Case on Contractual Limitations of Damages out of SDNY
In 2019, Johnson & Johnson (J&J) and its subsidiary Ethicon, Inc. (Ethicon) sought to partner with ChemImage Corporation (ChemImage) to help J&J to close the gap with its competitors in the surgical robotics space. Ethicon develops and commercializes J&J’s surgical intervention technologies. ChemImage had developed imaging technology that helps detect tumor lesions and margins, key anatomic structures, and tissue perfusion during surgical procedures, “offering surgeons a simpler way to identify critical structures and abnormal areas during surgery,” according to the Court. The parties projected that their joint project would generate between $1.3 and 1.7 billion in royalties for ChemImage.
The parties entered into a Research, Development, License and Commercialization Agreement (the Agreement) which set out target dates for six development milestones and six regulatory milestones. Both ChemImage and Ethicon had two members on a Joint Steering Committee (JSC), which was supposed to make decisions unanimously. In case of disagreement, the Agreement provided for alternative dispute resolution. ChemImage was to receive an upfront payment of $7 million, as well as payments totaling $149 million if all milestones were met.
In late 2020, after ChemImage met the first milestone, Ethicon began slowing the process. Two years later, ChemImage filed its final report evidencing its achievement of the second milestone. Ethicon and J&J refused to attend meetings of the JSC and review ChemImage’s findings. Ethicon terminated the agreement in 2023, citing ChemImage’s failure to meet milestones. ChemImage first furloughed and then dismissed its employees and eventually shut down. It sued both its counterparties for breach of contract and J&J for tortious interference, seeking lost milestone payments and $1.5 billion in lost royalties payments.
J&J filed a motion to dismiss, and both defendants argued that ChemImage’s damages were capped at $40 million. In ChemImage Corp. v. Johnson & Johnson, the U.S. District Court for the Southern District of New York held that ChemImage’s damages were indeed capped, but not necessarily at $40 million.
J&J first contended that it, as a non-signatory to the Agreement, cannot be liable for its breach. In general, the Court noted, corporate non-signatories are not bound by agreements entered into by their subsidiaries. However, in this case, although the issue was close, ChemImage had alleged sufficient facts to survive a motion to dismiss. J&J was alleged to be actively engaged in all aspects of Ethicon’s decision-making relating to the agreement, benefitted from the agreement, and directed Ethicon to terminate it.
The motion to dismiss the tortious interference claim was much more easily rejected. J&J’s main argument was that the tortious interference claim was duplicative of the breach of contract claim. It is not. It is an argument in the alternative. If ChemImage is successful on its breach of contract claim against J&J, then the tortious interference claim will become duplicative, but if, as J&J claims, it is not a party to the Agreement, the tortious interference claim will survive. Parties can plead claims in the alternative.
Defendants fared much better on their motion to limit damages. ChemImage alleged that, because it was terminated without cause, it is entitled to recover its full milestone payments plus $1.5 billion in lost royalties. However, the Agreement had a liquidated damages provision, which should cap its entitlement to $40 million. J&J argued that ChemImage could recover, at most, $40 million, but that’s not quite right. ChemImage may be able to show that it entitled to both the $40 million fee for early termination and the payment to which it is entitled for reaching the second milestone.
The case doesn’t break much new ground. However, the discussion of when a corporate parent can be held accountable for its subsidiary’s breach is interesting. The Court’s provides a deft discussion of the relationship between the breach claim and the tortious interference.