# State of Indiana, acting on behalf of the Indiana Family & Social Services Administration v. International Business Machines Corporation

> Indiana Court of Appeals · February 13, 2014 · 4 N.E.3d 696

URL: https://www.frixlaw.com/law-library/cases/2725591

## Case

- **Full name:** STATE of Indiana, Acting on Behalf of the INDIANA FAMILY & SOCIAL SERVICES ADMINISTRATION, Appellant-Defendant, v. INTERNATIONAL BUSINESS MACHINES CORPORATION, Appellee-Plaintiff
- **Court:** Indiana Court of Appeals
- **Decided:** February 13, 2014
- **Citations:** 4 N.E.3d 696; 2014 Ind. App. LEXIS 54; 2014 WL 561658
- **Precedential status:** Published
- **Opinion:** Opinion
- **Judges:** Vaidik, Baker, Friedlander
- **Cited by:** 3 later opinions in the Frix Law Library

## Citator (automated)

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## Opinion text

FOR PUBLICATION

ATTORNEYS FOR APPELLANT: ATTORNEYS FOR APPELLEE:

PETER J. RUSTHOVEN JAY P. LEFKOWITZ
JOHN R. MALEY STEVEN J. MENASHI
Barnes & Thornburg, LLP Kirkland & Ellis, LLP
Indianapolis, Indiana New York, New York

STEVEN D. McCORMICK
DOUGLAS G. SMITH
Kirkland & Ellis, LLP
Chicago, Illinois
Feb 13 2014, 12:40 pm
ANDREW W. HULL
DANIEL K. BURKE
Hoover Hull, LLP
Indianapolis, Indiana

IN THE
COURT OF APPEALS OF INDIANA

STATE OF INDIANA, )
acting on behalf of the Indiana Family )
& Social Services Administration, )
)
Appellant-Defendant, )
)
vs. ) No. 49A02-1211-PL-875
)
INTERNATIONAL BUSINESS )
MACHINES CORPORATION, )
)
Appellee-Plaintiff. )

APPEAL FROM THE MARION SUPERIOR COURT
The Honorable David J. Dreyer, Judge
Cause No. 49D10-1005-PL-21451

February 13, 2014
OPINION - FOR PUBLICATION

VAIDIK, Chief Judge

Case Summary

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 by 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),1 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

1
The FSSA—the State’s largest agency—is charged with, among other things, administering
Medicaid, Food Stamp, and Temporary Assistance to Needy Families (TANF) programs for the State of
Indiana. Each of these programs provides welfare benefits to individuals and families in need of financial
assistance in Indiana. To be deemed eligible for a particular program, an individual must be certified as
eligible by the FSSA and recertified either annually or semi-annually depending on the particular program.
See Perdue v. Gargano, 964 N.E.2d 825, 830 (Ind. 2012).
2
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

3
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.2 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).

2
The State does not set forth any background facts in its brief. See Appellant’s Br. p. 4-14. IBM
sets forth some background facts, but its citations for these facts are to the trial court’s nearly thirty-five
pages of findings of facts—not to the official transcript. Because no party challenges the findings of facts,
we use the trial court’s findings when setting forth the background facts of this case.
In addition, we note that our review of this case has been hampered by the trial court’s citations to
the uncertified, and thus unofficial, transcript of this case. See Appellant’s App. p. 166 n.3 (trial court
explaining in its July 2012 order that “[c]itations to trial testimony are taken from the uncertified transcript
and are unofficial.”). The record shows that in advance of trial, both “parties collaboratively arranged for
a team of John Connor & Associates certified court reporters to prepare daily trial transcripts for each day
of trial and throughout the trial and those transcripts have been paid for by the parties.” State v. Int’l Bus.
Machs. Corp., Cause No. 49A02-1211-PL-875, Agreed Mot. Regarding Submission of R. Items for
Purposes of Appeal (filed Jan. 3, 2013). In the meantime, “the Marion Superior Court, Civil Division 10,
court reporters . . . prepared the ‘official’ trial transcript,” resulting in discrepancies between the two
records. Id. Because the parties and trial court cited the unofficial transcript in the trial court, they asked
this Court if they could use the unofficial transcript for purposes of appeal because “citing to the newly
generated and re-paginated ‘official’ trial transcripts will be laborious for the parties and confusing for all
concerned, including this Court.” Id. However, an order from our former Chief Judge denied the parties’
request to cite the unofficial trial transcript prepared by private court reporter John Connor & Associates
because it did not comport with Indiana Appellate Rules 28, 29, and 30. State v. Int’l Bus. Machs. Corp.,
Cause No. 49A02-1211-PL-875 (Ind. Ct. App. Jan. 18, 2013).
4
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.3

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

3
Other participating bidders dropped out, leaving the IBM Coalition as the only potential contract
partner. Appellant’s App. p. 169-70. The largest portion of the work among Coalition members went to
ACS. Id. at 169.
5
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[4] 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

4
“Client” means “any individual or family (1) who receives or applies for assistance under a Public
Assistance Program during the Term, or (ii) whose Records or Personal Information have been delivered
to Vendor pursuant to the Agreement for receipt of benefits under a Program.” Appellant’s App. p. 761.
6
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

7
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,

8
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[5] 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

5
According to the MSA, “Vendor” is defined as IBM. Appellant’s App. p. 782, 566.
9
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 . . . .

10
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.;

11
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.”6 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

6
The trial court cited a document from the National Bureau of Economic Research for the
proposition that the recession began in December 2007. See Appellant’s App. p. 185 n.30.
12
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

13
133.7 Id. at 190-91. 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].”).

7
In addition, there is an issue on appeal as to whether IBM admitted Change Orders 71 and 102
into evidence. This issue is addressed in IBM’s cross-appeal, which challenges the trial court’s failure to
award IBM fees for four change orders, including Change Orders 71 and 102.
14
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.

Id.

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

15
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:

16
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.”8

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

8
To support its finding that the IBM Coalition had made substantial progress, the trial court also
cited an email that contained a June 29, 2009 newspaper article in the Evansville Courier & Press quoting
Governor Daniels. Two Evansville lawmakers—a State senator and representative—said that their
constituents had repeatedly complained of long waits on hold with the new call center, lost documents in
the online system, and lines at local agency offices. Ex. 1105. Although Governor Daniels was quoted as
saying that the “backlogs are coming way down. Complaints are dropping,” he was also quoted as saying
that he was “very dissatisfied with at least certain aspects” of the Modernization Project, which led to “one
very direct conversation with IBM and their partners.” Id. Governor Daniels said that as a result, the
“contractors understand they have a responsibility to make the new system work without all the glitches.”
Id. Notably, the article said, “Data showing improvement is not available now.” Id. The article also
previewed the Corrective Action Plan that the parties ultimately signed on July 2, 2009, which included
hiring hundreds of workers, retraining workers, and reviewing documents more quickly—all at the IBM
Coalition’s expense. Id.
17
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

18
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)).

19
After the State notified IBM of the termination of the MSA, the State and IBM

entered into a Disengagement Plan on December 11, 2009.9 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:

9
The parties contemplated such a plan in the MSA in the event that the contract was terminated.
MSA § 16.6.1 provided:

Vendor acknowledges that, upon Termination of this Agreement or Services for any
reason, in whole or in part, either the State or another service provider (either, a
“Successor”) may provide services similar to the Services and the Delegated Activities (or
such portion thereof related to the portion of this Agreement and the Services so
terminated). In such event, Vendor shall furnish adequate and appropriate phase-out
services (“Disengagement Services”) pursuant to a Disengagement Plan (“Disengagement
Plan”), which plan shall be executed prior to the Services Termination Date, with
Disengagement Services commencing upon the direction of the State and continuing for
up to six (6) months after this Agreement terminates or such longer period as the State may
reasonably require (up to a maximum of an additional six (6) months) (“Disengagement
Period”). The Disengagement Plan shall include the following assistance upon the State’s
request . . . .

Appellant’s App. p. 699.
20
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 roll-out, and was below
Federal and State guidelines.

160. The State provided IBM the opportunity to cure its defective
performance through the [Corrective Action Plan]; however, IBM failed to
satisfy the requirements of the [Corrective Action Plan].

161. IBM has failed to cure its deficient performance.

Id. at 280. IBM filed a complaint against the State for breach of contract that same day.

Specifically, IBM sought Deferred Fees of $43,416,738 plus $9,369,898.93 for equipment,

“pray[ing] for a judgment against the State in the amount of $52,786,636.93, plus

applicable interest, and for such further relief as warranted under the contract and Indiana

law as the Court deems just and proper. IBM is entitled to both pre-judgment and post-

judgment interest, as required under the MSA and Indiana law.” Id. at 337.

