$125 Million in Contract Dispute Over AI Surgical Imaging Technology

A federal judge has ruled that Johnson & Johnson subsidiary Ethicon Inc. breached its contract with ChemImage Corp., a Pittsburgh-based imaging technology firm, in a failed collaboration to develop AI-powered imaging tools for surgery. The ruling, issued by U.S. District Judge Jesse Furman, finds Ethicon liable for a $40 million termination fee and leaves the company facing additional intellectual property damages estimated at $84.6 million.

The parties entered into an agreement in December 2019 to co-develop two tissue-identification technologies using hyperspectral imaging and artificial intelligence. The aim was to assist surgeons by using wavelengths of light to distinguish tissues in real-time. Ethicon was granted an exclusive healthcare license to ChemImage’s relevant intellectual property, including IP created outside the project scope. The deal was structured around 12 performance milestones, half of which were development-based.

But by early 2023, the partnership began to unravel. Ethicon accused ChemImage of failing to meet the second developmental milestone and canceled key meetings intended to assess progress. On February 10, Ethicon internally decided to terminate the agreement. A formal 30-day termination notice followed on March 6, citing “several errors and flaws in collecting and processing data.” ChemImage attempted to discuss the issues and offered to cure them under the contract’s provisions, but Ethicon rejected the offer. The partnership officially ended on April 26, 2023.

The Contractual Breakdown

Central to the dispute was the contractually mandated role of the Joint Steering Committee (JSC), composed of two representatives from each party. According to Judge Furman, only this committee had the authority to determine whether a milestone had been met. By canceling JSC meetings and failing to engage in mandatory good-faith discussions, Ethicon sidestepped the procedural safeguards embedded in the agreement.

“Ethicon breached the underlying contract when it terminated the parties’ agreement for failure to achieve the relevant milestone without a final determination from the project’s joint steering committee,” Furman wrote in his opinion. He added that Ethicon “could not cut corners” and ignore the contractual process designed to handle milestone disputes.

Judge Furman also rejected Ethicon’s argument that ChemImage had failed to cure the alleged breach. Although Ethicon had provided the required 30-day cure notice, Furman found that ChemImage’s inability to respond was a direct result of Ethicon's improper termination, which had already undermined any opportunity for remediation.

The IP Dispute and Damages

The ruling not only enforces the $40 million termination fee but also leaves Ethicon liable for impairing ChemImage’s ability to commercialize its technology. Because Ethicon claimed the termination was “for cause,” it retained exclusive rights to ChemImage’s healthcare-related IP, effectively preventing the company from seeking new licensing partners during a critical window.

ChemImage presented an $84.6 million estimate for these intellectual property damages through expert testimony. While Judge Furman acknowledged that the number may be subject to adjustment, he called it an “appropriate starting point” for calculating damages tied to IP impairment. An earlier $105 million estimate was deemed excessive by the court.

Expert Witnesses and AI Technology Challenges

At trial, much of the technical debate focused on ChemImage’s use of human data annotators to train its imaging software. Ethicon criticized the overuse of so-called “ignore tags” applied to ambiguous pixels, alleging these labels compromised the quality of the training data. Internal Ethicon emails described the ignore tags as “omnipresent” and “contrary to the process proposed and agreed upon.”

Despite this critique, Judge Furman concluded that Ethicon’s decision to terminate the agreement had already been made before its formal notice and without giving the JSC a chance to fulfill its contractual role. This procedural failure, not the technical debate over annotations, was central to the breach.

What’s Next?

While Judge Furman has not yet finalized the total damages, both parties have been ordered to submit further briefing within two weeks. The case has now entered a phase where the court must determine the precise scope of intellectual property damages and how the exclusive license Ethicon retained may need to be adjusted or revoked.

ChemImage filed its suit in April 2024, asserting claims of breach of contract and tortious interference. If the court adopts the $84.6 million impairment figure, the total award could approach $125 million, a significant liability for J&J’s surgical unit. Moreover, the ruling may have broader implications for corporate partnerships in the medtech sector, especially those involving joint innovation and intellectual property licensing.

The Law Firms Involved

ChemImage is represented by Quinn Emanuel Urquhart & Sullivan LLP, with attorneys Courtney Whang, Alex Spiro, Andrew Rossman, and Ron Hagiz leading the case.

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

The case is ChemImage v. Johnson & Johnson et al., case number 1:24-cv-02646, in the U.S. District Court for the Southern District of New York.