An AI imaging firm says Johnson & Johnson stole its tech. Testimony began Monday.

• Johnson & Johnson executives are scheduled to take the stand in a trial that started Monday.
• ChemImage, a small biotech firm, sued the healthcare giant over a 2019 partnership that went south.
• Johnson & Johnson had signed a multibillion-dollar contract with the Pittsburgh-based company.

In 2019, Johnson & Johnson, hoping to compete in the growing surgical robotics field, signed a multibillion-dollar contract with a small biotech company called ChemImage.

Based in Pittsburgh, ChemImage was pioneering AI-powered software that a surgeon could use to "see" and interpret what a robotic scalpel is doing. The images would help the surgeon form real-time assessments of damaged or cancerous tissue.

On Monday, these former partners — the small biotech company and the global healthcare giant — began facing off in federal court in Manhattan at a trial over a $1.5 billion breach of contract lawsuit ChemImage filed last spring.

US District Judge Jesse Furman, who is presiding over the weeklong bench trial, has trimmed the allowable damages. If ChemImage prevails, it could still win some $180 million in contract-termination penalties and other overdue payments.

ChemImage has also asked the judge to restore all patents and intellectual property it developed under its contract with Johnson & Johnson. This would let the plaintiffs resume developing and monetizing their imaging software.

"This is a case about J&J's decision to retreat from its failed play in surgical robotics, breaking the promises it made to ChemImage to develop its life-saving imaging technology," the lawsuit alleges.

"J&J's decision ultimately killed this family-founded company and its technology that could have vastly improved surgical outcomes for millions of people."

What's undisputed in the case is that two days after Christmas in 2019, ChemImage and the J&J subsidiary Ethicon entered into a 104-page "Research, Development, License, and Commercialization Agreement."

The contract set a payment schedule — ChemImage received $7 million up front — and established milestones for future payments and as much as $1.5 billion in eventual royalties.

Also undisputed is that in April 2023 — with the effort to meld ChemImage's software and J&J's robotics mired in delay and no commercially viable product in sight — the contract blew up.

The judge is tasked with determining whether J&J pulled the contract for good reason — "with cause." If so, ChemImage would be entitled to no damages at all.

Alternately, if J&J pulled the contract for no valid reason — without cause — the healthcare company would have been required to give ChemImage a 120-day notice and a $40 million termination payment, neither of which happened.

ChemImage also alleges that an additional $140 million in incremental development "milestone" payments are due.

Much of the trial testimony will involve opposing accounts of why the partnership went south after three years.

J&J will present witnesses to show that the contract was terminated for cause, and so ChemImage does not deserve damages. In court papers, they allege that ChemImage failed to meet more than one developmental milestone after more than two years of work, and caused significant cost overruns.

"Plaintiff was harmed as a result of its own conduct," J&J's lawyers wrote in January.

ChemImage puts its founder on the stand

On Monday morning, ChemImage called the trial's first witness, Patrick Treado, who founded the imaging company in 1994. He testified that the imaging company was blindsided when reps of J&J subsidiary Ethicon announced two years ago that they were terminating the contract because development milestones had not been met.

"At no time were there concerns about the study designs that were not addressed," he said.

Ethicon had participated as partners every time its hardware was paired with ChemImage's AI-powered software in research surgeries on animals, Treado told the judge.

The surgeries were conducted in labs run by both ChemImage and J&J "at great expense," Treado said during cross-examination, referring to what he described as the high cost of treating the test animals ethically by conducting "non-survival surgeries."

"In my remarks, I indicated my opinion that there was no breach of the contract," he told the judge of a contentious April 7, 2023 meeting, during which J&J execs accused ChemImage of obscuring its failures through poor quality data.

ChemImage has said in court papers that development delays were caused by issues with J&J's own technology, employee turnover, and lack of engagement.

Nine current and former J&J executives are on the parties' witness lists, including Hani Abouhalka, the surgery chairman for the MedTech division, and Rocco De Bernardis, the global president of robotic and digital surgery. Peter Shen, the MedTech division's former global head of research, is also on the list.

ChemImage is also expected to call many of its own former executives, including its former CEO, Dr. Jeffrey Cohen, who, according to court documents, will be questioned about the imaging company's frequent requests to J&J for more funding and cash advances.

Cohen will testify that J&J "knowingly and maliciously" caused Ethicon to breach the contract, ChemImage's lawyers wrote in January.