost effective and fraud free system ever" in the nation.

"We'll seek and expect a reversal," he said in a statement. "Either way, it's all been well worth it to solve the problem we set out to fix."

A welfare advocate said while the hybrid system addresses some deficiencies in Indiana's welfare system, it is still difficult for many people to get approved for welfare, food stamps and health care benefits and keep receiving them.

Daniels' statement "doesn't accurately portray to the public how much room for improvement there is to bring Indiana up to the level of other states," said David Roos, executive director of the advocacy group Covering Kids & Families of Indiana.

David Sklar, president of the Indiana Coalition for Human Services, a not-for-profit coalition of about 25 service providers and advocacy groups, said the organization had always been concerned about the effect privatization would have on low-income families, but said the new, hybrid system generated far fewer complaints.

"It's a shame that this endeavor in the end will probably cost the taxpayers more money," he said.