Delaware Supreme Court’s Earnout Decision Reinforces Primacy of Contract and Illustrates the Limits of the Implied Covenant

On January 12, 2026, the Delaware Supreme Court issued an en banc opinion in Johnson & Johnson v. Fortis Advisors LLC, No. 490, 2024, 2026 WL 89452 (Del. Jan. 12, 2026), largely affirming and reversing in part a Court of Chancery post-trial decision that awarded former stockholders of Auris Health, Inc. (“Auris”) over $1 billion in damages in their post-closing earnout dispute against Johnson & Johnson (“J&J”). Apart from the high stakes, the Supreme Court’s unanimous opinion, authored by Justice LeGrow, is notable because it is the first opinion to address the recent slew of earnout disputes in Delaware (which we have previously summarized here). The decision reinforces three key principles of Delaware M&A and contract law. First, absent unusual circumstances, a court will not utilize the implied covenant of good faith and fair dealing to rewrite the parties’ agreement as reflected in the words in the contract. Second, where a party’s obligation is dependent on regulatory approval, courts will hold the parties to the standard they set for themselves in the contract, including where that standard is by reference to the buyer’s past practices with respect to securing regulatory approval for its own products. Third, fraud claims based on extracontractual statements are precluded only by clear “anti-reliance” language in the contract, not by an “exclusive remedy” provision. Together, these principles underscore the importance of careful drafting so that the language of an agreement conforms to the parties’ expectations.

Background

In its quest to expand into the surgical robotics market, J&J, a global healthcare company, pursued a transaction with Auris—a medical robotics company known for its two flagship robotic-assisted surgical devices (“RASDs”), Monarch and iPlatform, which had yet to receive certain FDA approvals. In February 2019, the parties entered into a merger agreement whereby J&J would acquire Auris for $3.4 billion in cash. Because much of Auris’s value derived from future regulatory approval and commercial performance of its RASDs, J&J agreed to also pay Auris’s stockholders up to $2.35 billion in cash based on ten incremental milestones set forth in the Merger Agreement to be achieved at certain post-closing intervals between 2020–2024.

The Merger Agreement included a provision requiring J&J to use “commercially reasonable efforts” to achieve the milestones consistent with its normal practice for its own “priority medical device products” (the “Efforts Provision”). The Merger Agreement also included a one-way anti-reliance provision whereby J&J, but not Auris, expressly disclaimed reliance on statements made outside of the agreement. It also provided that the agreement’s indemnification provisions were the exclusive remedy for claims made after closing related to the acquisition, except “in the case of fraud by [the parties] with respect to making the representations and warranties in [the Merger] Agreement” (the “Exclusive Remedy Provision”).

Following closing, J&J’s handling of iPlatform allegedly diverged from what the Merger Agreement contemplated. Within weeks, J&J launched an initiative referred to as “Project Manhattan” whereby J&J supposedly pitted iPlatform against its comparable product, Verb, in a “winner-take-all showdown” in which the “loser would likely ‘cease to exist.’” Despite winning the duel, iPlatform was then combined into a single project with Verb, which, among other things, relegated iPlatform to the role of a “parts shop for Verb.” In addition, according to plaintiffs, J&J shifted away from the agreed-upon “MVP” strategy, which set out to achieve the first milestone by obtaining regulatory approval for simple surgical procedures and incrementally progress to more complex procedures to achieve later milestones. Instead, J&J pursued a new strategy to immediately develop “a full-featured, commercially attractive system that was better able to compete head-to-head” with market-leading systems. Doing so allegedly made achieving regulatory approval, and thus the related milestones, more difficult. Around the same time, the FDA changed its regulatory pathway for iPlatform, switching from the 510(k) pathway to a pathway requiring “De Novo” review.1 Since the Merger Agreement specifically pegged J&J’s first milestone for iPlatform to 510(k) approval, J&J treated the FDA’s regulatory shift as excusing its obligations to achieve all the subsequent iPlatform milestones on the notion that each were dependent on J&J achieving the first milestone—which, given the regulatory shift, “could not be satisfied as written.” Following this regulatory shift, J&J revised the employee incentive program and eliminated awards for achieving certain regulatory milestones defined in the Merger Agreement. Ultimately, J&J concluded that “iPlatform would not be viable in a commercially reasonable timeframe,” and according to the Supreme Court, “effectively shelved the iPlatform program.” Monarch, for its part, remained on the market but did not meet its milestones by the contractual deadlines. With no milestones met, none of the $2.35 billion in earnouts was paid.

