Efforts and Earnouts: Lessons From the Delaware Supreme Court in Johnson & Johnson v. Fortis

In January 2026, the Delaware Supreme Court issued a significant decision in Johnson & Johnson v. Fortis Advisors LLC, a high‑stakes dispute arising from a $5.75 billion acquisition of medical‑robotics company Auris Health, Inc. The deal included up to $2.35 billion in contingent earnouts tied to U.S. Food and Drug Administration (FDA) regulatory milestones for Auris’ iPlatform and Monarch robotic-assisted surgical devices (RASDs). None of the milestones were achieved following a change in the FDA’s required clearance pathway for certain RASDs, and the former stockholders of Auris (through plaintiff Fortis Advisors) sued Johnson & Johnson (J&J) for breach of contract, breach of the implied covenant of good faith and fair dealing, and fraud.

After a 10-day trial and post‑trial judgment from the Delaware Court of Chancery exceeding $1 billion, the Delaware Supreme Court (the Court) affirmed most of the Court of Chancery’s findings at trial, including breach of the “commercially reasonable efforts” clause (CRE) in the parties’ merger agreement and fraud in the inducement. The Court reversed only on the implied covenant of good faith and fair dealing claim, holding that because the contract explicitly conditioned earnouts on 510(k) clearance, once FDA required a De Novo pathway instead of 510(k) clearance for iPlatform’s first indication, the implied covenant did not require J&J to pursue the alternative pathway to meet the first regulatory milestone.

The Court remanded for recalculation of the interest award after removing the Milestone 1 payment from the damages calculation.

Key Holdings

Despite reversing the Court of Chancery on only one claim, the Court made a number of key holdings in its decision:

• Breach of Implied Covenant (Reversed)
  The Court held that the earnout provisions repeatedly conditioned payment of regulatory milestones on obtaining 510(k) premarket clearance. Therefore, the risk that FDA might require an alternative regulatory pathway for approval was foreseeable and was allocated in the contract to Auris’ stockholders. The implied covenant did not apply because it is relevant only where, unlike here, there is a contractual “gap” to fill.
  
  The Court’s reversal on the merits of the good faith and fair dealing finding, however, changed the result only with respect to the first regulatory milestone. As to subsequent regulatory milestones, the Court held that J&J remained obligated to use CRE to pursue 510(k) approval, including by seeking De Novo approval for an initial indication where necessary to facilitate 510(k) clearance for subsequent indications.
• Breach of Commercially Reasonable Efforts (Affirmed)
  The Court upheld detailed factual findings supporting the trial court’s holding that J&J breached its inward‑facing CRE obligation for the remaining iPlatform regulatory milestones, which required J&J to devote efforts commensurate with its own “priority medical devices” (MVP). Although J&J had discretion in how to meet its obligation to exercise CRE, the trial court held that J&J’s discretion was not “free floating.” For example, the Court affirmed that J&J was not “permitted to prioritize commercialization, product differentiation, or short-term profitability at the expense of achieving the milestones.” According to the Court, J&J’s conduct in launching “Project Manhattan,” an internal competition between iPlatform and J&J’s pre-existing RASD “Verb” device, merging the Auris and Verb teams in a way that hindered development of iPlatform, abandoning Auris’ MVP regulatory strategy, and altering prior incentives for employees based on achieving regulatory milestones (among other things) collectively constituted a breach of J&J’s affirmative obligation to exercise CRE to achieve each regulatory milestone.
• Fraud in the Inducement (Affirmed)
  Although the trial court determined that certain of J&J’s alleged misstatements were “the sort of fluffy platitudes made during negotiations that no rational prospective investor would find material,” it also held that one of Fortis’ fraud theories was “markedly different than the others.” Specifically, the Court affirmed the finding that J&J fraudulently induced Auris to accept a $100 million “Soft Tissue Ablation Milestone” by stating that there was such a “high certainty” of achieving the milestone that J&J viewed it as an “‘effective’ up front payment.”
  
  The Court determined that this statement actively concealed certain facts, including J&J’s knowledge of (1) a patient death in a study of a separate device, (2) an FDA for‑cause investigation, and (3) expected delays as a result.The Court rejected J&J’s argument that the agreement’s “standard” integration clause barred Fortis’ fraud claim. Because the merger agreement contained an asymmetric anti-reliance provision in which only J&J disclaimed reliance on extra-contractual representations, Auris was not barred from relying on extra‑contractual statements by J&J.

Key Takeaways

There are a number of key takeaways from this decision for pharma, med-tech, device, and other life sciences companies that are parties to agreements with earnouts:

1. Highly fact-intensive and science-based earnout disputes often rise and fall with the trial court’s factual determinations. The Delaware Supreme Court applies a high burden to overturning factual findings and is likely to defer to the trial court.
2. Bespoke CRE factors will be read as part of the agreement as a whole. Although the agreement at issue in Fortis included 10 CRE factors that J&J could consider to “calibrate” its efforts, these negotiated factors were subject to what the Court identified as a priority medical device “baseline” and the parties’ inclusion of a prohibition against J&J taking any action with the intent of avoiding an earnout payment.
3. The implied covenant of good faith and fair dealing cannot be used to impose obligations that were foreseeable when the contract was executed. Delaware courts will not loosely apply the implied covenant to impose unexpressed duties where a foreseeable shift in the regulatory landscape transpires after closing. 
4. Anti-reliance provisions matter. A standard integration clause with a one-way anti-reliance provision by which only the buyer disclaims reliance will not operate to bar a fraud claim by a seller. 

© Arnold & Porter Kaye Scholer LLP 2026 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.