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A federal judge in New York has ruled that Johnson & Johnson’s unit, Ethicon Inc., owes approximately $125 million to ChemImage Corp. following the premature termination of their 2019 contract to develop innovative AI-powered tissue imaging technology for surgical use.

U.S. District Judge Jesse Furman, presiding over the case in the Southern District of New York, found that Ethicon breached the contract by unilaterally ending the agreement in 2023 without adhering to the agreed termination procedures. The ruling mandates Ethicon to pay a termination fee of $40 million plus intellectual property impairment damages estimated around $85 million.

The contract, formed after years of research and development efforts, required a joint steering committee comprised of representatives from both companies to determine whether specific developmental milestones had been met before any termination. Judge Furman noted that Ethicon failed to follow this process, canceling critical committee meetings and terminating the agreement without the committee’s final determination, thus breaching the contract.

“This ruling underscores the importance of honoring contractual procedures and good faith negotiations in complex technology partnerships,” said Judge Furman.

The case stems from Ethicon’s concerns about ChemImage’s progress, particularly regarding the application of AI annotations in tissue imaging data. Despite efforts by ChemImage to address the alleged issues and initiate cures under the contract’s provisions, Ethicon declared termination for cause and blocked ChemImage from licensing its intellectual property to other parties.

Following the termination, ChemImage sued Ethicon in April 2024, alleging breach of contract and tortious interference. The court recognized that while Ethicon provided appropriate notice, the company’s failure to complete the milestone determination process constituted a breach.

ChemImage’s expert witness initially estimated IP impairment damages at $105 million, but the judge endorsed a revised figure of approximately $84.6 million as a fair starting point for damages.

About the Parties:

• ChemImage Corp. is an imaging technology company focused on developing AI-driven tissue identification systems designed to enhance surgical precision.

• Ethicon Inc., a subsidiary of Johnson & Johnson, specializes in surgical technologies and medical devices.

Legal Representation:

• ChemImage Corp. is represented by Courtney Whang, Alex Spiro, Andrew Rossman, and Ron Hagiz of Quinn Emanuel Urquhart & Sullivan LLP.

• Johnson & Johnson and Ethicon Inc. are represented by Rachel Sherman, William Cavanaugh Jr., and Christopher Wilds of Patterson Belknap Webb & Tyler LLP.