Case 7:16-cv-05173-ECR Document 276 Filed 06/21/21 Page 1 of 65
`
`IN THE UNITED STATES DISTRICT COURT
`FOR THE SOUTHERN DISTRICT OF NEW YORK
`NUANCE COMMUNICATIONS, INC.,
`:
`CIVIL ACTION
`:
`NO. 16-5173
`Plaintiff,
`:
`:
`:
`:
`:
`:
`:
`:
`
`v.
`INTERNATIONAL BUSINESS MACHINES
`CORP.,
`
`Defendant.
`
`MEMORANDUM
`
`June 21, 2021
`
`EDUARDO C. ROBRENO, J.
`TABLE OF CONTENTS
`INTRODUCTION ............................................. 2
`PROCEDURAL HISTORY ....................................... 4
`FINDINGS OF FACT ......................................... 6
`A.
`The Parties ..................................................... 6
`B.
`DeepQA .......................................................... 7
`C.
`The Software License Agreement .................................. 7
`1. The Negotiations ............................................ 8
`2. The Writing ................................................ 12
`Performance .................................................... 13
`1. IBM Creates Updates ........................................ 14
`2. IBM Withholds Updates ...................................... 16
`3. The Parties’ Communications ................................ 21
`Updates and Products ........................................... 23
`E.
`CONCLUSIONS OF LAW AND DISCUSSION ....................... 27
`A.
`Breach of Contract ............................................. 28
`1. Contract Interpretation .................................... 28
`2. Breach ..................................................... 35
`Statute of Limitations ......................................... 40
`1. Willful Blindness .......................................... 42
`2. Continuing Breach .......................................... 59
`3. Equitable Estoppel ......................................... 63
`SUMMARY ................................................. 65
`
`I.
`II.
`III.
`
`IV.
`
`V.
`
`D.
`
`B.
`
`
`
`IN THE UNITED STATES DISTRICT COURT
`FOR THE SOUTHERN DISTRICT OF NEW YORK
`NUANCE COMMUNICATIONS, INC.,
`:
`CIVIL ACTION
`:
`NO. 16-5173
`Plaintiff,
`:
`:
`:
`:
`:
`:
`:
`:
`
`v.
`INTERNATIONAL BUSINESS MACHINES
`CORP.,
`
`Defendant.
`
`MEMORANDUM
`
`June 21, 2021
`
`EDUARDO C. ROBRENO, J.
`TABLE OF CONTENTS
`INTRODUCTION ............................................. 2
`PROCEDURAL HISTORY ....................................... 4
`FINDINGS OF FACT ......................................... 6
`A.
`The Parties ..................................................... 6
`B.
`DeepQA .......................................................... 7
`C.
`The Software License Agreement .................................. 7
`1. The Negotiations ............................................ 8
`2. The Writing ................................................ 12
`Performance .................................................... 13
`1. IBM Creates Updates ........................................ 14
`2. IBM Withholds Updates ...................................... 16
`3. The Parties’ Communications ................................ 21
`Updates and Products ........................................... 23
`E.
`CONCLUSIONS OF LAW AND DISCUSSION ....................... 27
`A.
`Breach of Contract ............................................. 28
`1. Contract Interpretation .................................... 28
`2. Breach ..................................................... 35
`Statute of Limitations ......................................... 40
`1. Willful Blindness .......................................... 42
`2. Continuing Breach .......................................... 59
`3. Equitable Estoppel ......................................... 63
`SUMMARY ................................................. 65
`
`I.
`II.
`III.
`
`IV.
`
`V.
`
`D.
`
`B.
`
`
`
`Case 7:16-cv-05173-ECR Document 276 Filed 06/21/21 Page 2 of 65
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`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.
`
`
`1
`“Yet the concept of intelligent computers, advanced by the British
`mathematician Alan Turing in 1950, isn’t new; nor is the term ‘artificial
`intelligence,’ first used at a research conference in 1956.” David A.
