February 4, 2019

Facts Not Part of Appellate Decision-Making Process Are Not Law of the Case; International Business Machine Corp. v. State of Indiana

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The State has been engaged in a long legal battle with IBM, which has lead to multiple appellate opinions, at least two of which we’ve discussed before. This is the most recent appellate decision arising from this litigation, and contains lessons for all of us.

In his first term, Governor Daniels sought to overhaul and modernize Indiana’s welfare system. In 2006, the State entered into a 10-year, $1.3 billion Master Services Agreement (MSA) with IBM. The MSA set forth various Policy Objectives, and the MSA was to be construed in a manner consistent with the Policy Objectives.

After a pilot version of the modernization began, both parties noticed implementation issues. They nevertheless forged ahead, only to encounter the Great Recession and natural disasters. This, along with the addition of features such as the Healthy Indiana Plan, dramatically increased the number of applications IBM needed to process. The parties mutually agreed to suspend additional rollout of the modernization to accommodate disaster relief efforts.

In 2009, the parties agreed to a corrective action plan, but the overall scope and services of the modernization did not improve. Thus, the State changed its approach and adopted a Hybrid version to welfare Modernization, referred to as “Plan B.” The State and IBM did not reach an agreement regarding the price of Plan B (or Hybrid) services. The State then terminated IBM for cause and implemented Plan B.

The State sued IBM, seeking over $170 million, and IBM claimed it was owed $52 million. The matter proceeded to a bench trial before Judge Dreyer, resulting in a $49.5 million judgment for IBM. This award included $9.5 million in equipment fees for the IBM-owned computer equipment the State kept after terminating the MSA and $40 million in subcontractor assignment fees, which were contractually required payments owed to IBM as a result of the State’s decision to purchase IBM’s interest in its contracts with certain IBM subcontractors.

The Court of Appeals reversed the trial court’s decision. It found that IBM had materially breached the MSA, but it affirmed the trial court’s award of $49.5 million to IBM for equipment fees and subcontractor assignment fees. The Indiana Supreme Court granted transfer and agreed with the Court of Appeals. It then remanded to the trial court for calculation of the parties’ damages, including any appropriate offsets to the State as a result of IBM’s material breach of the MSA.

On remand, Judge Dreyer found that the State was not entitled to any damages from IBM’s breach. The State moved for a change of judge, and was granted that motion, which vacated the trial court’s decision.

The case was assigned to Judge Welch, and she found that she was not bound by Judge Dreyer’s order and held a new bench trial. The trial court awarded the State $125 million in direct damages on its breach of contract claim, based largely on the costs the State incurred by implementing Hybrid after terminating Modernization pursuant to the MSA, and $3 million in consequential damages. The court denied IBM’s request for post-judgment interest on its $49.5 million award. Offsetting the State’s pre-interest liability to IBM, the trial court entered a final judgment, ordering IBM to pay the State more than $78 million.

On appeal, IBM argued that Judge Welch was bound by the findings of fact that Judge Dreyer made after the first trial, and that the appeals just dealt with his conclusions of law. Judge Dreyer found that the modernization and Plan B were materially different, and that this finding was inconsistent with Judge Welch’s judgment. But while the Court recognized that a finding of fact is law of the case if it is part of an issue on which judgment is entered and an appeal is taken, it found that this doctrine did not apply here.

Deciding whether the factual determination on Modernization and Hybrid are part of the law of the case and binding upon us, we note that although the supreme court mentioned and explained Modernization versus Hybrid in its Facts section, in its Discussion section, the supreme court was silent on Hybrid and merely analyzed how the problems with Modernization led to the termination of the MSA and to the determination of a material breach. … In reaching its conclusion that IBM had breached the MSA, the supreme court did not touch on whether Hybrid was a continuance of Modernization or a completely different system. As such, a gap needed to be filled by the presentation of additional evidence on damages before the trial court on remand.

Thus, Judge Dreyer’s findings were not part of the law of the case and did not bind Judge Welch.

After dealing with some fact-specific challenges to the trial court’s damages award, the Court addressed IBM’s claim that it was entitled to post-judgment interest on its $49.5 million award. IBM argued that this award was affirmed on appeal, and that this entitled it to post-judgment interest, regardless of subsequent proceedings. On this point, the Court agreed. “[A]s no appellate decision reversed IBM’s judgment on its Complaint, IBM is entitled to post-judgment interest “from the date of the original verdict.”

Lessons:

  1. Facts an appellate court relies on are law of the case.
  2. Facts not part of appellate decision-making process are not law of the case.
  3. A party is entitled to post-judgment interest on a judgment, even if the case is appealed and remanded on other grounds, so long as the appeal did not vacate the judgment.