The Court of Chancery Decision

Fortis Advisors LLC, as a representative for Auris stockholders under the Merger Agreement, sued J&J in the Court of Chancery, claiming, inter alia, that J&J (1) breached the Merger Agreement’s Efforts Provision and the implied covenant of good faith and fair dealing, and (2) fraudulently induced Auris to accept a contingent payment instead of additional upfront consideration for one of the Monarch-related milestones. Despite the post-closing regulatory change requiring a different “De Novo” review of iPlatform by the FDA—which J&J argued excused its obligations to achieve the first milestone and each of the subsequent iPlatform milestones—the Court of Chancery held that J&J breached the Merger Agreement by failing to devote the contractually required level of effort with respect to the iPlatform milestones. It reasoned that the implied covenant of good faith and fair dealing required J&J to pursue the alternate pathway for iPlatform’s first regulatory milestone and to treat that approval as the functional equivalent of the regulatory clearance specified in the contract. As for Monarch, the court also found that J&J, through its CEO, fraudulently induced Auris to accept a $100 million payment contingent on one of the Monarch milestones—which would be achieved following regulatory approval for robotically driven lung tissue ablation using J&J’s NeuWave FLEX catheter—by portraying it as “essentially certain” while omitting a recent patient death during a study involving FLEX and resulting FDA investigation which J&J knew would threaten timely approval. The court entered judgment for Fortis in excess of $1 billion in contract and fraud damages, plus pre-judgment interest.

Takeaways from the Delaware Supreme Court’s Decision

• The Court reinforced that the implied covenant of good faith and fair dealing applies in two limited situations: to fill a gap in light of an unforeseeable event that the parties did not anticipate or to require parties to exercise discretion in good faith. Neither rationale applied here. On appeal, J&J argued that the Court of Chancery misapplied the implied covenant by rewriting the contract to permit iPlatform milestones to be achieved following De Novo approval of the first milestone when the Merger Agreement expressly tied the milestone to 510(k) clearance. The Supreme Court agreed with J&J, explaining that the implied covenant is a “narrow gap-filling tool of last resort” that “applies only where there is a true contractual gap about how to handle an unforeseen event.”  The Court also emphasized that it is not “a license for the court to ‘rewrite the contract to appease a party who later wishes to rewrite a contract [it] now believes to have been a bad deal.’”  Rather, it functions like a “scalpel” when “there is a genuine contractual gap about a truly unanticipated development.”  Because, based on the evidence at trial, the regulatory switch from 510(k) to De Novo was not truly “unanticipated” it “should have been secured ex ante at the bargaining table, rather than ex post in the courtroom,” and the first milestone was not met. This holding highlights the importance of parties to a merger agreement or other contract anticipating potential contingencies, even if deemed unlikely to occur (e.g., changes in regulatory pathways or market conditions) and explicitly address them in the contract—for example, by defining a milestone to include alternative or successor pathways. Parties should not expect Delaware courts to rewrite their agreements because they later see a result as inconsistent with the spirit of the agreement.

• Regulatory changes do not necessarily excuse performance of efforts clauses obligating a merger agreement party to attempt to achieve earn-out milestones. Despite holding that J&J was not required to meet the first iPlatform regulatory milestone due to the regulatory shift to De Novo review, the Supreme Court agreed with the Court of Chancery that such an outcome did not discharge J&J’s obligations to meet the subsequent iPlatform milestones. “Those milestones continue—by their plain terms—to require 510(k) notifications. The Court of Chancery found, and J&J does not challenge, that once iPlatform obtained De Novo approval for a first-generation indication, it could serve as its own predicate device and proceed through the 510(k) pathway for additional indications.”  The Court rejected J&J’s argument that the De Novo requirement for iPlatform’s first milestone should relieve its obligations as to the remaining milestones because “De Novo review is so much more onerous.”  Rather, there was no clear error in the Court of Chancery’s finding that the shift from 510(k) to De Novo had an “immaterial effect on the time and cost for iPlatform to gain FDA clearance” because the FDA “already required extensive clinical data for iPlatform under 510(k), meaning that [its first milestone] would not require the additional testing, verification, or pre-clinical work that typically makes De Novo review more onerous.”  Based on this holding, the vast majority of the damages awarded by the Court of Chancery will stand, despite the partial reversal. This result demonstrates the risks that an acquiror runs if it ceases to pursue milestones based on early setbacks.