`Shaywitz, They Think They’re So Smart, Wall St. J., May 22, 2021, at C7.
`“What has changed is AI’s power and reach, especially with the arrival of
`what is called ‘deep learning’—the capacity for powerful pattern recognition,
`with seemingly little human instruction required.” Id.
`2
`
`
`
`
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`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.
`
`
`2
`Although IBM and Nuance entered into collaboration agreements prior to
`2010, see, e.g., Reuters Staff, Nuance to Buy IBM Speech Patents, to
`Collaborate, Reuters, https://www.reuters.com/article/ibm-nuance/nuance-to-
`buy-ibm-speech-patents-to-collaborate-idUSN1548243220090115 (Jan. 15, 2009,
`9:06 AM), these agreements focused on other technology that is not at issue
`in this case.
`3
`For clarity’s sake, and because the parties refer to it as such, the
`Court will refer to the software system as “DeepQA” for the remainder of the
`memorandum.
`
`
`
`3
`
`
`
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`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
`
`
`
`4
`
`
`
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`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.
`
`
`4
`The Honorable Eduardo C. Robreno serves as a United States District
`Judge in the Eastern District of Pennsylvania.
`5
`At trial, witnesses on direct examination testified by way of
`declarations. These witnesses were then subjected to cross-examination, re-
`direct, and re-cross. Also, the deposition testimonies of certain witnesses
`not available at trial were admitted. The declarations and the deposition
`testimonies are part of the trial record.
`6
`This memorandum constitutes the Court’s findings of fact and
`conclusions of law. See Fed. R. Civ. P. 52(a)(1).
`5
`
`
`
`
`
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`III. FINDINGS OF FACT
`A.
`The Parties
`
`Nuance Communications is a Delaware corporation with a
`1.
`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
`
`International Business Machines (“IBM”) Corporation is
`2.
`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.
`
`
`7
`Forbes recently reported that Microsoft has agreed to acquire Nuance.
`See Joe Cornell, Microsoft Announces Acquisition of Nuance; Targets
`Completion in 2021, Forbes (Apr. 20, 2021, 11:47 AM),
`https://www.forbes.com/sites/joecornell/2021/04/20/microsoft-announces-
`acquisition-of-nuance-targets-completion-in-2021/. That acquisition has no
`bearing on this case.
`
`
`
`6
`
`
`
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`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
`B.
`DeepQA
`
`DeepQA is a question-answering software technology,
`3.
`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.
`C.
`The Software License Agreement
`
`On June 3, 2010, IBM and Nuance had a daylong meeting,
`4.
`where IBM presented several IBM technologies and opportunities
`
`
`8
`Citations to “JX” refer to the joint exhibits filed by the parties.
`Citations to “PX” refer to the plaintiff’s exhibits filed by Nuance.
`Citations to “DX” refer to the defendant’s exhibits filed by IBM.
`7
`
`
`
`
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`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.
`
`1.
`
`The Negotiations
`
`Nuance was interested in DeepQA for its potential
`5.
`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
`
`
`
`8
`
`
`
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`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.
`
`IBM was interested in licensing the DeepQA technology
`6.
`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 outside
`of IBM Research—including IBM Software code already contained in
`DeepQA—without the permission of the IBM group that held the
`technology being licensed. Reardon Decl. 5; King Decl. 2–3, ECF
`No. 216-4; Trial Tr. 165; Cox Dep. 104–05; DX10; DX110; DX122;
`DX123.
`
`A provision entitling it to all IBM updates to DeepQA
`7.
`was integral to Nuance obtaining the commercially viable
`technology it sought because the DeepQA technology prepared for
`Jeopardy! was not ready for commercial applications. Bloom Decl.