Twelve motions for summary judgment have been filed in this case, three of which

have bearing on this appeal. An emergency transfer has also been taken to the Indiana

Supreme Court concerning whether Governor Daniels had to submit to a deposition. See

State v. Int’l Bus. Machs. Corp., 964 N.E.2d 206 (Ind. 2012). Regarding one of the

summary-judgment motions, IBM filed a partial motion for summary judgment on its claim

for subcontractor assignment fees. The MSA included fixed-sum “assignment fees” of $5

million or $10 million per subcontract to be paid to IBM post-termination if the State

21
assumed IBM’s prime-contractor role within the first seven years. The trial court found

that the State accepted assignment of the seven subcontracts at issue10 and that the

assignment fees were not an unenforceable penalty as argued by the State because payment

was not triggered by a breach; rather, the court found that the fees were “compensation for

valuable contract rights.” Appellant’s App. p. 159-60. Finding no genuine issues of

material fact and that IBM had demonstrated that it was entitled to judgment as a matter of

law with respect to its claim for subcontractor assignment fees, the court granted IBM’s

motion for partial summary judgment on this issue, thereby awarding IBM $40 million in

assignment fees. Id. at 161 (trial court’s January 25, 2012 summary-judgment order).

The State filed a motion for summary judgment relating to the impact of the

economic downtown and flooding on IBM’s performance. The trial court granted

summary judgment on this issue in favor of the State:

[T]he Court GRANTS the State’s motion for summary judgment number 5,
and RULES that any contention by IBM at trial that the economic downturn
or flooding rendered its performance “impossible,” or otherwise excuses any
failure by IBM to meet any of its contractual obligations under the MSA, is
precluded as a matter of law[.]

Id. at 390-91 (trial court’s January 25, 2012 summary-judgment order).

This case proceeded to a bench trial before the Honorable David J. Dreyer on

February 27, 2012. The trial lasted six weeks and concluded April 3, 2012. Eight attorneys

appeared for the State, and eleven attorney appeared for IBM. Id. at 230. Ninety-two

witnesses testified, and 7500 exhibits were admitted. Id. at 231. During trial, the State

moved for reconsideration of the trial court’s earlier summary judgment in favor of IBM

10
The subcontracts at issue were for ACS, Arbor, Haverstick, Interactive Intelligence, Phoenix,
PostMasters, and RCR.
22
on subcontractor assignment fees, which the trial court denied. Id. at 396 (trial-court

order). Then, on July 18, 2012, the trial court issued sixty-five pages of findings of fact

and conclusions of law plus an eight-page appendix. In the order, the trial court ruled as

follows:

Breach for cause or for convenience?—the trial court found that the State
failed to prove that IBM materially breached the MSA and that IBM
substantially performed under the contract (which practically meant that the
court found that termination was for convenience rather than for cause). Id.
at 201.

Subcontractor Assignment Fees—the trial court affirmed its earlier
summary-judgment order that awarded IBM $40 million in assignment fees.
Id. at 220.

Deferred Fees—the trial court found that IBM failed to show that the
$43,416,738 claimed in Deferred Fees was reasonable and proportionate as
liquidated damages. Id. at 224-227.

Early Termination Close Out Payments—the trial court found that IBM
was entitled to $2,570,621 in Early Termination Close Out Payments due
under MSA § 16.6.6, which included actual costs that IBM incurred as a
result of the State’s premature termination of the MSA.11 Id. at 221-22.

11
According to the trial court’s order:

128. IBM is entitled to $2,570,621 in “Early Termination Close Out Payments” due under
MSA § 16.6.6. These include actual costs IBM incurred as a result of the State’s premature
termination. The State’s only defense to payment of these costs is that they are not due in
the event of termination for cause. The State did not introduce any credible evidence
suggesting that IBM did not incur these costs or challenging the amount of these costs. The
Early Termination Close Out Payments owed by the State are as follows: (1) $2,305,964.37
in prepared software costs owed under MSA § 16.6.6(3); (2) $31,143.58 in lease
termination payments owed under MSA § 16.6.6(3)(C) to end the lease on IBM’s
Indianapolis office space; (3) $61,284 in improvement costs IBM incurred in improving its
Indianapolis offices owed under MSA § 16.6.6(3)(D); and (4) $101,763 in salary and labor
costs for IBM employees and $71,466 for Crowe employees idled as a result of the
termination, which are owed under MSA § 16.6.6(4)(B) because the State gave less than
75 days notice.

Appellant’s App. p. 221-22 (footnotes omitted).
23
Equipment—the trial court found that IBM was entitled to $9,510,795 for
the value of the Equipment that the State kept after terminating the MSA. Id.
at 220.

Change Order Fees—the trial court found that IBM was not entitled to fees
for four Change Orders because the record showed evidence for only two of
the four Change Orders. As for the two Change Orders in the record, the
court found that the changes predated the MSA and therefore IBM should
have initially incorporated them into the project. Id. at 227-28.

Prejudgment Interest—the trial court found that IBM was entitled to
prejudgment interest and gave IBM thirty days to submit a separate petition
calculating the prejudgment interest. Id. at 222.

IBM timely submitted a petition calculating the prejudgment interest, to which the

State objected on grounds that state law forbids prejudgment interest against the State.

Nevertheless, on August 14, the trial court awarded IBM $10,632,333 in prejudgment

interest.

The State appeals, and IBM cross-appeals. We held an extended oral argument in

this case on November 25, 2013. Both parties then filed post-argument submissions.

Discussion and Decision

This case involves the interpretation of a $1.3 billion contract entered into by two

sophisticated parties—the State of Indiana—represented by both outside counsel and the

Attorney General’s Office—and IBM—a multinational technology and consulting

company—represented by multiple attorneys. Both parties alleged breach of this more

than 160-page contract.

The ultimate goal of any contract interpretation is to determine the intent of the

parties when they made the agreement. Citimortgage, Inc. v. Barabas, 975 N.E.2d 805,

813 (Ind. 2012), reh’g denied. We begin with the plain language of the contract, reading

24
it in context and, whenever possible, construing it so as to render each word, phrase, and

term meaningful, unambiguous, and harmonious with the whole. Id. “A contract is

ambiguous if a reasonable person would find the contract subject to more than one

interpretation.” Id. (quotation omitted). If the language is unambiguous, we may not look

to extrinsic evidence to expand, vary, or explain the instrument but must determine the

parties’ intent from the four corners of the instrument. Bd. of Commr’s of Delaware Cnty.

v. Evans, 979 N.E.2d 1042, 1046 (Ind. Ct. App. 2012); Niezer v. Todd Realty, Inc., 913

N.E.2d 211, 215 (Ind. Ct. App. 2009), trans. denied. However, if the language is

ambiguous, we may look to extrinsic evidence and will construe the terms to determine

and give effect to the intent of the parties when they entered into the contract. Barabas,

975 N.E.2d at 813. “[C]onstruction of the terms of a written contract is a pure question of

law for the court, reviewed de novo.” Harrison v. Thomas, 761 N.E.2d 816, 818 (Ind.

2002).

I. Material Breach

The first issue to be determined is whether IBM materially breached the contract.

The trial court concluded that the State failed to prove that IBM materially breached the

MSA. Whether IBM materially breached the contract impacts other issues in this case.

The trial court determined on summary judgment that IBM was not entitled to $43,416,738

in Deferred Fees if it materially breached the contract. Moreover, whether the State must

pay Early Termination Close Out Payments depends on whether it terminated the contract

for cause or for convenience. Because of the significance of the breach issue, we address

it first.

25
According to MSA § 16.3.1(1)(A), in order to terminate the MSA for cause, the

State had to prove a breach by IBM that was “material considering this Agreement as a

whole[.]” Appellant’s App. p. 692. A material breach is one that goes to the heart of the

contract. Steve Silveus Ins., Inc. v. Goshert, 873 N.E.2d 165, 175 (Ind. Ct. App. 2007). In

determining whether a breach is material, the following five factors are considered:

(a) the extent to which the injured party will be deprived of the benefit which
he reasonably expected;
(b) the extent to which the injured party can be adequately compensated for
the part of that benefit of which he will be deprived;
(c) the extent to which the party failing to perform or to offer to perform will
suffer forfeiture;
(d) the likelihood that the party failing to perform or to offer to perform will
cure his failure, taking account of all the circumstances including any
reasonable assurances;
(e) the extent to which the behavior of the party failing to perform or to offer
to perform comports with standards of good faith and fair dealing.

Collins v. McKinney, 871 N.E.2d 363, 375 (Ind. Ct. App. 2007); see also Ream v. Yankee

Park Homeowner’s Ass’n, Inc., 915 N.E.2d 536, 543 (Ind. Ct. App. 2009), trans. denied;

Frazier v. Mellowitz, 804 N.E.2d 796, 803 (Ind. Ct. App. 2004) (adopting the Restatement

(Second) of Contracts § 241 (1981)). Whether a breach is material is generally a question

of fact to be decided by the trier of fact. Collins, 871 N.E.2d 375; see also Roche

Diagnostics Operations, Inc. v. Marsh Supermarkets, LLC, 987 N.E.2d 72, 83 (Ind. Ct.

App. 2013), trans. denied.

