Nuance Commc'ns, Inc. v. Int'l Bus. Machs. Corp.
| Citation | 544 F.Supp.3d 353 |
| Decision Date | 21 June 2021 |
| Docket Number | CIVIL ACTION NO. 16-5173 |
| Parties | NUANCE COMMUNICATIONS, INC., Plaintiff, v. INTERNATIONAL BUSINESS MACHINES CORP., Defendant. |
| Court | U.S. District Court — Southern District of New York |
Daniela Kirsztajn, Robert William Taylor, Jessica Falk, Kevin F. Meade, David Lender, Weil Gotshal & Manges LLP, New York, NY, David Greenbaum, Nuance Communication, Inc., Mahwah, NJ, for Plaintiff.
Elinor Catherine Sutton, Kevin Samuel Reed, Hope DeLaney Skibitsky, Quinn Emanuel Urquhart & Sullivan, New York, NY, Florentina Dragulescu Field, Pro Hac Vice, Quinn Emmanuel Urquhart & Sullivan, LLP, Washington, DC, for Defendant.
TABLE OF CONTENTS
I. INTRODUCTION ...358
II. PROCEDURAL HISTORY ...359
III. FINDINGS OF FACT ...360
IV. CONCLUSIONS OF LAW AND DISCUSSION ...368
V. SUMMARY ...384
I. INTRODUCTION
This is a breach of contract case arising under New York law. But more than that, this case is a contemporary window into the brave new world of artificial intelligence ("AI") commercial applications. In 2011, Watson, a computer system embedding IBM-designed software technology DeepQA, defeated two human former champions in a real-time competition on national television on the popular game show Jeopardy!. DeepQA accepts natural language questions and searches a body of information, generates a range of hypotheses, ranks these hypotheses, and returns the hypothesis it has the most confidence correctly answers the question, all in no more than seconds. The public debut of this modern deus ex machina received world-wide attention.1 But to fully interact with humans and be useful, Watson needed to understand and process questions beyond the Jeopardy! domain, asked through human voice.
IBM's search for sophisticated partners with whom it could develop applications for DeepQA beyond winning Jeopardy! forms the backdrop of this case.
Beginning in 2010, even before DeepQA's triumphant appearance in Jeopardy!, IBM and Nuance were discussing possible partnership opportunities to build technological solutions to business problems.2 These discussions ripened in late 2010 into a Software License Agreement ("SLA"). The SLA entitled Nuance to one copy of IBM Research Group's "Automatic Open-Domain Question Answering" software system (which embedded IBM's DeepQA technology3 ), Tools to create commercial applications based on this technology and Nuance's technology, and ten years of software "updates." In return, Nuance paid IBM $25 million.
Nuance contends that under the SLA, IBM was to supply it with updates created by all IBM groups (i.e., not just IBM Research Group, which created the technology). IBM argues to the contrary, i.e., that the delivery of updates was limited to only those developed by the Research Group. Crucial to the distinction is that under IBM's interpretation of the SLA, it was not obligated to deliver to Nuance the "blue-washed" code (created by the Software Group), a set of updates which Nuance claims made DeepQA commercially viable.
For the reasons set forth below, the Court finds that Nuance was entitled to receive one set of updates that would allow DeepQA to be used in a commercial setting (i.e., the blue-washed code), and while IBM delivered some updates to Nuance, IBM breached the agreement by failing to deliver the blue-washed code. However, Nuance was sufficiently aware of the significant possibility that IBM was breaching the agreement prior to June 30, 2014 (i.e., more than two years before Nuance filed suit). Given what Nuance knew at the time, Nuance avoided making the appropriate inquiry to IBM and was willfully blind. Under these circumstances, Nuance's claims are barred by the contractual limitations period.
II. PROCEDURAL HISTORY
Nuance filed suit on June 30, 2016, in the United States District Court for the Southern District of New York. Nuance brought three counts: declaratory judgment, breach of contract, and breach of the implied covenant of good faith and fair dealing. After completing discovery, the parties filed cross-motions for summary judgment. Judge Karas, who was then presiding over the case, denied Nuance's motion but granted IBM's motion in part and denied it in part. Nuance's claim for breach of the implied covenant of good faith and fair dealing was dismissed with prejudice because it was duplicative of the breach of contract claim.