`5; Trial Tr. 87–88, 117–18, 225, 363, 377–78. And before
`entering the agreement, Nuance understood that its investment in
`DeepQA was risky and that the potential business applications of
`
`
`
`9
`
`
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`the technology were speculative. Trial Tr. 49–51, 56–58, 469;
`DX112. Accordingly, Nuance believed it needed assistance from
`IBM, in the form of updates to make DeepQA commercially usable,
`to successfully commercialize DeepQA. Petro Decl. 3; Trial Tr.
`44–45.
`
`When IBM’s first draft of the proposed licensing
`8.
`agreement did not include a provision for updates to DeepQA,
`Nuance viewed it as a nonstarter. Bloom Decl. 6; Trial Tr. 185;
`JX004. Nuance insisted on including an updates provision—telling
`IBM that Nuance required the same updates provision as in a
`prior deal between the companies. Bloom Decl. 6; McCann Dep.
`129–31; JX006.003. However, in that prior deal, Nuance had
`signed a separate agreement with IBM Software to obtain IBM
`Software-developed code. King Decl. 3; Trial Tr. 194–95; DX48.
`
`In negotiating the DeepQA deal, Nuance expected the
`9.
`DeepQA technology to be transferred by IBM among its various
`groups, and Nuance wanted access to all updates to DeepQA,
`regardless of where they were developed within IBM. Ricci Decl.
`6–7; Trial Tr. 166. And Nuance communicated to IBM that it
`wanted the updates provision to be as broad and long as
`possible, and that it expected updates to include new code. Cox
`Dep. 58–59; PX19.002.
`
`
`
`10
`
`
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`10. That said, the parties understood the license did not
`include IBM-developed products; for the development of products,
`the parties entered a separate collaboration agreement, which
`Nuance ultimately terminated. King Decl. 5; McQueeney Decl. 2,
`7; Trial Tr. 45, 200; McCann Dep. 91–96; DX19. And the parties
`understood the license to extend only to domain independent
`code—i.e., code that is generally applicable to all domains—as
`opposed to domain dependent code—e.g., code specific to the
`healthcare domain. Brown Decl. 4; Trial Tr. 71, 304.
`
`11. The parties did not explicitly discuss which IBM
`groups would provide updates under the DeepQA deal: they did not
`specify Nuance would only be entitled to updates developed by
`IBM Research and not updates developed by IBM Software, but they
`also did not specify that Nuance would be entitled to updates
`developed by any IBM group. Ricci Decl. 8; Trial Tr. 39, 237,
`553–54. And the parties did not discuss the possibility of IBM
`“forking” the DeepQA code—splitting the code into two separate
`components held in different IBM groups. July 28 Trial Tr. 11.
`Instead, IBM continued to reiterate its general commitment to
`investing in DeepQA to Nuance’s benefit, including in a last-
`minute meeting between Nuance and IBM executives before the
`agreement was signed. Ricci Decl. 5–6; Trial Tr. 454, 493–94.
`
`
`
`11
`
`
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`2.
`
`The Writing
`
`12. On September 30, 2010, the parties signed the SLA,
`giving Nuance a perpetual license to the DeepQA technology and
`ten years of updates. JX001. The SLA is valid and binding, and
`it is governed by New York law. JX001.19; Joint Pretrial Order
`4, ECF No. 155. It provides for a $25 million liability cap,
`regardless of the theory of liability, and precludes liability
`for any consequential damages. JX001.15–16. The agreement also
`includes an integration clause, providing that “[n]either party
`relies on any promises, inducements or representations made by
`the other, or expectations of more business dealings, except as
`expressly provided in this Agreement.” JX001.18. And it provides
`for a two-year statute of limitations: “Neither party may bring
`an action arising out of this Agreement, regardless of form,
`more than two years after the cause of action has accrued and
`the party obtained knowledge thereof.” JX001.18.