We also must look to the Performance Measurements set forth in the MSA.

Pursuant to MSA § 3.8.1,

Vendor will ensure that the Services will be performed and delivered in a
manner that (i) meets or exceeds the required levels of performance,
including the Performance Standards specified in or pursuant to this
Agreement, (ii) is effective, efficient and courteous to the Clients, and (iii)

26
uses Commercially Reasonable Efforts[12] to support the State’s achievement
of its Policy Objectives.

Appellant’s App. p. 591. According to MSA § 3.8.2, satisfactory performance of the

Agreement by IBM “will be measured by” eight standards:

(1) Adherence to all the terms of this Agreement, including all covenants,
obligations, representations and warranties;

(2) Performance in accordance with and compliance with the Modernization
Project work plans, schedules, and milestones agreed to by the Parties;

(3) Performance of the Services in accordance with all applicable
requirements of this Agreement, including the Performance Standards set
forth in Schedule 10 [Performance Standards];

(4) Satisfactory results of Audits by the State, its representatives, or other
authorized Persons in accordance with Article 9 (with all results of such
Audits being addressed in accordance with the Governance Plan);

(5) Attendance at and participation in the DFR financial review and other
meetings conducted from time to time by FSSA (both internally and with the
public);

(6) Timeliness, completeness, and accuracy of required reports;

12
“Commercially Reasonable Efforts” means “taking commercially reasonable steps and
performing in such a manner as a well managed entity would undertake with respect to a matter in which it
was acting in a determined, prudent, businesslike and reasonable manner to achieve a particular result.”
Appellant’s App. p. 761-62.

27
(7) Determination by the State of (i) Vendor’s satisfactory performance of
the Services[13] and the Delegated Activities,[14] and (ii) Vendor’s satisfactory
oversight and management of the Subcontractors; and

(8) Vendor’s efforts to assist the State in achieving the Policy Objectives.

Id. at 591-92.

Because the trial court entered special findings and conclusions according to Indiana

Trial Rule 52(A), our standard of review is two-tiered.15 Marion Cnty. Auditor v. Sawmill

Creek, LLC, 964 N.E.2d 213, 217 (Ind. 2012) (citation omitted). We first determine

whether the evidence supports the findings and then whether the findings support the

judgment. Id. Appellate courts “shall not set aside the findings or judgment unless clearly

erroneous.” Ind. Trial Rule 52(A). “In reviewing the trial court’s entry of special findings,

13
The MSA defined “Services” as:

the tasks, functions, and responsibilities of Vendor under the Agreement expressly assigned
and delegated to Vendor, and any incidental or ancillary tasks, functions, or responsibilities
not expressly described in the Agreement but that are necessary and appropriate subtasks
for the successful performance of the Services and the Agreement, including Delegated
Activities. The Services will include such additional activities as are from time to time
agreed between the Parties but do not include Retained Activities.

Appellant’s App. p. 776-77.
14
The MSA defined “Delegated Activities” as:

all functions and responsibilities being performed by the Affected Employees as of the
Service Commencement Date, except as modified by the Agreement, the activities set forth
in the Statement of Work (but excluding the Retained Activities), and any additional
functions that may thereafter be delegated to Vendor by mutual agreement of the Parties.

Appellant’s App. p. 764.
15
Although the parties submitted proposed findings and conclusions, it is not clear whether this
was at the trial court’s request or in accordance with a Trial Rule 52(A) motion. If the trial court entered
findings and conclusions sua sponte, our standard of review is slightly altered. On those issues which the
trial court has not found, or for which the findings are inadequate, we treat the judgment as a general one,
and we may affirm a general judgment on any legal theory the evidence supports. Harrison v. Thomas, 761
N.E.2d 816, 819 (Ind. 2002).

28
we neither reweigh the evidence nor reassess the credibility of the witnesses.” Sawmill

Creek, 964 N.E.2d at 216 (citation omitted). We view the evidence in the light

most favorable to the judgment, and we will defer to the trial court’s factual findings if they

are supported by the evidence and any legitimate inferences therefrom. Id. at 217 (citation

omitted). Legal conclusions, conversely, are reviewed de novo. Id. “A judgment is clearly

erroneous if it applies the wrong legal standard to properly found facts.” Id. (citation

omitted).

The trial court concluded that the State failed to prove that IBM materially breached

the contract by employing a balancing test:

100. Looking at the whole contract and IBM’s whole performance, at least
substantial performance is clearly shown as a matter of fact. The State’s case
extrapolates from a number of general examples of frustrated welfare
applicants and State workers, and even attempts to estimate from data that as
many as 80,000 or more applications (out of 1 million) were processed late
during the 12 measured months of IBM’s management. Taken as true, these
examples still have to be balanced against the whole contract and IBM’s
whole performance showing benefits to the State and adhering to MSA policy
objectives. Accordingly, the heart of the contract remained intact, although
sometimes beating irregularly.

Appellant’s App. p. 210 (emphasis added). In determining whether any breach went to

the heart of the contract, we find that the core of the contract is identified in the following

“Policy Objectives” in the MSA:

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

29
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.

Id. at 567 (MSA § 1.1(1)). In other words, the essence of the Modernization Project was

to provide and expand access to services for welfare recipients in a timely, reliable, and

efficient manner within federal guidelines, to discourage fraud, and to increase work-

participation rates—all of which were problems that plagued the earlier system. Contrary

to the trial court’s implication in Conclusion No. 100, whether IBM materially breached

the contract does not require balancing the number of benefits the State received versus the

number of performance standards that IBM failed. Rather, the issue is whether any breach

went to the essence of the contract—to provide and expand access to services for welfare

recipients in a timely, reliable, and efficient manner within federal guidelines, to discourage

fraud, and to increase work-participation rates.

A. The State’s Arguments

The State’s Dissatisfaction with IBM’s Performance. Although the evidence

showed that the State was not satisfied with IBM’s performance, the trial court concluded

that the State’s dissatisfaction with IBM’s performance did not support a claim of breach

(much less a claim of material breach); instead, it was merely one of eight enumerated

ways in which IBM’s performance was to be judged.

According to MSA § 3.8.2, satisfactory performance of the Agreement by IBM “will

be measured by” eight standards, including “Determination by the State of (i) Vendor’s

satisfactory performance of the Services and the Delegated Activities.” Id. at 592. The

30
State presented evidence at trial from several people establishing that the State was not

satisfied with IBM’s performance, including Brian Whitfield, IBM Vice President of State

and Local Government when the MSA was executed. Whitfield testified that the “project

didn’t perform at a level that I would have found to be satisfactory” and conceded that the

State was not satisfied with IBM’s performance in 2009 and had a reasonable basis to be

dissatisfied. Tr. p. 6381-82. Steve Zaudtke, IBM on-site project executive, similarly

testified that there were problems in 2009 with IBM’s performance and that overall the

State was not satisfied. Id. at 6867-68. And John Lyons, IBM’s trial representative,

conceded that over the course of the six-week trial he never heard any of the witnesses say

that IBM’s performance was good in 2009. Id. at 7670.

Despite this clear evidence of the State’s dissatisfaction, the trial court concluded:

107. Beyond Schedule 10, the State points to record evidence, including
confirming documents and testimony by IBM witnesses, that the State was
“dissatisfied” with aspects of the Modernization Project (as was IBM), and
claims IBM was in breach under § 3.8.2(7). However, this provision does
not say that the State’s dissatisfaction will support a claim of breach (much
less a claim of material breach), but rather that the State’s level of satisfaction
is one of eight enumerated ways in which IBM’s performance will be judged.
As found above, the problems with the Modernization Project that can be
attributed to IBM under the contract are not material when compared to the
MSA as a whole and the bargained-for benefits that the State received.

Appellant’s App. p. 214 (emphasis added).

A party to a contract involving requirements of commercial quality, operative fitness,

or mechanical utility may condition its obligation to pay upon that party’s satisfaction that

the other party’s performance meets the applicable standard. Greg Allen Constr. Co. v.

Estelle, 762 N.E.2d 760, 772-73 (Ind. Ct. App. 2002), summarily aff’d in pertinent part by

798 N.E.2d 171 (Ind. 2003), reh’g denied. A party’s evaluation of the other party’s

31
performance under these criteria will be judged against a reasonable-person standard, and

dissatisfaction may not be claimed arbitrarily, capriciously, or unreasonably. Id. at 773. A

party should be satisfied with another party’s performance if a reasonable person in the

same circumstances would be satisfied. Id.

The State argues that under this standard, it had a reasonable basis to be dissatisfied

with IBM’s performance and that IBM’s unsatisfactory performance is not “immaterial.”

Although the State’s determination of whether IBM’s performance of Services was

satisfactory was just one standard to be considered, IBM witnesses admitted that the State

was and had a reasonable basis to be dissatisfied with its performance. The State’s

dissatisfaction should have been considered by the trial court in determining whether there

was a material breach.

