STATE OF INDIANA, acting on behalf of the Indiana Family & Social Services Administration, Appellant-Defendant,
INTERNATIONAL BUSINESS MACHINES CORPORATION, Appellee-Plaintiff
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APPEAL FROM THE MARION SUPERIOR COURT. The Honorable David J. Dreyer, Judge. Cause No. 49D10-1005-PL-21451.
ATTORNEYS FOR APPELLANT: PETER J. RUSTHOVEN, JOHN R. MALEY, Barnes & Thornburg, LLP, Indianapolis, Indiana.
ATTORNEYS FOR APPELLEE: JAY P. LEFKOWITZ, STEVEN J. MENASHI, Kirkland & Ellis, LLP, New York, New York; STEVEN D. McCORMICK, DOUGLAS G. SMITH, Kirkland & Ellis, LLP, Chicago, Illinois; ANDREW W. HULL, DANIEL K. BURKE, Hoover Hull, LLP, Indianapolis, Indiana.
VAIDIK, Chief Judge. BAKER, J., concurs. FRIEDLANDER, J., concurs in part and dissents in part with separate opinion.
VAIDIK, Chief Judge
Indiana's poorest residents live hand-to-mouth trusting that they will receive food stamps to eat and Medicare or other state health insurance in order to receive basic medical care. These citizens do not have the luxury of being able to wait to eat or go to a doctor while a phone goes unanswered, an appointment cannot be scheduled, or an application sits on a desk. The needs of the poor are immediate.
Indiana entered into an arrangement with the federal government to distribute federal funds to those in greatest need. Part of the State's responsibility was to make certain that only the poorest received aid and to help welfare recipients find work. If the State failed to comply with federal guidelines, then it would be penalized bye the federal government, resulting in less federal aid for our citizens.
By all accounts, the State was failing in performing its duties. As a result, in December 2006, the State, on behalf of its agency the Indiana Family and Social Services Administration (FSSA), entered into a ten-year, $1.3 billion contract with International Business Machines Corporation (IBM) to modernize and improve the State's welfare system. IBM agreed to the State's proposal, although it argues that the system design was doomed to fail. Nonetheless, IBM received $437 million while assuring the State that it was up to the task. Less than three years into the ten-year contract, the State terminated the contract citing IBM performance issues, and the parties sued each other for breach of contract on the same day in Marion Superior Court. The State sought over $170 million in damages, and IBM sought almost $100 million. Appellant's App. p. 239-40. The trial court granted IBM summary judgment for $40 million in assignment fees and, after a six-week bench trial in 2012, found no material breach on IBM's part and awarded IBM an additional $9,510,795 in Equipment fees, $2,570,621 in Early Termination Close Out Payments, and $10,632,333 in prejudgment interest, totaling $62,713,749.
While IBM's software, computers, and employee training aided in delivering welfare services, the primary focus of the contract was to provide food and medical care to our poorest citizens in a timely, efficient, and reliable manner within federal guidelines, to discourage fraud, and to increase work-participation rates. In the most basic aspect of this contract--providing timely services to the poor--IBM failed. We therefore reverse the trial court's finding that there was no material breach.
Despite finding a material breach on IBM's part, we affirm the trial court's award of $40 million in assignment fees and $9,510,795 in Equipment fees to IBM.
We do so because the State and IBM agreed under the terms of the contract that the State would pay these fees. Further, the State would be unjustly enriched if it were to keep IBM's equipment and to assume IBM's subcontracts without paying IBM. We further affirm the trial court's denial of Deferred Fees to IBM, reverse the trial court's award of $2,570,621 in Early Termination Close Out Payments and $10,632,333 in prejudgment interest to IBM, and remand the case to the trial court to determine the amount of fees IBM is entitled to for Change Orders 119 and 133. Finally, we remand the case to the trial court to determine the State's damages for IBM's material breach of the contract and to offset any damages awarded to IBM. We therefore affirm in part, reverse in part, and remand the case to the trial court.