`
`13. The SLA is an agreement between Nuance and IBM,
`“through its IBM Research Group.” JX001.1. It provides that “all
`references to ‘IBM’ mean IBM Corporation, unless otherwise
`expressly limited to a division or group of IBM Corporation
`herein.” JX001.19. Under the SLA, “IBM hereby grants to Nuance
`and its Subsidiaries a . . . license to . . . the Licensed IBM
`Background Software.” JX001.2.
`
`
`
`12
`
`
`
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`14. The SLA includes an updates provision by defining the
`licensed code to include updates for ten years. JX001.253–54.
`Specifically, it provides as follows:
`
`“Licensed IBM Background Software” means (a) all
`Software that exists as of the Effective Date in all
`available formats (including Source Code and Object
`Code) that is owned by, or that has been developed or
`licensed by the IBM Research Group, including Tools, and
`that is listed on Exhibit A, including any
`modifications, updates, upgrades, error corrections, bug
`fixes, diagnostic and/or testing tools, that are JDBC
`compliant,
`and
`other
`changes,
`if
`available
`(“Modifications”), and if such Modifications are not
`contractually prohibited under a Third Party agreement,
`and such, Modifications are available, will be timely
`provided to Nuance; and where the Modifications continue
`to meet the scope contemplated in Article 2.1 regarding
`the licensing of Deep QA under this Agreement , as of
`the Effective Date and thereafter for a period of ten
`(10) years, and additional Software as agreed by the
`parties, provided to Nuance by IBM under the Agreement
`(collectively “Updates”); and (b) all Software Materials
`for such Software.
`
`JX001.253–54. The SLA also says that “[i]f IBM provides [] any
`modifications, updates, upgrades, error corrections, bug fixes,
`diagnostic and/or testing tools and other changes to the
`Licensed IBM Background Software, IBM will update Exhibit B to
`include any additions or subtractions to the Open Source
`Software or the Third Party Code.” JX001.3.
`D.
`Performance
`
`15. A few months after the agreement was signed, DeepQA
`won Jeopardy!, and IBM determined that it had potential
`
`
`
`13
`
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`commercial applications that IBM wanted to pursue. Kelly Decl.
`4–5; Trial Tr. 258–59.
`
`1.
`
`IBM Creates Updates
`
`16. Without informing Nuance, IBM “forked” the DeepQA code
`in 2011, which until then was held exclusively by IBM Research,
`giving IBM Software a copy of the code for it to begin
`commercialization efforts. Brown Decl. 9; McQueeney Decl. 3;
`Trial Tr. 270, 554, 671, 692–93, 697, 700; July 28 Trial Tr. 9,
`99. This essentially created two separate versions of the code:
`the IBM Research version and the IBM Software version. Trial Tr.
`693; Boloker Dep. 73–74, ECF No. 119-18. IBM invested
`significant resources into developing updates for the IBM
`Software version, including rewriting a significant amount of
`the DeepQA code. High Decl. 3–4, ECF No. 216-6; Trial Tr. 259;
`July 28 Trial Tr. 104.
`
`17. The updates developed for the IBM Software version of
`the DeepQA code made the code commercially usable and added
`commercial adaptations. High Decl. 3–4; July 28 Trial Tr. 104.
`
`18. First, between August 2011 and June 2012, the code was
`made commercially usable with updates made by IBM Software’s
`Emerging Technologies Group. High Decl. 3; Trial Tr. 696; July
`28 Trial Tr. 99; Boloker Dep. 53–54, 75–76, 83–84, 247. These
`updates involved “blue-washing” the code—i.e., deleting code
`
`
`
`14
`
`
`
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`that is not suitable for commercial use and replacing it with
`code that can be used in a commercial product—and making other
`updates that made the DeepQA code commercially viable. High
`Decl. 3; Schnell Decl. 14–15; Trial Tr. 261–63, 696; July 28
`Trial Tr. 100; Boloker Dep. 54–72, 83; Rhodin Dep. 25–26, 29–30,
`ECF No. 119-17.