Failing Performance Standards. The State argues that the trial court erred by

concluding that IBM’s failing Key Performance Indicators were not cause to terminate the

Agreement because IBM paid liquidated damages under MSA § 15.2.3(3) as an alternative

means of performance. Appellant’s App. p. 212-13 (Conclusion No. 105). In the event of

a breach by IBM, MSA § 15.2.5(3) permitted liquidated damages as follows:

The Liquidated Damages and Service Level Credits prescribed in Schedule
10 [Performance Standards] and referenced in this Section are not intended
to be in the nature of a penalty, but are intended to be reasonable estimates
of the State’s projected financial loss and damage resulting from Vendor’s
breach, including financial loss as a result of Modernization Project delays
or other events identified in Schedule 10. Accordingly, in the event an event
set forth in Schedule 10 occurs, the State may assess Liquidated Damages
and Service Level Credits as set forth in Schedule 10.

32
Id. at 685. The trial court noted that the State’s main argument and focus was the Schedule

10 timeliness metric.16 Id. at 211. Although the trial court found that “[Key Performance

Indicator] metrics for timeliness were consistently missing the mark,” the court explained

that the MSA and Schedule 10 showed that the timeliness metric was “of the same

importance as the 19 of 24 [Key Performance Indicators] that the Coalition consistently

met, including performance reporting, system availability, document scanning, document

indexing, constituent care response time, and Help Center availability.” Id. at 210, 211.

Accordingly, the trial court concluded:

105. The [Key Performance Indicators], including timeliness, were
associated with identical liquidated damages, in an amount that the State
described as “miniscule,” a reasonable indicator of the weight the parties
gave to these measures in the agreement. . . . The MSA provides that the
specified liquidated damages constitute “reasonable estimates of the State’s
projected financial loss and damage resulting from Vendor’s breach . . . .”
(MSA § 15.2.5(3)). Liquidated damages were paid in lieu of performance
and provided IBM with an alternative means of performance that was
satisfied by payment (which payment is undisputed). . . . The Court finds
based on the complete record in this case, including the testimony of the
witnesses, that the Coalition’s failures to meet certain Schedule 10 metrics
did not constitute a breach of the MSA in light of IBM’s payment of
liquidated damages.

Id. at 212-13.

The State acknowledges that the MSA provided that the liquidated damages

prescribed in Schedule 10 were the “sole and exclusive remedy” for certain damages

arising out of or caused by IBM’s Key Performance Indicator failures; however, the MSA

also provided that this “shall not limit (i) any applicable State termination rights in Article

16
The trial court specifically found that “[t]he State claims that the Coalition (in this case the
primary subcontractor, ACS) consistently missed the [Key Performance Indicators] for Call Center
abandonment, timely processing of applications and redeterminations, and the SLMs for adherence to
proper process procedures . . . .” Appellant’s App. p. 211.
33
16 . . . .” Id. at 685 (MSA § 15.2.5(4)). Notably, MSA § 16.3.1(1)(C) authorized

termination for cause, including for:

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 . . . .

Id. at 692. Accordingly, the State argues that treating MSA § 15.2.5(3) liquidated-damages

payments as the State’s exclusive remedy was “flat error.” Appellant’s Br. p. 40. We

agree. Not only did the MSA address alternative remedies, but it also stated that IBM’s

paying liquidated damages for Key Performance Indicator failures did not deprive the State

of any termination rights, including for-cause termination for a “series” or “history of

breaches, whether or not cured.” Therefore, the trial court should have considered the IBM

Coalition’s failures to meet certain Schedule 10 metrics in determining whether there was

a material breach.

IBM’s Failure to Satisfy Legal Standards. The State argues that the trial court’s

conclusion that IBM’s breaches were not material “ignored other MSA provisions and

uncontradicted evidence, including that IBM’s performance failed to meet Federal legal

standards.” Id. The MSA’s first-listed Policy Objective was “to provide efficient, accurate

and timely eligibility determinations for individuals and families who qualify for public

assistance.” Appellant’s App. p. 567. Notably, the trial court found that “[Key

Performance Indicator] metrics for timeliness were consistently missing the mark.” Id. at

210. In other words, the IBM Coalition was failing on the very issues that the Policy

Objectives deemed to be vital. Accordingly, in determining whether there was a material

34
breach, the trial court should have considered the IBM Coalition’s breach of performance

obligations on the very matters that the MSA stated were its overarching policy objectives.

In addition, ensuring “compliance with all relevant Laws” was another explicit

Policy Objective. Id. at 567. The State cites evidence that in late July 2009, which was

less than two months before the State terminated the MSA for quality and timeliness issues,

CMS—the federal agency overseeing Medicaid programs—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. CMS noted that while the State and IBM’s Corrective Action Plan was

a “good start in the monitoring of IBM’s performance,” the State needed its own plan. Id.

35
IBM responds that the parties specifically agreed in MSA § 15.2.6(1) that the State’s

“sole and exclusive” remedy for “failure to meet the Federal Program Targets” 17 was

liquidated damages amounting to 50% of the State’s federal penalty and that this remedy

was available only during Steady State, a phase that was never reached. See id. at 686-87.

But as the State points out, IBM does not acknowledge the very next sentence in the MSA,

which states: “the foregoing shall not limit any applicable termination rights of the State

set forth in Article 16 [which governs termination].” Id. at 687. Accordingly, the trial

court should have considered IBM’s failures to meet Federal Program Targets in

determining whether to terminate the contract for cause.

Economic Downturn and Flooding. The State argues that the trial court improperly

considered the economic downturn and flooding as reasons to excuse IBM’s performance.

We start with the economic recession. Specifically, the court found that two months after

the rollout of the pilot region, “the State and the country began to feel the effects of what

has been termed the ‘Great Recession.’” Id. at 185 (Finding No. 42). The court observed

that almost immediately, benefit applications increased 21% and the number of processed

applications increased 41% compared to the previous year. Id. The court dubbed the

recession, “the most severe crisis since the Great Depression.” Id. In addition, the court

noted that Indiana’s unemployment rate had more than doubled since the MSA was

executed and was higher than the national average. Id. (Finding No. 43). The court noted

that in response to the economic crisis, in February 2009 Congress passed stimulus

17
“Federal Program Targets” are defined as federal TANF minimum work participation
requirements for the All Family Participation rate and federal Food Stamp error rate requirements.
Appellant’s App. p. 686.
36
legislation, which, among other things, increased the benefits to food-stamp recipients. Id.

at 186 (Finding No. 45).

The State argues that the trial court wrongly relied on these events because the MSA

provided IBM an appropriate remedy “if recession and legislative responses threatened its

performance—the Change Order Process.” Appellant’s Br. p. 42. Specifically, MSA §

4.1.3, entitled Material Assumptions, provided:

The Parties have negotiated the Fees in reliance upon the material
assumptions set forth in Schedule 11 [Material Assumptions] (“Material
Assumptions”). The Parties acknowledge that other than such Material
Assumptions, Vendor has not relied upon any other assumptions that are
material to this Agreement, the Services, or the Fees (or any components
thereof). Vendor acknowledges that any changes to any of its internal,
implied or inherent assumptions which are not included in the Material
Assumptions shall be at its risk and shall not serve as a basis for requesting
a Change or an increase in the Fees and that an inaccuracy or error in any of
the Material Assumptions shall not automatically entitle Vendor to any
Change which it may request, but any such Change shall be made solely
pursuant to the Change Order Process. At the reasonable request of Vendor
or the State, the Parties shall engage in good faith negotiations of any
Changes to address any inaccuracy or error in one or more of the Material
Assumptions.

Appellant’s App. p. 608-09 (emphasis added). The Material Assumptions included that

during the contract term, there would be no “material economic downturn in Indiana.” Id.

at 754. Therefore, the State argues, while an inaccuracy or error in any of the Material

Assumptions did not automatically entitle IBM to a Change, the MSA provided that IBM

could request changes in light of erroneous assumptions—“but any such Change shall be

made solely pursuant to the Change Order Process.” No such request was made here.

As for flooding, the trial court found:

46. Compounding the challenges presented by the economic downturn and
the Project’s expansion to HIP, Indiana was hit by a series of natural disasters

37
during 2008, which displaced thousands of Hoosiers from their homes and
caused nearly $2 billion in economic damages. As described by the State,
“[t]he 2008 disasters in Indiana have been among the worst in our state’s
history.” Eighty-two of Indiana’s 92 counties were declared Presidential
Disaster Areas during 2008. . . .

Id. at 186-87 (footnotes omitted). The trial court also found that “[t]he State directed the

reassignment of approximately one third of the State and IBM Coalition workforce ‘from

every available post,’ ‘modernized or as-is,’ to assist with the processing of tens of

thousands of emergency food statement applications” and “thousands of FEMA Individual

Assistance applications[.]” Id. at 187.