• Delaware courts will hold an acquirer to its contractually mandated level of effort to secure regulatory approval, particularly where the parties themselves provide a roadmap as to what those efforts need to entail. The Supreme Court upheld the Court of Chancery’s finding that J&J breached the Efforts Provision as to the remaining iPlatform regulatory milestones and that this failure “caused J&J to miss the remaining iPlatform regulatory milestones.”Because “commercially reasonable efforts” was defined as “the expenditure of efforts and resources . . . consistent with the usual practice of [J&J] with respect to priority medical device products of similar commercial potential at a similar stage,” J&J was bound to an “inward-facing” standard tied to its treatment of “priority medical device products,” with Velys—J&J’s surgical orthopedics robot—as the sole comparator (even though “priority medical device product” was undefined in the Merger Agreement). J&J’s strategic decisions were assessed against this benchmark, with the Court of Chancery finding that actions like Project Manhattan, the Verb integration, the shift away from the MVP strategy, and the revised employee incentive program eliminating awards for achieving certain regulatory milestones breached the Merger Agreement because they were inconsistent with how J&J treated Velys. J&J did not appeal these factual findings, nor did the Supreme Court find “clear error” with respect to these findings. While the Merger Agreement also contained a list of ten factors that J&J could “take into account” in setting its level of efforts for a priority medical device, the discretion afforded J&J had to be exercised within its obligation to follow its usual practice for a priority medical device. The Supreme Court rejected J&J’s argument that such a conclusion “effectively excised the ten factors.”  In so holding, the Court concluded that J&J’s interpretation would have allowed “the ten factors to swallow the ‘priority medical device’ requirement and to justify deprioritizing the milestones whenever J&J believed profitability, competitive positioning, or other business concerns . . . pointed in a different direction.”The J&J decision underscores how courts will rigorously enforce tailored “efforts” clauses, even if it constrains a buyer’s post-closing business judgment. It also instructs that where parties provide precedent against which to assess whether a buyer has satisfied its regulatory approval related efforts obligations, deviations from precedent conduct will not be countenanced lightly. If the parties agree to accept such deviations, such an agreement should be set forth clearly as part of the efforts obligation itself, and not as a subsidiary right to exercise discretion consistent with precedent conduct.
• The Supreme Court made clear that disclaiming reliance on extra-contractual statements must be made “in unmistakable terms.”  On appeal, J&J challenged the lower court’s fraud ruling, arguing that the elements of fraud were not met and that the Exclusive Remedy Provision bars the claim because it is not an indemnification claim nor does it fall within the fraud exception for representations made within the Merger Agreement. The Supreme Court rejected J&J’s argument, explaining that waiving a fraud claim requires a clear disclaimer of reliance on any extra-contractual representations (which in the Merger Agreement was only one-sided against J&J) and that a separate exclusive remedy clause “cannot be invoked to bar [Fortis’s] post-closing claims for intentional extra-contractual fraud.”  In so doing, the Supreme Court affirmed that Abry Partners V, L.P. v. F & W Acq. LLC, 891 A.2d 1032, 1059 (Del. Ch. 2006) remains the “lodestar” for balancing Delaware’s competing policies of freedom of contract and intolerance of fraud. Under Abry,only a “clear anti-reliance clause” in which a party unambiguously “contractually promised that it did not rely upon statements outside the contract’s four corners in deciding to sign the contract” can bar a claim for extra-contractual fraud. This holding underscores that contracting parties must carefully craft these provisions to ensure their intended effect under Delaware’s strict construction, and that an exclusive remedy exception for intra-contractual fraud will not suffice to waive claims for extra-contractual fraud.
• Delaware sticks to the plain language of the contract in the face of competing policy rationales. Despite the difficult extra-contractual gap-filling notions of “good faith” and “fair dealing”; the interpretive questions posed by “commercially reasonable efforts” clauses; or the competing policy considerations concerning anti-reliance provisions, the Supreme Court in J&J remained committed to Delaware’s contractarian policy. In each instance, the Court honored terms of the contract to carry out the parties’ intent. Accordingly, when carefully drafted to precisely spell out the party’s rights and obligations, these provisions continue to be powerful tools that Delaware courts will enforce subject to their plain terms.

1 In the 510(k) pathway, a manufacturer seeks clearance by showing that a new device is substantially equivalent to a legally marketed predicate device; this route has historically been the fastest and least burdensome path to approval. The De Novo pathway, by contrast, is intended for novel devices that lack an appropriate predicate; this pathway typically requires more extensive data and a longer review. (go back)