Facts and Procedural History
The facts in this case are largely undisputed. During Governor Mitch Daniels's first term as governor, he declared Indiana's welfare system " broken." Appellant's App. p. 166. It was " plagued by high error rates, fraud, wasted dollars, poor conditions for its employees, and very poor service to its clients." Id. Indiana's welfare-to-work record was the worst in the country. Id. at 167. Consequently, Governor Daniels dubbed Indiana's welfare system " America's worst welfare system." Press Release, Governor accepts recommendation to modernize FSSA eligibility processes (Nov. 29, 2006), http://goo.gl/Tfbas4 (Ex. 612).
Shortly after Governor Daniels was elected in November 2004, he and senior officials--including former Indianapolis Mayor Stephen Goldsmith and FSSA Secretary Mitch Roob--set out to modernize and improve Indiana's welfare system. The new system was modeled after the system in Texas. Under the new model, Indiana citizens would apply for benefits " via web and call center" without the need for a face-to-face meeting with a case worker, and eligibility determinations would be made on a centralized, statewide basis rather than in the local county welfare
offices. Appellant's App. p. 167. One of the State's requirements for the new system was to " reduce the number of mandatory visits to local offices" by " giving clients more avenues to interact with the agency," such as " the Internet, an automated and interactive phone system, and local organizations in the community." Id. at 168. Analysts had found that citizens most in need of FSSA's help were forced to make more than two million unnecessary trips a year. Id.
In October 2005, FSSA began seeking vendors for the project. Id. at 169. IBM and a group of twelve coalition companies, including Dallas, Texas-based ACS Human Services, submitted a bid. In May 2006, the State announced its intention to award the contract to the IBM Coalition.
After months of negotiations, on December 27, 2006, the State of Indiana and IBM signed a ten-year, $1.3 billion Master Services Agreement (" MSA" ). Specifically, the MSA sought to " transform and modernize the process by which information needed or related to making eligibility determinations is collected, organized, and managed . . . in order to improve access to, and responsiveness of, that system and process, and to assure the integrity, reliability and efficiency of the public assistance contemplated by such programs[.]" Id. at 566. During the process of negotiating and drafting the agreement, the State was represented by outside counsel as well as the Office of the Attorney General, which reviewed the contract as it was being drafted and approved it for " form and legality." Id. at 172. Governor Daniels signed the MSA for the State. Id. The MSA contains more than 160 pages plus extensive attachments, including 10 exhibits, 24 schedules, and 10 appendices. Id.
As part consideration for the MSA, a Memorandum of Understanding (" MOU" ) was also signed on the same day as the MSA. According to the MOU--which was executed by IBM, the Indiana Economic Development Corporation, Purdue University, and Indiana University--IBM agreed to undertake collaborative activities designed to promote economic activity in the state, including creating 1000 full-time new jobs. Ex. 1709.
The MSA incorporated the various goals that were important to the State in deciding to overhaul Indiana's welfare system. MSA § 1.1(1) identified the following " Policy Objectives" :
(1) The overarching policy objectives of the Modernization Project and this Agreement are (i) to provide efficient, accurate and timely eligibility determinations for individuals and families who qualify for public assistance, (ii) to improve the availability, quality and reliability of the services being provided to Clients by expanding access to such services, decreasing inconvenience and improving response times, among other improvements, (iii) to assist and support Clients through programs that foster personal responsibility, independence and social and economic self-sufficiency, (iv) to assure compliance with all relevant Laws, (v) to assure the protection and integrity of Personal Information gathered in connection with eligibility
determination, and (vi) to foster the development of policies and procedures that underscore the importance of accuracy in eligibility determinations, caseload integrity across all areas of public assistance and work and work-related experience for Clients in the Programs.
* * * * *
(5) Vendor recognizes that (i) the Services to be performed under this Agreement are vital to the State and its citizens who currently are and in the future will be legally eligible for and reliant upon the assistance available under the Programs and must be continued without interruption and (ii) upon Termination, a Successor must be able to continue to provide the Services in as seamless a transition from Vendor as possible.
