On August 13, 2010, the Court of Chancery issued a 76-page post-trial decision in Vianix Delaware LLC v. Nuance Communications, Inc., C. A. No. 3801-VCP (Del. Ch. Aug. 13, 2010), read opinion here, addressing the amount of royalties owed to Vianix under a 2003 technology licensing agreement (“TLA”). This decision is another excellent example of the breadth of complex business problems addressed by the Court of Chancery. The Court’s opinion, decided under the laws of Connecticut and Virginia, provides a detailed discussion and analysis of the proof needed with respect to the royalties under the TLA. Given the breadth and depth of the factual analysis in this decision, a short post is neither possible nor helpful. As a result, a brief summary of the facts and the Court’s finding is set forth below. Anyone interested in this topic should review the full decision of the Court.

Notably, one of the major obstacles that confronted the Court in its analysis had to do with the TLA being “remarkable for its poor drafting.” According to the Court, “[t]o say the TLA is poorly drafted is an understatement. The Agreement is replete with ambiguous and inconsistent provisions, typos, and disjointed, incomplete paragraphs.”

Under the TLA, Vianix agreed to license its audio compression software to Nuance for use in Nuance’s line of dictation and speech recognition products and Nuance agreed to pay Vianix royalties whenever it licensed a product containing that software. Vianix eventually became concerned because Nuance was consistently late with its payment of royalties. In addition, there were discrepancies between the sales growth Nuance announced in press releases and the royalties it was paying under the TLA. Vianix hired an auditor to conduct a royalty audit. As a result of the audit, Vianix sent an invoice to Nuance for $12.6 million for outstanding royalties. Nuance refused to pay the invoice or any substantial portion of it so Vianix filed suit.

At trial, the majority of the disputes concerned the interpretation of the TLA and whether certain products Nuance licensed were subject to a royalty-payment. One of the problems with the case was that Nuance did not track certain types of data that Vianix claimed were required to calculate royalties. In the end, the Court found that Nuance owed Vianix royalties for certain products and that “the amount of that royalty varies with the number of authorized End Users licensed by Nuance in each calendar year, but Nuance did not keep track of that data because it counted licenses, not End Users, and some of those licenses were concurrent licenses; therefore, a 5x multiplier must be applied to the number of concurrent user licenses Nuance sold to approximate the true number of End Users licensed.” While the Court determined that interest should be applied to all amounts Nuance owed Vianix at a rate of 1.5 percent per month compounded quarterly, it did not determine a fixed dollar amount of damages because of the missing proof. The Court did order Vianix to “populate the Damages Spreadsheet created by its expert Ellis in accordance with the rulings made in this Opinion.”

This summary was provided by Kevin F. Brady of Connolly Bove Lodge & Hutz LLP.