The State again argues that “the parties anticipated and accounted for the

implications of unpredictable weather” in the MSA. Specifically, MSA § 21.22 provided:

In the event that because of [a] Force Majeure Event, Vendor is unable to
perform any of its obligations under this Agreement or such performance is
rendered impractical, Vendor shall provide notice to the State as soon as
practicable and shall use Commercially Reasonable Efforts to resume
performance of the Services to the extent practicable, despite the Force
Majeure Event.

Id. at 732. The MSA’s definition of “Force Majeure Event” included “flood.” Id. at 767.

IBM did not give the State notice pursuant to MSA § 21.22.18

As for both the economic downturn and flooding, the State also argues that the trial

court ignored its pretrial rulings. That is, the State filed a motion for summary judgment

relating to the impact of the economic downturn and flooding on IBM’s performance. The

trial court entered summary judgment in favor of the State, concluding:

[A]ny contention by IBM at trial that the economic downturn rendered its
performance “impossible,” or otherwise excuses any failure to IBM to meet

18
However, the trial court found that 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. Appellant’s App. p. 188.
38
any of its contractual obligations under the MSA, is precluded as a matter of
law; and evidence about the claimed impact of the economic downturn on
IBM’s ability to meet its contractual obligations is irrelevant and
inadmissible.

*****

Any contention by IBM at trial that flooding rendered its performance
“impossible,” or otherwise excuses any failure to IBM to meet any of its
contractual obligations under the MSA, is therefore precluded as a matter of
law; and evidence about the claimed impact of flooding on IBM’s ability to
meet its contractual obligations is irrelevant and inadmissible.

For these reasons, the Court GRANTS the State’s motion for
summary judgment number 5, and RULES that any contention by IBM at
trial that the economic downturn or flooding rendered its performance
“impossible,” or otherwise excuses any failure by IBM to meet any of its
contractual obligations under the MSA, is precluded as a matter of law[.]

Id. at 390-91 (trial court’s January 25, 2012 summary-judgment order). In response to this

argument, IBM argues that the trial court considered these circumstances “not to excuse

IBM’s performance, but to conduct the required analysis under the Restatement [(Second)

of Contracts] as to whether the timeliness failures amounted to a material breach.”

Appellee’s Br. p 37. We find that this difference does not matter. See Appellant’s Reply

Br. p. 34. Because the MSA provided IBM with a remedy in the event of an economic

downturn or flooding, the trial court should not have considered the economic downturn

and flooding as reasons to excuse IBM’s performance.

Surge in Applications from the HIP. The State argues that the trial court improperly

considered any surge in applications from the HIP as a reason for IBM’s performance

issues. Specifically, the trial court found that the “HIP significantly increased the scope

and cost of the Modernization Project by adding design, development, implementation,

continuing services, and reporting requirements.” Appellant’s App. p. 184 (Finding No.

39
40). The court also found that the “HIP application volume regularly exceeded the State’s

predictions. . . . The State described this as a significant challenge for the modernized

system.” Id. at 184-85 (Finding No. 41) (citation omitted).

However, the MSA specified procedures for seeking service and fee changes when

IBM thought that it was warranted. MSA § 3.4.3(3) provided:

Upon the occurrence of a Force Majeure Event or any sudden and
material increase in the number of Clients utilizing the Services beyond that
which might reasonably be anticipated, Vendor shall be entitled to provide
the Services at a location other than a Service Location on a temporary basis
. . . . Vendor may make this determination in its discretion, and any
additional charges associated therewith shall be determined in an equitable
manner in accordance with the Change Order Process.

Id. at 583-84. In addition, MSA § 3.12.3(1) provided that a change “relating to an

expansion of or change to the Services” required a Change Request.19 Id. at 597.

As the State points out, the record shows that IBM “obtained numerous change

orders, yielding $177 million in increased fees.” Appellant’s Br. p. 36. Moreover, the

State notes that when the trial court explained that the HIP “significantly increased the

scope and cost of the Modernization Project,” the court cited an actual change order—

Change Order 23 in Exhibit 1500.023. Appellant’s App. p. 184 (Finding No. 184).

Because the trial court cited a specific change order in its findings, the State contends that

IBM received a “double remedy”—“IBM first received more fees; then, when it still did

not meet performance standards, its failings were excused.” Appellant’s Br. p. 46. We

agree with the State; in determining whether the breach was material, the trial court should

19
A “Change Request” is “any request by a Party for a Change as contemplated by Section 3.11.3.”
Appellant’s App. p. 761.
40
not have considered any surge in applications from the HIP as a reason for IBM’s

performance issues.

The State’s Motives for Terminating the MSA. The State argues that the trial court

improperly considered that the State might have had other motives for terminating the

MSA. In its findings, the trial court noted that on the same day that the State delivered the

MSA termination letter to IBM, Governor Daniels held a press conference in which he

commended IBM for its work, citing a number of benefits that IBM had conferred on the

State. Appellant’s App. p. 199. In addition, Governor Daniels acknowledged, “They

[IBM] did try hard. If resources would have fixed the problem, we wouldn’t be making

this announcement . . . . It wasn’t resources. It wasn’t effort. It was a flawed concept that

simply did not work out in practice.” Id. at 199-200. In essence, IBM argues that the State

did not terminate the MSA for “performance issues,” as they have maintained in this

litigation.

But as the State points out, a party’s motives or reasons for making contract

decisions are generally regarded as irrelevant. See Epperly v. Johnson, 734 N.E.2d 1066,

1073 (Ind. Ct. App. 2000) (citing Vernon Fire & Cas. Ins. Co. v. Sharp, 264 Ind. 599, 349

N.E.2d 173, 180 (1976)); see also Tuf Racing Prods., Inc. v. Am. Suzuki Motor Co., 223

F.3d 585, 589 (7th Cir. 2000) (“In the law of contracts, while procuring a breach by the

other party to your contract would excuse the breach, merely having a bad motive for

terminating a contract would not. If a party has a legal right to terminate the contract (the

clearest example is where the contract is terminable at will by either party), its motive for

exercising that right is irrelevant.” (citations omitted)).

41
Moreover, Justice Sullivan applied these principles in the earlier decision in this

case that vacated the trial court’s order to depose Governor Daniels. In his concurring-in-

result opinion, Justice Sullivan found it unnecessary to discuss the gubernatorial privilege

because—contrary to IBM’s contentions—any such testimony was irrelevant: “Neither the

Governor’s ‘assessment of IBM’s performance’ nor his ‘state of mind’ bear in any way on

whether or not IBM breached the contract or the State owes IBM fees or reimbursement.”

Int’l Bus. Machs., 964 N.E.2d at 212 (Sullivan, J., concurring in result) (citing Sharp, 349

N.E.2d at 180). In determining whether the breach was material, the trial court should not

have considered that the State might have had other motives or reasons for terminating the

MSA.

B. IBM’s Arguments

IBM, on the other hand, argues that “[o]verwhelming factual findings support the

court’s finding of no material breach. The vast majority are not even mentioned in the

State’s brief, much less challenged.” Appellee’s Br. p. 29. We address each of them.

IBM’s first argument is essentially the trial court’s balancing test—because the State

received an array of benefits, there was no material breach. IBM points to the following

benefits that the State received: (1) dramatic improvement in work-participation rates as

part of the welfare-to-work program, Appellant’s App. p. 204; (2) reduction in fraud, id. at

205; (3) programmatic and administrative cost savings totaling approximately $40 million

per year, id. at 205-06; (4) modern electronic access to the eligibility system, including the

online filing of applications, id. at 206; (5) the electronic “paperless” system, which was

preferred over boxes, id.; (6) the Work Flow Management System (WFMS), which the

42
State carried over to the hybrid system, id. at 207; (7) the HIP, which state officials

described as “an unqualified success,” id.; (8) the valuable contribution that the IBM

Coalition members made in responding to the 2008 natural disasters, id. at 208; and (9)

economic development, which, as Governor Daniels explained during his 2009 press

conference, brought 1000 new private-sector jobs to Daleville and Anderson, id. at 209.

IBM argues that on top of these benefits, the trial court found that IBM’s work

provided the foundation for the successful hybrid system. As the trial court explained,

“Modernization is the foundation on which the State Hybrid system now stands. For better

or worse, and through much transition difficulty, the contract, including IBM’s efforts,

conferred the overall aggregate benefit sought by the State: a new welfare system that

works better.” Id. at 204.

However, as we explained above and as the State points out, IBM misses the point

by highlighting the benefits the State received. The State readily concedes that it received

benefits under the MSA, “under [which] it paid IBM over $437,000,000.” Appellant’s

Reply Br. p. 28. As the State says, “one would hope the State got something for its $437

million.” Id. Although it is undisputed that IBM met some objectives and provided some

important benefits, the question is whether IBM’s failures went to the essence of the

contract—to provide and expand access to services for welfare recipients in a timely,

reliable, and efficient manner within federal guidelines, to discourage fraud, and to increase

work-participation rates.