Appellant's App. p. 567. In addition, MSA § 1.4, entitled Construction and Interpretation, provided that the agreement " shall be" construed in a manner consistent with the Policy Objectives:
(5) In the event of any uncertainties regarding the interpretation of any particular provision or term used in this Agreement, or in the event of any ambiguity, vagueness or inconsistency therein or thereof, such provisions and terms shall be read in a manner consistent with the Policy Objectives. In all events, the provisions and terms of this Agreement shall be interpreted with a view toward achieving those objectives. Notwithstanding the foregoing, in no event shall the Policy Objectives change or expand Vendor's obligations hereunder unless expressly agreed to by the Parties pursuant to a Change.
Id. at 571.
Under the terms of the MSA, IBM would assist the State in processing the applications for public assistance under the State's existing procedures in all ninety-two Indiana counties. The new system would then be rolled out in phases on a region-by-region basis according to a " preliminary" " Initial Transition Timeline." Id. at 175 (citing MSA § 3.2.1(2)). The final stage of the process, or " Steady State," would be reached when the new system was rolled out to all ninety-two counties. Id. (citing MSA § 3.2.1(1) & Appendix I). As it would turn out, Steady State was never reached because the State terminated the MSA and moved to a hybrid system when only about half of Indiana's counties were operating under the modernized system.
In any event, according to the MSA, the State retained operational control throughout the project, including " general authority and responsibility for operational, technical, financial, and general management and oversight of the Services provided under the Agreement." Id. (citing MSA App. V, § 3.7.2). The State also retained all policy-making authority over the project. Id. at 175-76 (citing MSA § 3.1.1(6)). Finally, the State made final eligibility determinations for the public-assistance programs. Id. at 176 (citing MSA § 3.1.1(1)).
In order to assess IBM's performance, the parties agreed on four categories of " Performance Standards" :
(1) Critical Transition Milestones, which were penalties imposed if IBM did not achieve the milestones identified by the State that were critical to the successful transition of the Services; (2) Transition Key Performance Indicators, which were performance measurements for the " as-is" counties during the transition; (3) Key Performance Indicators, which were performance measurements for the modernized system in force originally only during Steady State; and
(4) Service Level Metrics, which related primarily to service levels that guided the priorities of IBM, also in force only during Steady State.
Id. at 178-79, 737, 738. These were attached to the MSA in Schedule 10. See id. at 735. Twenty Key Performance Indicators were designed to measure performance only during Steady State. See id. at 744-48. However, eleven of the Key Performance Indicators were accelerated by agreement of the parties in Change Order 64 and began on September 1, 2008. Id. at 179-81 (citing Ex. 1500.064). Many significant metrics, such as the Service Level Metrics, did not apply until Steady State, which was never reached.
All of these standards included liquidated-damages provisions. They ranged from $150,000 to $350,000 for Critical Transition Milestones and far smaller sums--$500 to $5000--for the Key Performance Indicators and others. See, e.g., id. at 744-48.
Under Article 16 of the MSA, the State could terminate the agreement (1) for convenience or (2) for cause. Id. (citing MSA § § 16.3.1, 16.3.2). The termination-for-cause section provided that the State could terminate the agreement in three ways:
(1) The State may terminate this Agreement, in whole or in part, for cause in any of the following circumstances:
(A) a breach by Vendor of this Agreement which is material considering this Agreement as a whole occurs which cannot reasonably be cured by Vendor within thirty (30) days after delivery of the Termination Notice (the " Notice Period" );
(B) a breach by Vendor of this Agreement which is material considering this Agreement as a whole occurs which can reasonably be cured by Vendor within the Notice Period but which has not been cured within the Notice Period unless Vendor (i) has submitted to the State within the Notice Period a Corrective Action Plan to cure the breach within sixty (60) days after the date Vendor receives notice of the breach from the State (the " Extended Cure Period" ), (ii) proceeds diligently according to such Plan, and (iii) cures the breach within the Extended Cure Period (in which case the State's termination shall become effective when Vendor fails to perform any one of steps (i), (ii), or (iii)); or
(C) a series of breaches of Vendor's obligations, none of which individually, constitutes a breach of this Agreement which is material considering this Agreement as a whole, but which, in view of Vendor's history of breaches, whether or not cured, collectively constitute a breach of this Agreement which is material when considering this Agreement as a whole, provided that the State's notice to Vendor shall be provided within a maximum of three (3) months after the last such breach upon which the State bases its termination. For the purposes of clarity, the cure periods set forth in Sections 16.3.1(1)(A) and 16.3.1(1)(B), as appropriate, shall apply to a notice given under this Section 16.3.1(1)(C) as to any breach for which a cure period has not previously been provided.
