ChemImage Corporation v. Johnson & Johnson

Background

ChemImage Corporation sued Johnson & Johnson (J&J) and Ethicon, Inc., a wholly owned subsidiary of J&J, over an agreement concerning the development and commercialization of ChemImage’s artificial-intelligence-based light-imaging technology. ChemImage alleged claims for breach of contract against both defendants and tortious interference with contract against J&J. It sought, among other relief, more than $1.5 billion in damages.

The agreement was signed by ChemImage and Ethicon on December 27, 2019. It provided for an iterative development process, milestone payments, potential royalties, and two termination options. Ethicon could terminate for cause after a material breach that was not cured within 30 days after written notice. It could also terminate without cause on 120 days’ notice and payment of $40 million.

ChemImage alleged that the project progressed through an initial milestone but that Ethicon later delayed development and that J&J and Ethicon refused to continue meetings needed to determine whether ChemImage had achieved the next milestone. Ethicon sent a March 6, 2023 letter terminating the agreement for cause, and the termination became effective on April 26, 2023. ChemImage alleged that the termination caused it to lose milestone and royalty payments and eventually close its doors.

Claims Against J&J

The defendants moved under Rule 12(b)(6), which permits dismissal when a complaint does not allege enough facts to make a claim legally plausible. They argued that J&J could not be liable for breach because J&J was not a signatory to the agreement.

The court recognized that a non-signatory generally cannot be held liable for a contract breach, including when the non-signatory is the corporate parent of the signing entity. But the court explained that a non-signatory may be liable if it showed an unequivocal intent to be bound. ChemImage alleged that J&J executives helped negotiate and approve the agreement, that J&J had ultimate decision-making authority over Ethicon, that J&J would benefit from the agreement, and that J&J participated in performance through the Joint Steering Committee and Data Review Board.

The court called the issue close but held that the allegations were sufficient at the pleading stage. It noted that the agreement contained language weighing against imposing obligations on nonparties, and that discovery might show that J&J did not intend to be bound. Nevertheless, the court could not rule out J&J’s possible liability based on the allegations then before it.

The court also rejected J&J’s arguments for dismissing the tortious-interference claim. Because J&J disputed that it was a party to the agreement, ChemImage could plead breach of contract and tortious interference as alternative theories. The court further held that J&J’s claimed protection of its own economic interests was an affirmative defense that could not support dismissal at this stage because the facts establishing it were not clear from the complaint. ChemImage’s allegations that J&J controlled Ethicon and directed the termination were also enough to plead causation.

Limits on Contract Damages

The court held that ChemImage could not recover the billions of dollars in future milestone and royalty payments it requested. The agreement allowed only direct damages. Applying New York law, the court explained that expectation damages generally compensate the injured party for what it would have received if the contract had been performed as promised.

The court reasoned that when a contract permits termination after notice, damages generally are limited to the notice period. If Ethicon properly terminated for cause because ChemImage failed to achieve a required milestone, ChemImage’s breach claim would fail and it would recover no damages on that claim. But if the for-cause termination was improper, the termination notice would at least amount to a without-cause termination. In that event, ChemImage’s damages would be limited to the $40 million termination fee and any direct damages it could prove for the 120-day period after March 6, 2023.

The court rejected the defendants’ broader assertion that the $40 million payment was an absolute cap on damages. It stated that there might be additional recoverable damages, including a payment for Milestone 1B if ChemImage proved it had achieved that milestone before the termination notice, or other damages connected to the alleged improper use of the for-cause termination provision. The court expressed no view on whether ChemImage could ultimately recover those additional amounts.

Disposition

The court granted in part and denied in part the defendants’ motion to dismiss. ChemImage’s claims against J&J survived at that stage. However, if ChemImage proved its breach-of-contract claims, its damages were limited to the agreed-upon $40 million termination fee plus any damages it could prove it would have incurred during the 120-day notice period from March 6 through July 4, 2023. The defendants were ordered to answer ChemImage’s claims within two weeks unless the court ordered otherwise.