Due to temporary docket congestion in the Southern District of New York, and with Judge Karas's consent, the undersigned4 was designated by the Committee on Intercircuit Assignments to preside over all subsequent proceedings in the case. The matter proceeded to a bench trial5 in February 2020 for four days in New York. Due to the COVID-19 pandemic, the balance of the trial was then conducted at the end of July 2020 in Philadelphia, with some witnesses testifying via Zoom. After the bench trial concluded, the parties submitted proposed findings of fact and conclusions of law and the Court heard closing arguments.6
While the outcome of the case turns on the Court's determination that Nuance was willfully blind, for the sake of completeness and as a necessary part of the Court's decision on willful blindness, the Court has included in its decision factual and legal determinations on the issues relating to contract interpretation and the breach of contract claim.
III. FINDINGS OF FACT
1. Nuance Communications is a Delaware corporation with a principal place of business in Burlington, Massachusetts. Compl. 3, ECF No. 6. Nuance is a provider of voice recognition and natural language understanding technology, and it offers artificial intelligence solutions in industries such as mobile, automotive, and healthcare. Petro Decl. 2, ECF No. 211. Of these, the healthcare industry is Nuance's largest business segment. Petro Decl. 2.7
2. International Business Machines ("IBM") Corporation is a New York corporation with a principal place of business in Armonk, New York. Compl. 3; Answer 2, ECF No. 9. IBM Research Group ("IBM Research") is a subdivision of IBM that develops and licenses technologies but does not develop commercial software products. Brown Decl. 9, ECF No. 216-5; Kelly Decl. 4, ECF No. 216-7; Reardon Decl. 2–3, ECF No. 216-2; Trial Tr. 597; Summ. J. Op. 3, ECF No. 150. IBM Software Group ("IBM Software") is a subdivision of IBM that develops and markets IBM's commercial software products. McQueeney Decl. 3, ECF No. 216-1; Trial Tr. 598; Summ. J. Op. 4. These subdivisions are not separate legal entities—IBM Corporation is the relevant legal entity and owns the technology at issue. Trial Tr. 332–33, 341, 597–98; July 28 Trial Tr. 8; JX.001.1.8
3. DeepQA is a question-answering software technology, developed by IBM Research in the 2000s, which automatically accepts natural language questions and searches a body of information, generates a range of hypotheses, ranks these hypotheses, and returns the hypothesis it has the most confidence correctly answers the question. Brown Decl. 2–3; Schnell Decl. 9, ECF No. 34; PX001.045. This experimental technology, which uses natural language and mimics how humans think, was put to the test when embedded in Watson, a system capable of winning the television game show Jeopardy!, a goal achieved in 2011. Kelly Decl. 4. IBM ultimately intended not only to win Jeopardy! but also to create technology that had applications in business. Trial Tr. 257, 674–75.
4. On June 3, 2010, IBM and Nuance had a daylong meeting, where IBM presented several IBM technologies and opportunities to Nuance for investment and partnership. McCann Dep. 42–43, ECF No. 131-10; PX002. IBM's purpose for the meeting was to persuade Nuance to partner with IBM to build technology solutions in the healthcare space. PX002. IBM showcased the DeepQA technology at this meeting, and Nuance later expressed interest in licensing DeepQA. Bloom Decl. 2, ECF No. 212; Trial Tr. 351; McCann Dep. 50–51; DX117.
5. Nuance was interested in DeepQA for its potential application to business solutions in the healthcare space, not for its ability to compete on Jeopardy!. Ricci Decl. 3–4, ECF No. 214; Petro Decl. 2; Trial Tr. 105; PX005; PX007. Knowing of Nuance's business interest, IBM presented DeepQA to Nuance as having potential applications beyond Jeopardy!; and, while it had no concrete plans at the time, IBM told Nuance that IBM was committed to investing in developing those applications. Bloom Decl. 5; Ricci Decl. 5; Petro Decl. 3; Reardon Decl. 4; Trial Tr. 128–29, 538–39, 593–94, 675; July 28 Trial Tr. 10-11; PX005; PX007; PX024; DX056. Based on these communications, Nuance expected IBM to develop DeepQA into code that could be used to build commercial products, i.e., a single common core codebase that would be shared with Nuance regardless of which IBM group had developed the code. Ricci Decl. 6–7; Trial Tr. 493–94, 496–97; July 28 Trial Tr. 102; McCann Dep. 95–97, 101; PX11.079.
6. IBM was interested in licensing the DeepQA technology created by IBM Research to generate revenue to fund IBM Research, as it had done with prior technologies. Kelly Decl. 4–5; Trial Tr. 370. While the director of IBM Research had the authority to license technology outside of that group, he did not authorize the officers negotiating the DeepQA deal to license any updates created outside of IBM Research. Kelly Decl. 6–7; Trial Tr. 407; July 28 Trial Tr. 9; JX009. And Nuance was aware that IBM Research did not license technology held...
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