Id. at 692-93 (MSA § 16.3.1(1)). Under the termination-for-convenience provision, the State could terminate the agreement, in whole or in part, " for any reason" that the State determined was " in its best interest." Id. at 693 (MSA § 16.3.2).
The MSA included a range of payment provisions in the event that the agreement was terminated. Some of these, however, depended on whether the contract was terminated for convenience or for cause. In Article 14 governing Subcontractors, Section 14.8.1(3) gave the State the option of assuming IBM's subcontracts but provided for subcontractor assignment fees in certain circumstances:
(3) In the event the State exercises its right to accept assignment of one or more Subcontracts pursuant to this Section 14.8, the State shall not be required to pay to Vendor the Early Termination Close Out Payments that are directly attributable to the performance of such assigned Subcontract(s), but, instead for each Subcontract assigned to the State, the State shall pay Vendor the following upon the applicable Services Termination Date:
(A) if the replaced Subcontractor is ACS, (i) the amount of the Deferred Fees for Vendor's Subcontract with ACS as set forth in Schedule 24 [Deferred Fees], plus (ii) Ten Million Dollars ($10,000,000), if the applicable Services Termination Date is within Contract Years one through seven . . . .; and
(B) for each assigned Subcontract with a Key Subcontractor (other than ACS) and each other assigned Primary Subcontract (other than those Subcontracts with an aggregate contract value of less than Five Million Dollars ($5,000,000)), Five Million Dollars ($5,000,000), if the applicable Services Termination Date is within Contract Years one through seven . . . .
provided, however, that the provisions of this Section 14.8.1(3) shall not apply if all the Services contained within an applicable Subcontract are terminated by the State pursuant to Sections 16.3.1 [termination for cause], 16.3.4(2) [insolvency events], or 16.3.4.(3) [wrongful conduct], except that the unamortized balance of the Deferred Fees shall still be payable in such event.
Id. at 681. Similarly, Section 16.6.1(4) provided that the Disengagement Plan " shall" detail the transfer of Equipment and that " [u]pon receipt of payment for" the Equipment, IBM " shall provide the Successor with an agreed upon bill of sale . . . ." Id. at 700. Section 16.6.6 required the State to pay IBM Early Termination Close Out Payments, including Deferred Fees, in the event that the MSA was terminated. Id. at 702. However, as the trial court later determined on summary judgment, IBM was not entitled to Deferred Fees if the State terminated the MSA for cause. Id. at 383-87 (trial court's January 25, 2012 order).
" Phase 1" of the rollout began in March 2007. It consisted of informing the public as well as recruiting and transferring about 1500 State employees to IBM subcontractors. Id. at 183. " Phase 2" occurred over a seven-month period from October 2007 to May 2008 as the parties rolled out the modernized system in three stages. Id. On October 25, 2007, the State approved the rollout of the project to a twelve-county pilot area in north-central Indiana. Id. During this pilot phase, the State's Modernization Project team evaluated the IBM Coalition's performance, including the readiness of the Service Centers, document-processing center, general infrastructure, and application processing. Id. The team, including Secretary Roob, regularly met with the IBM team during the Pilot Phase and throughout the Modernization Project. Id. The parties " saw implementation issues immediately," including unanswered calls and the untimely processing of applications. Id.; see also id . (June 2007 email from Secretary Roob
to IBM Vice President of State and Local Government Brian Whitfield: " tens of thousands of calls unanswered, honestly perhaps the worst performance I have ever seen in a call center." (citing Ex. 8021)).
The trial court found that two background factors contributed to these initial difficulties. First, by December 2007, which was two months after rollout of the pilot region, the State and the country began to feel the effects of the " Great Recession."  Id. at 185. Benefit applications skyrocketed, and over the next two years, the State's unemployment rate more than doubled. Id. at 185-86.