IBM next argues that the breach was not material because the State asked IBM to

implement the hybrid system; in other words, if the State was truly dissatisfied with IBM’s

43
services, it would not have asked IBM to continue providing services. The trial court found

that beginning in September 2009, “the State actively pursued IBM in the hope that it would

implement the Hybrid plan” and “[o]nly when the State’s budget crisis prevented the

parties from reaching an agreement on financial terms did the State decide that it would

‘cut[] out the middle man’ and terminate the IBM contract.” Appellant’s App. p. 196, 198

(citation omitted). In addition, after the parties failed to come to an agreement on an IBM-

led roll out of the hybrid system, the State urged IBM to continue as the technology vendor.

Id. at 198.

However, it is not far-fetched that the State would ask IBM, a multinational

technology and consulting company, to lead the roll-out of the hybrid system given the

time both parties had invested in this venture and the fact that IBM was intimately familiar

with both the State’s old system and the Modernization Project. And when the parties

could not come to an agreement, it is just as reasonable that the State wanted IBM to

continue in a lesser role as the technology vendor.

IBM next argues that the trial court found that the State’s principal complaint about

the Modernization Project resulted from a key feature of the system that the State itself

designed and required—reduction of face-to-face interactions.

The trial court found that Governor Daniels “sought to change one of the key

requirements that the State had developed, that he had previously approved, and which was

specified in the MSA—the move away from face-to-face meetings and greater reliance on

multiple points of access to the system.” Id. at 196. Accordingly, IBM argues that it

“cannot be faulted, much less held in material breach, for following the design

44
requirements the State developed and the MSA required.” Appellee’s Br. p. 31. However,

even though the State may have developed a system that resulted in a reduction of face-to-

face meetings, IBM nevertheless agreed to implement this design. If IBM did not think

that it could carry out this concept, then it presumably would not have executed the MSA.

In addition, IBM agreed “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.” Appellant’s App. p. 567.

IBM also argues that the trial court found that the State’s breach allegations revolved

around failure to meet Key Performance Indicators for timely processing of applications,

but the Key Performance Indicators were not originally intended to apply during the

transition period.

The trial court found that the State’s main focus was the Schedule 10 timeliness

metric; however, IBM was consistently meeting the majority of the Key Performance

Indicators when the State announced termination of the MSA in October 2009. Id. at 211;

see also id. (“The MSA and Schedule 10 shows the timeliness metric was of the same

importance as the 19 of 24 [Key Performance Indicators] that the Coalition consistently

met . . . .”). Notably, the trial court found that the “[Key Performance Indicator] metrics

for timeliness were consistently missing the mark.” Id. at 210. In addition, the trial court

found that the Key Performance Indicators were not originally intended to apply during the

transition period. However, as the trial court also found, most of the Key Performance

Indicators were accelerated pursuant to Change Order 64. Id. at 212.

45
Finally, the trial court found that IBM’s performance was steadily improving in

2009. The trial court concluded as follows:

[T]he measured performance of IBM was steadily improving during 2009,
especially in the months leading up to the October 2009 termination.
Therefore, anything that could be interpreted as an IBM failure not only had
a likelihood of being cured, but was apparently in the process of being cured
at the time of termination.

Id. at 210 (Conclusion No. 99). Accordingly, IBM argues that the likelihood of curing any

performance deficiencies counsels against a finding of material breach. IBM cites Frazier

v. Mellowitz, 804 N.E.2d 796 (Ind. Ct. App. 2004), in support. In Frazier, this Court noted

that under the Restatement (Second) of Contracts, an injured party is not discharged from

his duty to perform unless (1) the breach is material and (2) it is too late for performance

or an offer to perform to occur. Id. at 803. We noted that in particular, the Restatement

(Second) of Contracts § 241 (1981) provides that in determining whether a failure to render

or to offer performance is material, several circumstances are significant, including “the

likelihood that the party failing to perform or to offer to perform will cure his failure, taking

account of all the circumstances including any reasonable assurances.” Id.

We first note that although the trial court concluded that IBM’s failure was

“apparently” in the process of being cured at the time of termination, this is just one of five

factors to consider in determining whether the breach is material. See Collins, 871 N.E.2d

at 375. In addition, we note that the findings that the trial court used to support this

conclusion are not persuasive. As support for this finding, the trial court relied on

statements from 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. The

46
litigation concerned how long it took the State to process applications. Not surprisingly,

the attorney general, speaking for the defendant, told the judge:

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, 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. This is not persuasive evidence that IBM’s performance was steadily improving

in 2009.

C. Conclusion

Although the Modernization Project reduced fraud and provided important benefits

to the State, the record also shows that the system had problems from the very beginning,

including unanswered calls and the untimely processing of applications. Appellant’s App.

p. 183. Also, in November 2008—approximately a year and a half after Phase 1 was

launched—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. Then,

in March 2009, Secretary Murphy sent the IBM Coalition a letter drafted by the State’s

outside counsel requesting a Corrective Action Plan. The letter identified thirty-six issues

that the State wanted the IBM Coalition to address, including excessive wait times at local

47
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. On July 2, 2009, the parties agreed on a Corrective Action Plan that included twenty-

two short-term “Quick Wins” and thirty-one long-term initiatives. Appellant’s App. p.

192. And in late July 2009, CMS found 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. at 834. 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. Not surprisingly, the trial court found that the “[Key

Performance Indicator] metrics for timeliness were consistently missing the mark.” Id. at

210. Not only was the public not satisfied with the new system, but—according to three

key IBM witnesses—the State was not satisfied with the new system and had a reasonable

basis not to be satisfied. The trial court’s mission was to determine whether there was a

material breach by IBM that went to the essence of this contract. In doing so, the trial court

employed a balancing test that weighed the number of benefits that the State received in

this contract. But the question before the trial court was not the number of benefits the

48
State received but whether the heart of this contract was breached by IBM. We find that

the heart of this contract was to provide services to the poor in a way that complied with

federal law. In this respect IBM’s performance, as the trial court explained, “consistently

missed the mark.” This substandard performance by IBM, $437 million and 36 months

later, went to the essence of this contract.

Yet the trial court excused IBM’s substandard performance for a number of

inappropriate reasons. In particular, the trial court took into account that the Great

Recession and an inordinate amount of flooding occurred in Indiana during the course of

the contract. While that is all true, this multinational company under the terms of the

contract had the ability to request more money from the State through Change Orders to

account for these disasters, but it did not. Strikingly, the trial court excused IBM’s

performance in part because of the increase in the HIP applications, although IBM was

paid extra to handle the increase in the HIP applications.

At the same time, the trial court discounted that the State and frankly IBM were both

dissatisfied with IBM’s performance, that IBM consistently missed the mark on Key

Performance Indicators, and that the federal government imposed penalties on the State for

IBM’s failings.

We find that the failings of IBM went to the heart of the contract—to provide

welfare services to our poorest in a timely, efficient, and reliable manner within federal

guidelines—and that this constituted a material breach of the contract. Accordingly, we

remand this case to the trial court to determine the State’s damages and offset any damages

awarded to IBM.

49
II. Assignment Fees

The State contends that the trial court erred in awarding IBM $40 million in

subcontractor assignment fees. The issue of assignment fees was determined by the trial

court on summary judgment and reaffirmed in its July 2012 order. The State first argues

that IBM has waived this issue by pleading no operative facts and making no demand for

relief for assignment fees in its amended complaint. Second, the State argues that the

subcontractor assignment fees are liquidated-damages clauses amounting to an

unenforceable penalty.

A. Waiver

The State first argues that IBM has waived this issue by pleading no operative facts

and making no demand for relief for assignment fees in its amended complaint. IBM

responds that it properly requested assignment fees in its amended complaint by generally

stating that it was asking “for such further relief as warranted under the contract and Indiana

law and as the Court deems just and proper.” Appellant’s App. p. 337.

Indiana Trial Rule 8(A) requires a pleading to contain “(1) a short and plain

statement of the claim showing that the pleader is entitled to relief, and (2) a demand for

relief to which the pleader deems entitled.” In addition, Trial Rule 8(F) provides that “[a]ll

pleadings shall be so construed as to do substantial justice, lead to disposition on the merits,

and avoid litigation of procedural points.” Indiana’s notice pleading rules do not require

the complaint to state all elements of a cause of action. Shields v. Taylor, 976 N.E.2d 1237,

1245 (Ind. Ct. App. 2012). Notice pleading merely requires pleading the operative facts

so as to place the defendant on notice as to the evidence to be presented at trial. Id.

50
Therefore, under notice pleading, the issue of whether a complaint sufficiently pleads a

certain claim turns on whether the opposing party has been sufficiently notified concerning

the claim so as to be able to prepare to defend it. Id. A complaint’s allegations are

sufficient if they put a reasonable person on notice as to why a plaintiff is suing. Id.

