Indiana appeals court hears welfare lawsuit

Lawyers representing Indiana asked an appeals court Monday to refund much of the money the state has paid IBM for a failed welfare privatization effort, but the company countered it's actually entitled to even more.

Former Gov. Mitch Daniels outsourced the intake of welfare clients to a team of private contractors led by IBM in 2006. He canceled the 10-year, $1.37 billion contract with Armonk, N.Y.-based IBM in 2009 amid widespread performance complaints from clients, their advocates and federal officials.

The state sued IBM for breach of contract, and the company countersued. Marion County Judge David Dreyer ruled last year that neither side deserved to win, but awarded IBM $52 million, including another $10 million in interest payments.

A three-judge panel from the Court of Appeals heard 45 minutes of arguments from both sides Monday.

The state told the judges that Dreyer erred in his reading of the law when awarding IBM a portion of what it had sought. Attorneys for IBM said the company should have actually received another $43 million in service fees and other costs because the state broke the contract.

Indiana officials have moved on since then with a hybrid version of the welfare system, led in part by one of IBM's former subcontractors on the projects, but the legal fighting has stretched on.

IBM lawyer Jay Lefkowitz said the company was shorted in the lower court because they are owed more in service fees and other costs included in the contract. Peter Rusthoven, a Barnes and Thornburg lawyer hired by the state, argued that the judgment should be tossed out because Dreyer followed the wrong court tests in determining the state owed IBM.

But both lawyers frequently returned to the same arguments they have been making since suits were first filed more than three years ago.

Lefkowitz said the state must, at least, pay for the IBM equipment it kept when it cancelled the contract.

"It makes perfect sense you have to buy this equipment if you want to use it," he said.

And Rusthoven returned to the central argument that IBM officials painted a rosy picture of improved operations and reduced costs when they sold the state on the contract, but quickly changed their tune when problems started popping up.

"Now, all of the sudden (they say), 'We're just the Geek Squad from Best Buy doing what you tell us to do'" Rusthoven said.

Appeals Judge John G. Baker did not offer a specific timeline for issuing an opinion in the case.