Second, in 2008, Indiana was hit by a series of natural disasters that cost the State nearly $2 billion in economic damage. Id. at 186. All but ten of Indiana's counties were declared Presidential Disaster Areas. Id. at 186-87. These disasters affected the rollout of the project, which was eventually suspended by mutual agreement of the parties in September 2008 in Change Order 69 in order to accommodate disaster-relief efforts. Id. at 188. The State directed the reassignment of approximately one-third of the State and IBM Coalition workforce to help process tens of thousands of emergency food-stamp applications and thousands of FEMA applications. Id. at 187.
Despite these challenges, in March 2008, the IBM Coalition received the State's approval to begin providing modernized services to Region 2A, which represented twenty-seven counties in southern and central Indiana. Id. After two months of operating these counties under the modernized system, on May 5 the State gave its approval to rollout the project to Region 2B, which represented twenty counties divided between southwest and northeast Indiana. Id. In total, the modernized system was implemented in fifty-nine of Indiana's ninety-two counties.
During the rollout, the State conducted a series of project assessments. In May 2008, FSSA Secretary Roob reported to the Indiana General Assembly that although they " still ha[d] more work to do," modernization had allowed the State to serve " more people statewide and in a timelier manner than we ever have before." Id. at 189; Ex. 34. In August 2008, FSSA reported to federal authorities that although the start and finish dates of several key milestones had to be adjusted, the Modernization Project had " 'already made substantial progress toward its goals and objectives.'" Appellant's App. p. 189 (quoting Ex. 247, a document requesting Federal Financial Participation for the costs projected during FY2009). In October 2008, the director of the FSSA's Division of Family Resources gave IBM primarily 9s and 10s (out of a possible 10) in IBM's annual customer satisfaction survey. Id. (citing Ex. 208). And in a December 2008 interview, which was nine months before the State terminated the MSA, Governor Daniels said that the new system was " a work in progress" and " far from perfect" but " far better than what preceded it," noting that critics wanted to " go back to a system where you had to beg for an appointment face to face," which was " atrocious." Id.; Ex. 630.
The State expanded the scope of IBM's work numerous times during the course of the project, which added $178 million to the contract price. Appellant's App. p. 190. These expansions were reflected in Change Orders 23, 33, 53, 60, 64, 67, 68, 90, 93, 119, and 133. Id.
For example, the State significantly increased the scope of the project in 2007 with Change Order 23 in order to include the Healthy Indiana Plan (HIP), which provides health insurance to uninsured Indiana residents who fall below a certain income level. Id. at 184. When the HIP launched, the number of applications regularly exceeded the State's predictions, which caused IBM to fall behind on application processing, thereby placing additional strain on the modernized system. Id. at 184-85.
But, as even the trial court found, these accolades and expansions did not mean that the project did not have problems. Id. at 191 (Finding No. 53). In November 2008, the IBM Coalition met with Secretary Roob to propose changes to the project because of problems including inconsistent feedback, document acceptance and processing, case-processing timeliness, quality, and higher volumes. Ex. 65, p. 12. Secretary Roob approved many of IBM's proposed reforms. Appellant's App. p. 191. Shortly after Secretary Roob approved the IBM Coalition's proposed reforms, Governor Daniels appointed Roob as Indiana's Secretary of Commerce and CEO of the Indiana Economic Development Corporation; Anne Murphy replaced Roob as FSSA Secretary. Id.