Here, although IBM’s amended complaint did not specifically request assignment

fees, the State was on notice. In its answer to IBM’s amended complaint, the State raised

as a defense: “IBM is unable to recover any damages, penalties, fees, costs, profits,

subcontractor assignment fees, deferred fees, damages, loans, or other monies by whatever

name or label that violate the public policy and/or Constitution of the State of Indiana,

including Article X.” Appellant’s App. p. 343 (emphasis added). In addition, when IBM

propounded an interrogatory to the State asking for the “factual basis for each affirmative

defense asserted in the State’s Answer,” the State responded that “IBM has also made

demand for payment of assignment of Subcontract fees contained in MSA § 14.8.1.” Id.

at 160. Because the State was on notice as to assignment fees, we find that IBM has not

waived this issue and therefore proceed to the merits.

B. The Merits of Assignment Fees

Next, the State argues that the $40 million in subcontractor assignment fees are

liquidated damages amounting to an unenforceable penalty. IBM responds that the

assignment fees were actually consideration for valuable contract rights. Appellee’s Br. p.

18.

Consideration is “[s]omething (such as an act, a forbearance, or a return promise)

bargained for and received by a promisor from a promisee; that which motivates a person

51
to do something, esp[ecially] to engage in a legal act.” Black’s Law Dictionary 324 (8th

ed. 2004). This Court has defined it as a “‘bargained for exchange’ whereby the promisor

accrues a benefit or the promisee accepts a detriment.” Kelly v. Levandoski, 825 N.E.2d

850, 860 (Ind. Ct. App. 2005). “A benefit is a legal right given to the promisor to which

the promisor would not otherwise be entitled.” Id. (quoting DiMizio v. Romo, 756 N.E.2d

1018, 1023 (Ind. Ct. App. 2001), trans. denied).

On the other hand, a liquidated-damages clause is “[a] contractual provision that

determines in advance the measure of damages if a party breaches a contract.” Black’s

Law Dictionary 949 (8th ed. 2004). In general, “[a] liquidated damages clause provides

for the forfeiture of a stated sum of money upon a breach of contract without proof of

damages.” Weinreb v. Fannie Mae, 993 N.E.2d 223, 232 (Ind. Ct. App. 2013), trans.

denied. The purpose of these clauses is to compensate a non-breaching party when

damages from a breach of contract would be uncertain, difficult, or impossible to ascertain.

See id. While liquidated damages are generally enforceable, contractual provisions

constituting penalties are not. Dean V. Kruse Found., Inc. v. Gates, 973 N.E.2d 583, 591

(Ind. Ct. App. 2012), trans. denied. The difference between a penalty and liquidated

damages is that a penalty is imposed to compel performance under the contract by making

a breach so expensive that a party would not breach the contract even if its damages would

be lessened by doing so, whereas liquidated damages are an amount of money that

reasonably estimates the non-breaching party’s damages as a result of the breach. Id. In

52
other words, a penalty discourages efficient breach of a contract where a valid liquidated-

damages clause does not.20

The question, then, is whether the assignment fees were included in the MSA as

consideration for valuable contract rights or to compensate IBM for damages sustained in

the event of a termination of the contract.

MSA § 14.8.1(3) specified fixed sums to be paid post-termination if the State

stepped into the shoes of IBM and assumed the prime-contractor role with respect to the

subcontractors. If the State terminated the contract with IBM and assumed IBM’s

subcontracts during the first seven years, the State was required to pay assignment fees to

IBM in the amount of $10 million for the ACS subcontract and $5 million for each of the

other subcontracts:

(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[21] 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[22]:

(A) if the replaced Subcontractor is ACS, (i) the amount of the
Deferred Fees for Vendor’s Subcontract with ACS as set forth in

20
An efficient breach is “an intentional breach of contract and payment of damages by a party who
would incur greater economic loss by performing under the contract.” Black’s Law Dictionary 200 (8th ed.
1999). The concept of efficient breach stems from the efficient-breach theory, which is “[t]he view that a
party should be allowed to breach a contract and pay damages if doing so would be more economically
efficient than performing under the contract.” Id. at 555.
21
Early Termination Close Out Payments are defined in MSA § 16.6.6(3). These Early
Termination Close Out Payments include Deferred Fees as listed in Schedule 24. Appellant’s App. p. 702.
22
“Services Termination Date” means “the date upon which [IBM] is no longer providing the
Services for which the State is no longer paying the Fixed Fees, with respect to all or that portion of the
Services Terminated by the State.” Appellant’s App. p. 776.

53
Schedule 24 [Deferred Fees][23], plus (ii) Ten Million Dollars
($10,000,000), if the applicable Services Termination Date is within
Contract Years one through seven, or Five Million Dollars
($5,000,000) if the applicable Services Termination Date is within
Contract Years eight through ten; 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, or Two Million Five Hundred Thousand Dollars
($2,500,000) if the applicable Services Termination Date is within
Contract Years eight through ten;

provided, however, that the provisions of this Section 14.8.1(3) shall not
apply if all the Services[24] contained within an applicable Subcontract[25] are
terminated by the State pursuant to Sections 16.3.1 [termination for cause],
16.3.4(2) [insolvency event], or 16.3.4(3) [wrongful conduct], except that the
unamortized balance of the Deferred Fees shall still be payable in such event.

Appellant’s App. p. 681-82.26

23
Deferred Fees include fees that ACS deferred into the future. Ex. 1653. The fees due to ACS
under Schedule 24 were amortized over a three-year period from fiscal year 2007 through fiscal year 2009.
24
“Services” means:

the tasks, functions, and responsibilities of Vendor under the Agreement expressly assigned
and delegated to Vendor, and any incidental or ancillary tasks, functions, or responsibilities
not expressly described in the Agreement but that are necessary and appropriate subtasks
for the successful performance of the Services and the Agreement, including Delegated
Activities.

Appellant’s App. p. 776-77. Put differently, services means all services of the Vendor (IBM) and all
subcontractors that are provided to the State. While the State terminated IBM’s services for cause, it
continued to work with the subcontractors and renegotiated with all but one of the subcontractors.
25
“Subcontract” means “any Contract between Vendor and a Subcontractor with respect to or
involving the performance of any of the Services or the Delegated Activities, or any part thereof.”
Appellant’s App. p. 779.
26
There was no unamortized balance remaining for ACS, the only subcontractor in Schedule 24,
because the State paid their fees by the end of fiscal year 2009.

54
After the State terminated the MSA, the State assumed the ACS subcontract and six

others to keep key subcontractors working for about one month in order to continue

providing FSSA services while it negotiated new subcontracts. Appellant’s Br. p. 5; Oral

Arg. at 17:10, available at http://goo.gl/0jyxtB; see also Tr. p. 4721-23 (noting that the

State never intended to assume the contracts as they existed under the MSA and instead

planned to renegotiate them). The State rejected an eighth subcontract, Crowe, because

“[t]he value wasn’t there.” Appellee’s App. p. 96. According to the State, “the cost of the

service versus the value received was not considered to be worth continuing.” Id.

Accordingly, IBM invoiced the State $40 million for assignment of these seven

subcontracts—$10 million for the ACS subcontract and $30 million for the six others. See

Appellant’s App. p. 889.

The trial court concluded that the fees were consideration for a valuable contract

right. See Appellee’s Br. p. 18 (“The court found that the provision of the MSA requiring

the State to pay subcontractor assignment fees was not a liquidated-damages provision—

let alone an unenforceable penalty . . . .”). Specifically, the trial court concluded on

summary judgment:

Under Indiana law, a contract provision constitutes a “penalty” if it imposes
a grossly excessive financial payment for a breach of the contract or poor
performance. Here, it is undisputed that the MSA’s plain language does not
condition payment of the . . . fees on a breach of contract. In fact, it is
undisputed that the subcontractor assignment fees constitute compensation
for valuable contract rights, and not a financial payment to compensate a
party for breach of contract. Thus, they do not constitute a financial penalty,
much less an unenforceable penalty.

Appellant’s App. p. 160-61 (citations omitted). The trial court reaffirmed this ruling in its

July 2012 order:

55
123. MSA § 14.8.1(3) clearly states that “the State shall pay” the
subcontractor assignment fees if it accepts assignment of the subcontracts
(which the State did here), regardless of whether there was a termination for
cause. As the Court previously ruled during summary judgment, IBM is
entitled to Forty Million Dollars ($40,000,000.00) for such fees.

Id. at 220.

We agree with the trial court and IBM that these assignment fees were the price to

which the State agreed to purchase IBM’s interest in the subcontracts. The State paid the

$40 million assignment fee to IBM in consideration for the State accruing the legal right to

assume IBM’s subcontracts. Brian Whitfield, IBM Vice President of State and Local

Government when the MSA was executed, stated that IBM generally does not permit its

clients to assume its subcontracts, but that it allowed the subcontractors to be assignable in

this particular contract at the request of the State. Id. at 362. Indeed, this benefit was

substantial, as it is not customarily permitted in other services contracts that IBM

negotiates. Light v. NIPSCO Indus., 747 N.E.2d 73, 77 (Ind. Ct. App. 2001) (“A benefit is

a legal right given to the promisor to which the promisor would not otherwise be entitled.”),

reh’g denied, trans. denied.

