by Kelly Thornton and Kevin Crowe | inewsource

The city of San Diego has paid $1.9 million to settle a lawsuit brought by a computer software contractor it fired for missing deadlines that put the project more than a year behind schedule and $16 million over budget.

The settlement with Axon Solutions Inc. was the largest amount paid to litigate or resolve claims and lawsuits against the city so far this year, according to a review by inewsource.

Through July 12, the city has spent $13.1 million handling claims and fighting lawsuits, compared to $13.2 million for the entire year in 2010. It spent $25.5 million on claims and lawsuits in 2009, the biggest year of the eight years analyzed.

See a list of top payouts and settlements

The City Council approved the settlement with Axon in March in closed session. The computer contract dates to 2007, when the city was reeling under investigations, fraud indictments, civil sanctions, overdue audits and sunken credit ratings.

Catching up on audits helped restore the city’s luster on Wall Street in 2008, but then the new computer system was blamed for an eight-month delay in the 2010 audit released last month.

The city awarded Axon an $18.8 million contract in 2007 for installation of one main software package to replace fragmented and outdated financial computer systems. Doing so fulfilled a recommendation by outside consultants hired to help the city correct its financial issues. The city fired Axon in November of 2008 and hired the manufacturer of the software system to complete the installation.

After firing Axon, the city spent millions more to finish the job. The final project cost was just under $52 million — $16 million over the original projected cost of $36.6 million. The mayor’s office said that final amount includes interest costs that should have been factored in the first estimate, plus additional work that was added later, such as a new budgeting software system.

Axon sued the city in November 2009, seeking $5.59 million in unpaid invoices plus interest. The company’s attorney did not return a call for comment.

The City Attorney’s office said the settlement was “a business decision.”

“We started doing an analysis of what it was going to cost to defend the case and the ultimate settlement was less than a third of what they were demanding,” said Joe Cordileone, chief deputy city attorney for the Civil Division.

Addressing the city’s overall payouts for litigation, Jonathan Heller, a spokesman for City Attorney Jan Goldsmith, said two large settlements – Axon and to the family of a motorcyclist who died in a traffic accident – artificially inflated the total and he did not expect the trend to continue in the second half of 2011. Goldsmith declined to be interviewed but Heller answered some questions via email.

More than half the amount the city has spent on claims and lawsuits so far this year went to settlements, for a total of $7.6 million; another 13 percent, or $1.8 million, went to judgments against the city; $1.4 million was paid to outside legal counsel to represent the city in cases where the city’s own lawyers lack expertise or have a conflict of interest. That’s on pace to approach the 2010 sum, which was $3.1 million.

In the email, Heller noted that Goldsmith has significantly cut outside counsel expenses and has not hired any outside lawyers for new cases in 2011.

Mayor Jerry Sanders’ office declined to be interviewed.

Councilwoman Marti Emerald said it pained her to vote in favor of settling the litigation with Axon, but she felt she had to.

“The city attorney explained to us the case could have gone either way, and our liability could have been higher,” Emerald said.

She said voting to pay almost $2 million to a company that was terminated was galling.

“This whole project from a financial standpoint has been a big disappointment,” Emerald said. “I support the idea of automating, making sure we have all our information in one place, creating more efficiency and saving costs, but at what cost? I don’t know where to appoint blame but I hope we’re finally on track so we can get this thing done and get what was promised.”

Former City Councilwoman Donna Frye, who cast one of two votes against awarding the computer consulting contract to Axon in 2007, said she was not surprised at the outcome of the Axon case.

She characterized the contract as a knee-jerk reaction to the city’s financial chaos and resulting investigations.

“It was a case of hurrying up to look like we’re doing something while again failing to do our due diligence so it really was a recipe for failure. It was handled badly from the beginning so it was certain to have a bad outcome.”

The city’s decision to settle the Axon lawsuit came after a federal judge declined to dismiss the case. U.S. District Judge Jeffrey T. Miller allowed Axon’s case to proceed on three of seven claims, including trade secret misappropriation and copyright infringement – essentially that the city continued to use Axon’s trade secrets and copyright-protected material without paying.

“Oh my god, you’re kidding me,” said former City Attorney Michael Aguirre when told of the settlement. “You don’t pay damages to someone who destroyed your accounting system and caused you to be unable to produce a financial statement for eight months.”

Cordileone scoffed at Aguirre’s reaction.

“Mr. Aguirre knows nothing about this case. He hasn’t seen the evidence or talked with the expert witnesses.

“I am a chief deputy city attorney with over 35 years of litigation experience. I saw all the evidence and assessed it for the City. It would have been nearly impossible to lay all the blame for the City’s problems on Axon.

“Moreover, the case was very complex, technical and expensive,” he said. “The City Council was properly advised and made its decision based upon the evidence, the likely result, the costs, and a recommendation from our office.”

The lawsuit was especially expensive to defend because it was brought against the city and a city agency, Data Processing Corp., which required its own outside lawyers.

“It turned out to be an extremely costly endeavor and there’s no guarantee who’s going to win when it winds up being a battle of experts,” Cordileone said.

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