In March 2009, Secretary Murphy sent the IBM Coalition a letter drafted by the State's outside counsel requesting a Corrective Action Plan. Id.; Ex. 75 (" The State of Indiana has raised with IBM multiple issues with the Modernization Project that need to be addressed immediately and believes that it is in the best interest of the State and IBM to enter into a Corrective Action Plan as contemplated by Section 15.4.1 of the [MSA]." ). The letter identified thirty-six " issues" that the State wanted the IBM Coalition to address, including excessive wait times at local offices, incorrectly categorized imaged documents, high turnover of staff, scheduling problems, inaccurate and incomplete data gathering, clients not receiving mailed correspondence, poor communication to all staff, unresolved help-desk tickets, untimely expedited food-stamp processing, excessive wait times for applicant appointments, and failure to process Food Stamp, TANF, and Medicaid applications in a timely manner. Ex. 75. The IBM Coalition responded to the State's letter and denied that a formal Corrective Action Plan was required under the MSA; nonetheless, it expressed a willingness to work with the State to address the issues. Appellant's App. p. 192. The IBM Coalition also argued that twenty-one of the thirty-six issues did not relate to any contractual measure or performance standard contained in the MSA while six of them related to performance standards that were not yet in effect. Id. While the State found " some" of IBM's responses helpful, it found many of them to be " incomplete, non-responsive, insufficient or otherwise unsatisfactory." Ex. 1929. This implied to the State that:
IBM has not fully appreciated the depth of the State's concerns about the status of the Modernization Project and the Coalition's failure to achieve expected performance objectives in the modernized regions, ongoing failures in the As-Is regions and failure to make satisfactory progress on the overall implementation of the Modernization Project. These concerns have been expressed as
well by many key constituencies, including State legislators, federal agencies, client advocates and other stakeholders.
On July 2, 2009, the parties agreed on a Corrective Action Plan to address the issues that had been raised by the State's March 2009 letter as well as an independent analysis undertaken by IBM. The Corrective Action Plan included twenty-two short-term " Quick Wins" and thirty-one long-term initiatives. Appellant's App. at 192 (citing Ex. 5409).
But in late July 2009, the federal agency overseeing Medicaid programs--Centers for Medicare and Medicaid Services (CMS)--found that Indiana was " consistently not meeting Federal eligibility processing requirements." Id. at 834. CMS noted that since the Modernization Project's rollout, it was " plagued" " by ongoing issues and complaints that consumers are losing Medicaid benefits or being denied benefits inappropriately." Id. The problems included extended wait times for processing enrollment applications and in receiving responses to Call Center inquiries, lack of responses to enrollment applications, and inappropriate disenrollments. Id. CMS noted that these problems, which had garnered media attention, " indicate a serious situation in Indiana that is negatively impacting consumers' access to Medicaid." Id. at 834, 837. Finding that the State was not in compliance with several provisions of the United States Code and the Code of Federal Regulations, CMS ordered the State to provide its own " Corrective Action Plan (CAP) for ensuring that the Federal eligibility requirements are met." Id. at 837.
The trial court found that by mid-October 2009, the IBM Coalition had made " substantial progress" on the Corrective Action Plan entered into between the State and IBM. Id. at 193. As support for this finding, the trial court relied on statements made by an attorney general in a September 2009 hearing in Thornton v. Anne Murphy in the United States District Court for the Southern District of Indiana. Id. The litigation concerned how long it took the State to process applications. The attorney general, speaking for the defendant, stated:
We looked at what were the causes. We tried to identify the causes; and we've initiated a number of activities to correct those causes, many of which--they call it Quick Win[s], but we have made substantial progress in a very short period of time.
Ex. 304, p. 70. The trial court also cited a late September 2009 email which contained public statements from Secretary Murphy that " a team of vendors led by IBM Corp. has already made improvements in technology and added more staff under a corrective action plan submitted in July" ; however, Secretary Murphy added that " the timeliness of processing applications for food stamps, Medicaid and other benefits has not improved." . Ex. 111.
Nevertheless, in September 2009, two months after the State and IBM signed the Corrective Action Plan, the State decided to change course and adopt a hybrid approach to welfare modernization, which the State and IBM referred to as " Plan B." Id. at 194. Most notably, Plan B abandoned the centralized Call Center, moving the eligibility determinations to the local office where clients would experience face-to-face interactions with FSSA staff handling their cases. Id. at 194-95 (citing Ex. 2085). The State noted that " '[t]he largest difference between the Hybrid System and the modernized system will be an increased focus on the face-to-face contact.'" Id. at 195 (quoting Ex. 97). The State approached IBM about implementing the hybrid plan, but an agreement was never reached between the parties because the State could not afford the price that IBM was charging for the plan. Id. at 196-98. Even after the parties failed to agree on an IBM-led rollout of the hybrid plan, the State encouraged IBM to continue as the technology vendor. Id. at 198.