In assuming these contracts, the State received certain benefits in consideration for

the $40 million it paid in assignment fees. The State received the benefit of a packaged

deal of contracts that were already written to conform to their needs. Had IBM not allowed

the State to assume its subcontracts, the State would either have had to rewrite and

renegotiate new contracts with the same subcontractors or find new subcontractors.

According to IBM, these contract negotiations were long and expensive. Oral Arg. at

42:58, available at http://goo.gl/0jyxtB; see also Ex. 8908, p. 9. By assuming IBM’s

56
subcontracts, the State bypassed the lengthy and expensive process of renegotiating the

contracts or finding new contractors for the services provided under the MSA.

Additionally, the State received the benefit of a fixed contract price. The prices

negotiated between IBM and its subcontractors were fixed for a ten-year period. Had the

State not negotiated this assignment provision in the contract, the subcontractors could

have demanded more money to continue working with the State upon termination of the

MSA at the end of the Disengagement Period. Oral Arg. at 41:50.

Furthermore, the State received the benefit of IBM hiring and training the

employees of the subcontractors. Working with the subcontractors directly after IBM had

trained the subcontractor’s employees would have been considerably less expensive to the

State. The cost associated with training the subcontractors and their employees is not

insubstantial.

All of this evidence supports the conclusion that these assignment fees were

consideration and not liquidated damages. The State wanted the ability to assume IBM’s

subcontracts for the reasons stated and therefore asked that the ability to assume the

contracts be included in the MSA. The State knew that the ability to assume IBM’s

subcontracts benefitted them and determined that the benefit was worth $40 million. We

determine that the fees are consideration and not liquidated damages.

Our conclusion is bolstered by the fact that these fees are not contingent upon a

breach of the contract, but instead are contingent on the State’s assumption of IBM’s

subcontracts. Generally, liquidated-damages clauses are intended to compensate in the

event of a breach when damages are uncertain or difficult to determine. Here, IBM would

57
be damaged, and the State would be unjustly enriched, if the State chose to assume IBM’s

subcontracts even if the State did not breach the MSA.

Nonetheless, the State argues that the assignment fees are a set amount meant to

penalize the State in the event that the State terminates the contract—whether by the State’s

breach or by the State terminating the contract for convenience—rather than payment for

a valuable contract right. But many of the cases the State cites concerned fees due only

when a party breaches the contract or when a party terminates after a breach. See A.V.

Consultants, Inc. v. Barnes, 978 F.2d 996, 1001 (7th Cir. 1992) (determining that the

administrative fee was a liquidated-damages provision after determining that one of the

litigants breached the contract); see also Doral Bank, PR v. Fed. Home Loan Mortg. Corp.,

2010 WL 3984667 (E.D. Va. Oct. 7, 2010); CMG Realty of Conn., Inc. v. Colonnade One

at Old Greenwich Ltd. P’ship, 653 A.2d 207 (Conn. App. Ct. 1995); Allison-Williams Co.

v. Viasource Funding Grp., LLC, 2010 WL 2346621 (N.J. Super. Ct. App. Div. June 9,

2010). Finally, while Mau does consider the enforceability of cancellation fees as a

liquidated-damages clause where a contract was terminated for convenience, the

cancellation fees in that case were contingent upon termination. Mau v. L.A. Fitness Int’l,

LLC, 749 F. Supp. 2d 845 (N.D. Ill. 2010). Here, however, the assignment fees were

contingent on the State assuming the subcontracts and not on the termination of the

contract.

Even still, the State could have avoided these fees while at the same time terminating

the contract. As argued by IBM both in its brief and at oral argument, the State had the

ability to terminate the contract without paying the assignment fees. See Appellee’s Br. p.

58
19; Oral Arg. at 42:32, available at http://goo.gl/0jyxtB. MSA § 16.6.1 required IBM to

provide Disengagement Services pursuant to a Disengagement Plan continuing for up to a

period of twelve months. During this time, the State could have found and negotiated with

new subcontractors, or it could have abandoned the Modernization Project and chosen to

implement a new system. Instead, it chose to assume IBM’s subcontracts and continue

working with the subcontractors. Because the State could have terminated the contract,

not paid the $40 million in assignment fees, and operated under the Disengagement Plan

until it found replacement contractors, the assignment fees were not contingent on the

termination or breach of the contract. For all these reasons, we determine that the

assignment-fees provision was consideration.

But this does not end our inquiry. In the first portion of this opinion, we determined

that IBM materially breached the MSA. Generally, “[a] party first guilty of a material

breach of contract may not maintain an action against or recover damages from the other

party to the contract.” Ream, 915 N.E.2d at 547. A breaching party may, however, recover

the value of what he or she has provided in quantum meruit. Am. Nat’l Bank & Trust Co.

v. St. Joseph Valley Bank, 180 Ind. App. 546, 554, 391 N.E.2d 685, 687 (1979), reh’g

denied. “To prevail on a claim of quantum meruit—also referred to as unjust enrichment—

the plaintiff must establish that a measurable benefit has been conferred upon the defendant

under such circumstances that the defendant’s retention of the benefit would be unjust.”

King v. Terry, 805 N.E.2d 397, 400 (Ind. Ct. App. 2004) (citing Inlow v. Inlow, 797 N.E.2d

810, 816 (Ind. Ct. App. 2003), trans. denied). The value of services rendered is a question

of fact for the trial court, but the value of services is not necessarily equivalent to

59
consideration. See Nunn Law Office v. Rosenthal, 905 N.E.2d 513, 520 (Ind. Ct. App.

2009).

Here, the trial court, in determining that the assignment fees were not liquidated

damages, determined that they represented payment for a valuable contract right. We agree

with the trial court.

The subcontracts themselves were valuable. Not only would the State receive the

benefit of a packaged deal of contracts that were already written to conform to their needs,

but they would bypass the lengthy process of renegotiating contracts with new

subcontractors. Additionally, in assuming the subcontracts, the State would benefit from

a negotiated fixed contract price for the remainder of the ten-year period. Otherwise, the

subcontractors would have had the ability to leverage their negotiating position and

increase the contract price. Also, the State saved the substantial cost of retraining an army

of employees as IBM had already trained the subcontractors’ employees in the system that

IBM had put into place.

But most importantly, the State’s conduct in the negotiations and afterward indicates

that this contractual right was of value to them. The State, through both its highly

competent outside and inside counsel, agreed that the value to the State of assuming these

subcontracts was $40 million. We cannot ignore the fact that the State, a highly

sophisticated party, determined after several months of negotiations that $40 million was

the value of the State’s right to assume IBM’s subcontracts.

But even more telling is that after the State terminated the contract with IBM, the

State chose to assume certain subcontracts while not assuming at least one other

60
subcontract. Out of the eight subcontracts, the State chose not to assume the Crowe

subcontract, because “[t]he value wasn’t there.” Appellee’s App. p. 96. According to the

State “the cost of the service versus the value received was not considered to be worth

continuing.” Id. By admitting that the Crowe subcontract did not have value to the State,

the State impliedly agreed that the other seven subcontracts assumed by them were “worth”

the price.

Based on the benefits the State received in assuming IBM’s subcontracts and the

conduct of the State both during the negotiations of the MSA and after, we agree with the

trial court that the assignment fees represent value to the State in the ability to assume these

subcontracts. Because there was a measurable benefit conferred upon the State under such

circumstances, the State’s retention of the benefit would be unjust. IBM is therefore

entitled to $40 million in assignment fees notwithstanding a finding of material breach.

III. Early Termination Close Out Payments

A. Deferred Fees

In its cross-appeal, IBM argues that the trial court erred in denying judgment on its

claim for $43,416,482 in Deferred Fees. The State responds that the trial court did not err

and, in any event, Deferred Fees are not payable if the MSA is terminated for cause.

When construing the language of a contract, we must determine and effectuate the

intent of the parties. Ryan v. Lawyers Title Ins. Corp., 959 N.E.2d 870, 875 (Ind. Ct. App.

2011). We must “read the contract as a whole and will attempt to construe the contractual

language so as not to render any words, phrases, or terms ineffective or meaningless.” Id.

In doing so, “[w]e must accept an interpretation of the contract that harmonizes its

61
provisions, rather than one that places the provisions in a conflict.” Id. Additionally, when

“construing a contract we presume that all provisions were included for a purpose, and if

possible we reconcile seemingly conflicting provisions to give effect to all provisions.” Id.

If a contract contains both “general and specific provisions relating to the same subject, the

specific provision controls.” Id.

Using these rules, we must determine whether Deferred Fees are payable only upon

a termination for convenience or whether Deferred Fees are payable regardless of how the

contract is terminated. MSA § 16.6.6, entitled “Closeout Payments,” provided:

(1) In the event of a Termination of this Agreement for any reason (other
than a Termination by expiration), the State shall pay Vendor, to the extent

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/2725591. Public record. Not legal advice.