March 1997, Volume 14, No. 3
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March 1997, Volume 14, No. 3
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A breach of contract suit has been filed against computer giant IBM (Armonk, N.Y.; http://www.ibm.com) by Knowledge Based Technologies (KBT) (Long Valley, N.J.), alleging that IBM violated KBT's patent and copyrights, and failed to honor a royalty agreement. Filed in the Federal Court's Southern District of New York, the suit alleges that IBM breached a June 1993 Technology Transfer Agreement between the two companies. KBT has basically functioned as a shell company since that 1993 agreement.
KBT specializes in the applications of fuzzy logic to detect fraud. The complaint surrounds the alleged misappropriation of TELUS, KBT's fuzzy logic expert system used to develop IBM's own Fraud and Abuse Management System (FAMS). FAMS is a "behavior profiler" which supports the detection, investigation, settlement, and prevention of healthcare fraud and abuse.
Under the 1993 agreement, after an initial cash payment, IBM was to pay royalties to KBT for seven years, on revenues from IBM-marketed applications that are based on KBT's TELUS product.
The suit alleges that in September 1995, after 27 months of paying the contracted FAMS royalties, IBM informed KBT that it was no longer using the KBT technology and consequently was stopping royalty payments. The suit alleges that IBM claimed this action was based on IBM's freedom, under the Technology Transfer Agreement, to independently develop (or acquire) new technology and to stop marketing applications based on KBT's TELUS technology. The suit alleges that, rather than "independently" developing or acquiring the new technology, IBM based its new system on KBT's TELUS, in violation of the contract.
The suit seeks to establish KBT's ownership of the TELUS technology, as well as unspecified monetary awards for the unpaid royalties.
According to Martin Goetz, a consultant to KBT since 1990, KBT and IBM counsels and business people spent the ensuing 16 months to try to resolve the dispute amicably, but could not agree on the facts regarding how IBM replaced the KBT technology.
Nadine Taylor, a spokesperson for IBM, said, "Since this is
pending litigation, it would not be appropriate for IBM to comment
specifically on the allegations at this time."
KBT's complaint
According to the complaint, KBT in the late 1980s developed
TELUS, a fuzzy logic application development product. In June 1989,
KBT became an IBM Business Partner. Over the next several years, KBT
and IBM worked together to identify appropriate applications for
TELUS. One such application developed by KBT, and eventually
patented, was a behavior profiler.
Using fuzzy logic, this system analyzes the behavior of an entity, such as a physician, in search of a target behavior, such as fraud, based on abnormal patterns found in a physician's billing data. During 1991 and 1992, several insurance companies used the TELUS profiler to conduct pilot projects to detect healthcare fraud, producing very promising results.
In June 1993, KBT and IBM entered into a technology transfer agreement in which IBM acquired KBT's proprietary rights in the TELUS product, as well as the specific use of the TELUS profiler in the forthcoming FAMS product. At the same time, KBT signed a three-year agreement with IBM to assist in the development and marketing of FAMS and the TELUS profiler.
During the period of June 1993 through September 1995, FAMS was installed and operating successfully at major insurance companies, Blue Cross operations, HMOs and government Medicare organizations. In April 1994, the suit alleges, IBM filed for patent protection for the fuzzy logic behavior profiler created by KBT and used in the FAMS application. The suit states that Robert Prezioso, KBT's president, prepared the application, was the sole inventor and assigned the patent to IBM.
Unknown to KBT, the suit alleges, while KBT was maintaining and improving FAMS and the TELUS profiler, a member of IBM's FAMS group was developing a "shadow" FAMS at one of IBM's pilot installations. That is, IBM was performing side-by-side comparisons of the TELUS-based profiler while developing an IBM clone of the TELUS-based profiler, producing almost identical results.
During this same period, the suit alleges that IBM assured KBT stockholders that relations between the two companies were going well, that customers were delighted with FAMS, and that sales were on target. As late as July 1995, KBT investors received a written status report by the senior IBM FAMS manager that IBM was planning to market FAMS internationally and that they had plans to market FAMS to the government and to the retail industry for applications, such as Social Security fraud and cashier fraud.
The suit relates that less than two months later, in September 1995, IBM replaced the TELUS-based profiler with the IBM-developed functionally equivalent system, and informed KBT that they were no longer entitled to royalties because the TELUS software was no longer being used.
In subsequent discussions, IBM contended that it stopped paying royalties because the IBM-developed profiler was independently created by the IBM senior member of the FAMS group and that he never saw the TELUS source code for the TELUS-based FAMS profiler.
KBT alleges that IBM did not independently develop its new profiler, that the senior IBM technician was knowledgeable with the TELUS-based FAMS profiler design, and that the IBM senior technologist in the FAMS group had seen and had complete access to the TELUS source code.
In November 1996, the Patent Office granted a patent for a Fuzzy Logic Entity Behavior Profiler to Robert Prezioso, KBT's president.
Based on this scenario, the complaint charges IBM with breach of contract, copyright and patent infringement, false designation of origin, misrepresentation, and unfair competition.
While the outcome of the lawsuit is very much in doubt at this
time (but never bet against an out-of-court settlement), it is a
significant moment for the fuzzy logic field that the technology is
considered successful enough that it is worth a legal battle.