On October 15, 2009--less than three years into the ten-year contract--Secretary Murphy delivered a letter to IBM explaining that the State was terminating the MSA " in whole" " for cause" effective December 14, 2009. Ex. 1555. The State alleged that IBM's breaches included " numerous and repeated quality and timeliness failures." Id. In addition, the State alleged that pursuant to Section 16.3.1(1)(A) of the MSA, IBM's breaches were material considering the MSA as a whole and IBM could not reasonably cure them within thirty days of the notice. Id. The State also alleged that pursuant to Section 16.3.1(1)(B) of the MSA, some--but not all--of IBM's breaches were the subject of IBM's July 2009 Corrective Action Plan, but IBM had not proceeded diligently according to the Corrective Action Plan. Id. Finally, the State alleged that pursuant to Section 16.3.1(1)(C) of the MSA, IBM's series of breaches, in view of IBM's history of breaches, collectively constituted a breach of the MSA, which was material considering the MSA as a whole, with the last of such breaches occurring within three months of the notice of termination. Id.
On the same day as the termination letter, Governor Daniels held a press conference to announce the termination of the MSA and the State's plan for a " hybrid" system. Ex. 52. According to the press release, the hybrid system would " incorporate successful elements of the old welfare delivery system and what is known as the modernized system" and " include more face-to-face contact and more localized team-based case management." Press Release, State ends contract with IBM for welfare services (Oct. 15, 2009), http://goo.gl/4d63PF. Also according to the press release, the State canceled the contract with IBM because IBM " did not make satisfactory progress to improve services to welfare applicants and recipients under a plan to correct deficiencies." Id. The press release continued:
" The fraud appears to have been stopped and we're still on track to save taxpayers hundreds of millions of dollars, but the intended service improvements have not been delivered, and that's not acceptable," said Daniels. " Those who raised concerns about service quality were correct and we appreciate
their efforts. We'll now take the best parts of the old and new and move ahead with a hybrid system in what amounts to a major mid-course correction."
Id. The press release stated that the IBM system suffered from two fundamental flaws in concept: (1) the system tried to remove the burden of required face-to-face meetings and (2) it used a task-based approach rather than a case-based approach to process applications. Id.
In total, the State paid IBM approximately $437 million under the MSA. Appellant's Br. p. 2; see also Appellee's Br. p. 8 (" The State continued to make payments to IBM and its subcontractors each month without objection, including more than $428 million over 36 months." (citing Appellee's App. p. 247)).
After the State notified IBM of the termination of the MSA, the State and IBM entered into a Disengagement Plan on December 11, 2009. See Appellant's App. p. 869; Ex. 472. The Disengagement Plan set forth the activities of the State and the Disengagement Services to be provided by IBM as required by the State in connection with its termination of the MSA. Ex. 472, p. 1. Under the Disengagement Plan, the State was required to pay IBM $4,412,200 for Disengagement Services. Ex. 472, p. 36. IBM does not dispute that the State has paid it $4.4 million for such services. Tr. p. 6739-40. Under the section of the Disengagement Plan called " Schedule A--Transfer of Dedicated Equipment," the State was to specify the equipment that it wished to be transferred to it. IBM invoiced the State $9,349,654.93 for the computers and furniture that it kept. Appellant's App. p. 889. The State, however, never paid this invoice.
On May 13, 2010, the State filed a complaint for damages and declaratory relief against IBM in Marion Superior Court seeking over $170 million. The State alleged that IBM materially breached the MSA as follows:
157. IBM failed to roll out the Modernized system to the entire State by the agreed date, implementing the Modernized service in just 59 of Indiana's 92 counties.
158. IBM failed to achieve its promise of improving timeliness, accuracy, and client satisfaction and failed to meet established performance measures.
159. In the counties where IBM rolled out the Modernized system, performance standards fell significantly below the non-Modernized counties, fell below the counties' performance prior to the ...