`
`19. Then, between June 2012 and late 2015, IBM Software’s
`Watson Division and the Watson Group9 developed updates that made
`the commercially usable DeepQA code applicable to business. High
`Decl. 3–4; July 28 Trial Tr. 104–05; Rhodin Dep. 29–36, 177–78.
`Unlike the commercial suitability updates, these commercial
`applicability updates were not precursors to making DeepQA into
`a product; instead, these latter updates adapted the code for
`commercial applications, which turned DeepQA into a product
`known as Watson Core. High Decl. 4–5; Kelly Decl. 6 n.1; July 28
`Trial Tr. 104–05, 653; Boloker Dep. 57–72, 83; Rhodin Dep. 25–
`26, 29–33, 177–78; Xiang Dep. 103, ECF No. 60-9.
`
`20. Over several years, beginning in August 2014, IBM
`released two sets of Watson-branded10 products developed by IBM
`Software and Watson Group: one set that contains functionality
`
`
`9
`In 2014, the Watson Division of IBM Software was reorganized into the
`Watson Group. July 28 Trial Tr. 95.
`10
`IBM branded several DeepQA-related products as “Watson,” in honor of
`IBM’s founder Thomas J. Watson. See Mike Hale, Actors and Their Roles for
`$300, HAL? HAL!, N.Y. Times (Feb. 8, 2011),
`https://www.nytimes.com/2011/02/09/arts/television/09nova.html.
`15
`
`
`
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`related to DeepQA and another set that shares some code with
`DeepQA. High Decl. 4–7; July 28 Trial Tr. 106, 112; Liao Dep.
`25, 110, 145, 175, 187, ECF No. 33-2. First, IBM Software
`developed products that perform some functions related to
`DeepQA’s functions—e.g., the Retrieve and Rank product indexes
`and ranks documents in response to natural language questions,
`paralleling the search and answer-scoring stages of DeepQA. High
`Decl. 4–5; Schnell Decl. 37–39. Second, IBM Software developed
`products that use code that overlaps with DeepQA code—e.g.,
`Watson for Oncology, which assists doctors in assessing
`treatment options for oncology patients, contains or uses some
`DeepQA code. Eggebraaten Decl. 2–5, ECF No. 216-8; Schnell Decl.
`26–28.
`
`2.
`
`IBM Withholds Updates
`
`21. But IBM did not give Nuance the Emerging Technologies
`Group updates, the Watson Division updates, or any of the Watson
`products. Trial Tr. 347, 426, 697; Boloker Dep. 72, 75. Instead,
`it withheld most DeepQA updates created outside of IBM Research
`from Nuance by not implementing a single common code base and
`thus preventing IBM Research from obtaining IBM Software’s
`updates to DeepQA. Brown Decl. 5–6; Schnell Decl. 14; Trial Tr.
`723–24.
`
`
`
`16
`
`
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`Case 7:16-cv-05173-ECR Document 276 Filed 06/21/21 Page 17 of 65
`
`22. To ensure that Nuance would not receive IBM Software’s
`work on DeepQA, IBM implemented a firewall between IBM Research
`and IBM Software in 2011. Kelly Decl. 8; McQueeney Decl. 4;
`Trial Tr. 270–71, 273–74; July 28 Trial Tr. 74, 76-78; PX079.2.
`The firewall was one-sided, preventing IBM Research from
`obtaining IBM Software’s updates to DeepQA, but allowing IBM
`Software to obtain IBM Research’s updates. Brown Decl. 9–10;
`Trial Tr. 280. The implementation of a firewall was unusual
`because IBM Research ordinarily collaborated with IBM Software
`in the commercialization of IBM Research code, and the firewall
`was, accordingly, also counterproductive. McQueeney Decl. 4;
`Trial Tr. 272, 282, 705–06.
`
`23. Because of the inefficiencies created by the firewall,
`IBM sought to amend the SLA. King Decl. 6; McQueeney Decl. 4.
