544 F.Supp.3d 353
S.D.N.Y.2021Background
- In 2010 Nuance paid $25 million for a perpetual license to IBM Research’s DeepQA (Watson) technology plus ten years of “updates” under a Software License Agreement (SLA). The parties agreed Nuance would receive domain‑independent code updates but negotiated a separate path for finished products.
- The SLA’s updates provision referenced software “developed or licensed by the IBM Research Group” but was ambiguous about whether updates created elsewhere within IBM (e.g., IBM Software/Watson Group) were covered.
- After Watson’s Jeopardy! win, IBM “forked” the code (copying it into IBM Software), blue‑washed and productized the Software Group version (producing commercially usable code and later Watson products), and erected a firewall preventing Research from receiving Software updates.
- IBM withheld the blue‑washed, commercially enabling updates from Nuance; Nuance never produced a commercial product from the Research code and sued IBM in 2016 for declaratory relief and breach of contract.
- The court found the SLA entitled Nuance to non‑product updates that would make DeepQA commercially usable (e.g., the blue‑washed code), and that IBM breached by withholding those updates; but the court also found Nuance was willfully blind and had actual knowledge of the breach before June 30, 2014, so Nuance’s claims are barred by the SLA’s two‑year contractual limitations period.
Issues
| Issue | Nuance’s Argument | IBM’s Argument | Held |
|---|---|---|---|
| Scope of “Updates” — whether SLA limits updates to code written by IBM Research | Updates language entitles Nuance to all non‑product updates that make DeepQA commercially usable, regardless of which IBM group wrote them | Updates refer only to software owned/ developed by IBM Research Group; other IBM groups’ work (Software products) excluded | SLA ambiguous but court construes parties’ intent: Nuance entitled to non‑product updates that make DeepQA commercially usable (not finished products) |
| Breach — whether IBM breached by withholding blue‑washed/code hygiene updates | IBM withheld commercially enabling (blue‑washed) updates that were non‑product updates within SLA and thus breached | Withheld work was IBM Software productization work (not “updates” under SLA) and thus not required to be delivered | IBM breached by withholding the blue‑washed updates that made DeepQA commercially usable; finished Watson products are not “updates” under SLA |
| Statute of Limitations — whether Nuance’s claims timely under SLA’s 2‑year clause | Nuance sued within two years of actual discovery (claims of actual discovery in 2015/2016); continuing breach or estoppel saved the claims | Nuance had actual knowledge (and was willfully blind) to the substantial possibility of breach before June 30, 2014; SLA’s two‑year clock therefore expired | Nuance was willfully blind and had actual knowledge before June 30, 2014; contractual two‑year limitations bar Nuance’s claims |
| Equitable doctrines — continuing breach / equitable estoppel as defenses to limitations | Continuing breach restarts limitations; IBM’s assurances estop limitations | Withholding of blue‑washed code was a single complete breach in 2012 and Nuance’s prior knowledge precludes estoppel | Continuing‑breach and estoppel doctrines do not save Nuance; single complete breach + Nuance’s duty to inquire defeat those doctrines |
Key Cases Cited
- Orlander v. Staples, Inc., 802 F.3d 289 (2d Cir. 2015) (elements of breach of contract under New York law)
- PaineWebber Inc. v. Bybyk, 81 F.3d 1193 (2d Cir. 1996) (contract interpretation principles; intent governs)
- U.S. Bank Nat’l Ass’n v. UBS Real Est. Secs. Inc., 205 F. Supp. 3d 386 (S.D.N.Y. 2016) (application of willful blindness in a contract context)
- Scher L. Firm, LLP v. DB Partners I, LLC, 948 N.Y.S.2d 335 (App. Div. 2012) (willful blindness standard under New York law)
- Viacom Int’l, Inc. v. YouTube, Inc., 676 F.3d 19 (2d Cir. 2012) (discussing deliberate actions to avoid confirming probable wrongdoing)
- Kwan v. Schlein, 441 F. Supp. 2d 491 (S.D.N.Y. 2006) (continuing breach doctrine and when successive breaches restart limitations)