12. Commitments and contingencies
We are involved in various legal proceedings, including the matters described below, in the ordinary course of our business.
In March 2009, a state Medicaid agency asserted a claim against us, related to a discontinued business line, in the amount of $2.3 million in connection with a contract we had through February 1, 2009 to provide Medicaid administrative claiming services to school districts in the state. We entered into separate agreements with the school districts under which we helped the districts prepare and submit claims to the state Medicaid agency which, in turn, submitted claims for reimbursement to the United States Federal Government. No legal action has been initiated. The state has asserted that its agreement with us requires the Company to reimburse the state for the amounts owed to the Federal Government. However, the Company's agreements with the school districts require them to reimburse us for such payments and therefore we believe the school districts are responsible for any amounts disallowed by the state Medicaid agency or the Federal Government. We believe our exposure in this matter is limited to our fees associated with this work and that the school districts will be responsible for the remainder. We have exited the federal health care claiming business and no longer provide the services at issue in this matter.
In 2008, we sold the SchoolMAX student information system business line as part of the divestiture of the MAXIMUS Education Systems division. In 2012, a school district ("District") which was a SchoolMAX client initiated arbitration alleging that we and the buyer failed to (i) use best practices in developing the software and (ii) deliver and test product releases as required by the contract, resulting in damages of at least $10 million. In December 2012, the arbitration panel denied the District's claims in their entirety, and the District filed a motion in court seeking to vacate that decision. Separately, in late 2012, the District claimed that we had defrauded the District in 2007 or 2008 by misrepresenting our intentions regarding the sale of the Education Systems division. That allegation was not part of the arbitration, and no formal claim or lawsuit was filed. The parties settled all claims among them at no cost to us in September 2014.
In January 2014, we were named a defendant in Norton et al. v. MAXIMUS in the U.S. District Court for Idaho. The plaintiffs in this purported class action are current and former trainers and supervisors at the MAXIMUS federal health care projects in Boise, Idaho and Brownsville, Texas. They allege we willfully misclassified them as exempt employees under the Fair Labor Standards Act and failed to pay them overtime, and they seek to establish a nationwide class covering the company's federal health care operations. The plaintiffs allege compensatory and punitive damages of at least $5.0 million. We have since reclassified the trainers as non-exempt employees and are seeking an expedited resolution of their wage claims. We deny liability as to the supervisors and will contest the matter vigorously. As of September 30, 2014, the Company reserved $0.6 million to cover the estimated legal costs of defending this lawsuit, in addition to estimated liabilities to employees.
Acquired loss-making contract
As part of the acquisition of PSI in April 2012, we acquired a systems-integration contract that was anticipated to record significant future losses. The fair value of the obligation to provide these services at a loss was calculated and recorded on our balance sheet at acquisition as deferred revenue of $15.1 million.
The contract was an arrangement that included both significant production and customization of software as well as postcontract customer support for these services. As we were unable to estimate the costs of providing these services, management deferred all revenue and costs related to service in anticipation of recognizing revenue at the commencement of the postcontract customer support services.
In February 2013, we received a formal notice of termination for convenience for this contract. The work was terminated as part of a broad, state-wide initiative to focus resources on a select number of projects. At the termination of this agreement, we reimbursed the client for certain funds received and undertook to provide future services. All other obligations to provide services have been extinguished and no material future costs will be incurred. Accordingly, revenue of $16.0 million was recognized in the year ended September 30, 2013. In addition, costs of $5.1 million, including costs which had been deferred, were recognized in the same period for an operating profit of $10.9 million.
We have an employment agreement with our chief executive officer with a term ending in April 2018.
Collective bargaining agreements
Approximately 14% of our employees are covered by collective bargaining agreements or similar arrangements.