`IBM told Nuance the amendment was meant to clarify the
`agreement, and it maintains that the amendment reflected what
`had always been IBM’s intent, not a modification to the original
`agreement. Kelly Decl. 8–9; King Decl. 7; July 28 Trial Tr. 89;
`JX017.1. IBM’s proposed amendment explicitly provided that
`Nuance would only be entitled to updates “that are written by
`one or more IBM Research Group employees or acquired under a
`contract entered into by IBM Research Group.” JX017.2. And, in
`addition to a definition of IBM Research, it further provided as
`follows:
`
`
`
`17
`
`
`
`Case 7:16-cv-05173-ECR Document 276 Filed 06/21/21 Page 18 of 65
`
`For avoidance of doubt, Software (including
`modifications, updates, upgrades, error corrections,
`bug fixes, diagnostic and/or testing tools) written by
`IBM employees that are not IBM Research Group
`employees shall not be considered “Licensed IBM
`Background Software” even if such non-IBM Research
`Group employees consult with IBM Research Group
`employees in the course of their work on such
`Software. A “contract entered into by IBM Research
`Group” means a contract with a Third Party signed or
`authorized by IBM Research Group management to obtain
`code on behalf of IBM Research Group.
`
`JX017.2.
`
`24. Nuance rejected the amendment. Ricci Decl. 9; Joint
`Pretrial Order 4. Although IBM insists it did not understand
`Nuance to have rejected the amendment because it believed the
`amendment altered the agreement, Nuance told IBM it rejected the
`amendment because it preferred the contract as originally
`written. July 28 Trial Tr. 67–68, 89; JX019. And while IBM
`maintains that the amendment did not substantively change the
`agreement, it is not common for IBM to request non-substantive
`amendments to contracts. Kelly Decl. 8–9; King Decl. 7; Trial
`Tr. 287.
`
`25. After Nuance rejected the amendment, IBM responded by
`investing few resources into developing updates for the IBM
`Research version of DeepQA, i.e., the version it shared with
`Nuance. Schnell Decl. 11; July 28 Trial Tr. 70–71; Boloker Dep.
`53; JX019. IBM divested from the IBM Research version of the
`
`
`
`18
`
`
`
`Case 7:16-cv-05173-ECR Document 276 Filed 06/21/21 Page 19 of 65
`
`DeepQA code by moving several IBM Research engineers to IBM
`Software—and about 130 to Watson Group when it was formed—to
`work on the IBM Software version of the code. Trial Tr. 729–30;
`July 28 Trial Tr. 14, 95-96. And it further extracted
`intellectual capital from IBM Research by providing DeepQA
`tutorials to IBM Software and embedding IBM Software engineers
`in IBM Research for three months to learn about DeepQA. Brown
`Decl. 9; Trial Tr. 713, 728; July 28 Trial Tr. 134-35.
`
`26. To be sure, IBM did give Nuance some updates developed
`outside of IBM Research—i.e., domain independent updates
`developed by the IBM Research team that had been transferred to
`the IBM Watson Group. Brown Decl. 5–6. Nonetheless, the
`hamstringing of IBM Research’s efforts on DeepQA together with
`the withholding of IBM Software’s updates to DeepQA from Nuance
`resulted in Nuance not receiving the commercially viable “blue-
`washed” DeepQA code. Petro Decl. 5; Ricci Decl. 9; Trial Tr.
`131; July 28 Trial Tr. 70-71, 104.
