Judge Dreyer's Decision Vindicates Carl Moldthan

Carl Moldthan started out as a big fan of Gov. Mitch Daniels who gladly accepted his invitation to join his administration in helping remake the Family & Social Services Administration. After less than a year on the job, Moldthan left the agency disillusioned and disheartened by Mitch Roob's single-minded mission of getting rid of the county welfare case workers and replacing them with remote call centers run by Roob's former employer, ACS. Carl passed away a little more than a year ago after suffering a serious stroke, but I couldn't help but think about him as I read through the decision Judge David Dreyer handed down today awarding IBM $52 million in a drawn out lawsuit during which the state and its former contractor traded multi-million dollar claims against one another after Daniels fired IBM when the state's privatization plan didn't go as planned. The Indiana Law Blog has uploaded a copy of his 73-page opinion here.

Moldthan visited all of the state's county welfare offices and learned first-hand what problems ailed the system. He found that dated computers and obsolete computer systems made it impossible for case workers to do their jobs efficiently. Add to that the low pay of workers and poor communications with mid-level managers and decision-makers in Indianapolis, Moldthan found a broken system. Moldthan pleaded the case for an alternative solution to privatization recommended by the consulting firm hired by Roob, but Roob and others rebuffed him. As Moldthan explained to me his disgust and disappointment at the chosen outcome:

The best example I can think of is a person who is brought into the Governors office and told by him that he wants you to operate the State Garage. You look at him and because it is such a challenge, you accept. The Governor hands you a pair of pliers and a regular screw driver and says, “Here you go, here’s your tools.”

You immediately take a deep breathe and accept the seemingly unbelievable task and proceed to try and do the job. After 5 years the Governor says, “Well, he’s tried his best to do the job but I’m going to hire a consultant to see if we cannot privatize it to do better.” The consultants report comes back and says that even though you have tried to do a good job, all of the screws are messed up and all the bolts are rounded off. Their advice, privatize!

Now anyone who would read this would say that this scenario isn’t fair. The person in charge wasn’t given the proper tools, the proper money the proper support so how could they succeed? The answer is they couldn’t. If this sounds vaguely familiar to what has happened at FSSA, it is.

Reading Judge Dreyer's opinion, it is unmistakable that he understood and took to heart the exact sentiment Moldthan summarized.

The largely undisputed evidence shows that the Governor, the Family and Social Services Administration ("FSSA") and various State of Indiana ("State") officials set out to fix Indiana's poorly-performing welfare system by inserting an untested theoretical experiment, and substitute personal caseworkers with computers and phone calls ("remote eligibility"). This is now admitted to be an error, and there is nothing in this case, or the Court's power, that can be done to correct it, or remedy the lost taxpayer money or personal suffering of needy Hoosiers. All that can be done in this case is to take the first step at setting the final numbers among so many millions already spent.

This case is about nothing but the intent of the parties, performance of the parties, and whether there was a "material breach" of the contract as a whole. Breach of public trust is not included here, consideration of private greed is not included here, nor is any measure of public injury. It is just about the money between the parties, much of which is already spent by the State.  

The good faith of the parties cannot reasonably be questioned, especially the hard-working employees of the State and IBM. But the competence of the parties in this project is sometimes open to question.  

The short ill-fated life of this super-sized contract will remain an enigma. Overall, the Court finds, as a matter of fact, that the State failed to meet its burden to show that International Business Machines Corporation ("IBM") committed a material breach of the contract. Certainly the State showed that IBM did not perform well in some respects, especially when trying to get subcontractor ACS Human Services ("ACS") to answer phones notwithstanding evidence of ACS lobbying against IBM in violation of its own subcontract. But the record is too laden with too much evidence of political factors, the overwhelming difficulty of attempting such a project, and the State's own inconsistent performance to not allow a conclusion that unsatisfactory results were not caused as much by the State as IBM. Considering the contract as a whole, IBM's performance does not show breach going to the heart of the contract, and the State did not prove otherwise.