`
`27. Additionally, IBM also withheld some of the updates
`the pared-down IBM Research created after the divestment. Brown
`Decl. 7–8; Hicks Rebuttal Decl. 42–43, ECF No. 216-10; Schnell
`Decl. 18–20. IBM split the IBM Research version of the DeepQA
`code into two copies in 2012, storing them in separate folders
`to keep the updates that would be provided to Nuance separate
`
`
`
`19
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`
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`Case 7:16-cv-05173-ECR Document 276 Filed 06/21/21 Page 20 of 65
`
`from the updates withheld from Nuance. Brown Decl. 6; Schnell
`Decl. 18–20; Trial Tr. 762–65; PX070.3. It moved updates back
`and forth between these folders based on internal
`reconsiderations of what was an update under the SLA. Brown
`Decl. 8; Schnell Decl. 18–20. And IBM implemented an internal
`review process to ensure only the updates IBM believed counted
`as updates under the SLA were added to the folder that was
`shared with Nuance. Brown Decl. 7–8.
`
`28. Some IBM employees charged with providing updates to
`Nuance did not understand what constituted updates under the
`SLA, and others understood enhancements and fixes to constitute
`the full extent of the SLA’s definition of updates. Brown Decl.
`8; Devarakonda Dep. 76, 85, 105. At least once, the decision to
`provide an update to Nuance was arbitrary, based only on whether
`IBM wanted to give an update to Nuance. PX89. Ultimately, IBM
`did not provide Nuance with some IBM Research updates that were
`related to DeepQA and improved the functionality of DeepQA.
`Brown Decl. 7–8; Schnell Decl. 19–20; Trial Tr. 762–65.
`
`29. Nuance did not develop a commercial product from the
`DeepQA code. Ricci Decl. 9. Although Nuance invested resources
`into commercializing DeepQA by assigning employees and hiring
`consultants to work on the project, Nuance did not create a
`large DeepQA team internally, and some Nuance employees
`
`
`
`20
`
`
`
`Case 7:16-cv-05173-ECR Document 276 Filed 06/21/21 Page 21 of 65
`
`complained about a lack of effort to commercialize the code.
`Ricci Decl. 9; Trial Tr. 86–87, 90, 101; Fanty Dep. 68–69, 121–
`25; McCann Dep. 232–33; Stubley Dep. 75, 102, 189, ECF No. 131-
`17; DX124. Nuance’s investments did not produce a commercial
`product from the DeepQA code. Ricci Decl. 9; Trial Tr. 117, 508.
`
`3.
`
`The Parties’ Communications
`
`30. At the same time as IBM withheld updates from Nuance,
`many communications related to DeepQA took place between the
`parties and internally among the parties’ employees.
`
`31. Beginning in 2011, IBM communicated to Nuance that IBM
`Software was creating updates to DeepQA. McQueeney Decl. 5;
`DX71; DX88. Due to these communications, Nuance was aware that
`IBM Software was creating updates to DeepQA. Trial Tr. 92–93;
`McCann Dep. 189; Fanty Dep. 108; DX87; DX138.
`
`32. IBM also communicated to Nuance during this time that
`Nuance would not be receiving IBM Software’s DeepQA work. Kelly
`Decl. 10; McQueeney Decl. 5, 7; Fanty Dep. 43, 83; McCann Dep.
`166–67; DX103. And Nuance was aware that IBM was not providing
`it with work done by IBM Software. DX84; DX103.4; DX126; DX138.
`Indeed, IBM told Nuance that a firewall had been erected between
`IBM Research and IBM Software to prevent Nuance from obtaining
`IBM Software’s work product. Kelly Decl. 10; Fanty Dep. 41–43,
`
`
`
`21
`
`
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`Case 7:16-cv-05173-ECR Document 276 Filed 06/21/21 Page 22 of 65
`
`83–84, 107–08, 152–53; McCann Dep. 199–200, 214; Rhodin Dep. 73–
`76; DX103.4; DX138.
`
`33. With this knowledge, Nuance sought assurances from IBM
`that it would not breach the agreement, but it only sought non-
`specific assurances and received non-specific assurances. Ricci
`Decl. 10; Trial Tr. 239–40, 299–300; McCann Dep. 184, 235.
`Nuance did not have access to IBM’s DeepQA code to verify
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