I have always steadfastly maintained that it was never the intention of the Daniels administration to put IBM in charge of this major undertaking. I've contended that IBM's role was that merely as a placeholder to provide cover to Mitch Roob from criticism that he was steering the state's largest contract in Indiana history to his former employer. Judge Dreyer fully grasped this fact. In his opinion, he traces back the origins of the "remote eligibility" model for delivering welfare services by a private contractor to Roob and his former colleague at ACS, former Indianapolis Mayor Stephen Goldsmith. The model was based on one previously undertaken by Texas, which just happened to be an ACS project that also ran into serious problems with implementation. Dreyer observed that the problems with the Texas rollout were "so severe" that the project rollout was stopped even before Indiana signed the IBM contract. The documents Dreyer references in his opinion tying Roob and Goldsmith to the decision undercuts the administration's claim that Roob had not participated in the selection process that ultimately chose the IBM-led proposal that provided most of the work under the contract to ACS as the lead subcontractor. "The largest portion of the work among the Coalition members, and the largest portion of the compensation, went to ACS, which employed the personnel assisting in the processing of eligibility applications (many ofwhom were former State employees)," Dreyer wrote. Dreyer noted that all of the competing bidders had dropped out of the procurement process before it had concluded, leaving the IBM-led coalition alone as the single bidder for the state's largest contract.

Underscoring my view, Judge Dreyer noted evidence in the record that ACS's lobbyist, Joe Loftus, was lobbying state officials behind IBM's back to have it assume control of the contract and to oust IBM despite ample evidence that many problems with the implementation involved tasks performed by ACS. He cited testimony that Loftus "used his political contacts with the administration to help his clients, ACS and Arbor, with respect to Modernization" and "Anne Murphy relied on Joe Loftus as a source of information in her dealings with IBM." Judge Dreyer found that ACS was interfering with IBM's contract "by directly lobbying the Governor, and the State was unable or unwilling to redirect the revenue necessary to adequately fund Modernization with IBM." Judge Dreyer found that Loftus' lobbying actions were creating distrust among the contract partners. He cited an e-mail exchange Loftus had with Roob in which he said, "I expect to get a lecture today from IBM reminding me that they are the Prime." Loftus added, "They just don't get it." Dreyer found that Loftus' communication behind IBM's back "presumably violated its contract with IBM and the state was in violation of the terms of the MSA, which provided that IBM was the sole point of contact with regard to contractual matters." Loftus' communications included conversations directly with Gov. Daniels and one of his top staffers, Betsy Burdick, who is the sister of Brian Burdick, the Barnes & Thornburg attorney who signed the contract on behalf of the firm to represent the state in its lawsuit against IBM despite its obvious conflict of interests. Loftus' actions were that of a snake in the grass, completely stabbing IBM in the back to win the contract for his client. Dreyer noted that ACS officials testified that Loftus' communications behind IBM's back "were contractually prohibited." As Dreyer put it, "The Court is unable to find that IBM breached the contract by failing to adequately manage ACS at the same time ACS and the State were talking behind IBM's back.

In the end, the State cooked its case against IBM by the multiple favorable reviews members of the Daniels administration gave on various occasions both internally and publicly regarding IBM's performance on the contract cited in Judge Dreyer's opinion. Perhaps the administration officials were just blowing smoke to cover up the botched privatization effort, but it all came back to bite the state hard in the butt. Judge Dreyer figured out that IBM was sacrificed for window dressing purposes because of all the flack the state was getting over the privatization effort, particularly increased pressure from state lawmakers. Nonetheless, the conflicted attorneys at Barnes & Thornburg were shameless in their criticism of Judge Dreyer's opinion. "We believe the court's view that IBM's concededly bad performance did not materially breach the contract is wrong, and cannot be squared with the overwhelming evidence of poor performance," Peter Rusthoven said in a statement to the media. Rusthoven also said the ruling contained "regrettable, unnecessary political commentary that is neither accurate nor relevant." It's absolutely incredible that the law firm has been permitted to profit to the tunes of millions of dollars result of a problem largely of its own making. Gov. Daniels is promising to appeal the decision, which will allow the law firm to profit even more from their wrongdoing