J&J Ruling Offers Path for Deferred-Payment M&A Deals Gone Bad

A record ruling against Johnson & Johnson this month removed a major land mine from the deferred-payment M&A deals behind a surge of high-stakes litigation, but it left dealmakers plenty to fight about.

Delaware’s Supreme Court upheld most of a $1 billion judgment, saying the biotech giant tricked Auris Health Inc. into a $3.4 billion acquisition and broke its promise to prioritize approvals for Auris’ flagship product. At the same time, the high court wiped $300 million off J&J’s tab, rejecting claims the company breached the duty of fair dealing by bailing on the “iPlatform” surgical robot system—with $2.35 billion in “earnout” payments on the line—when the regulatory pathway changed.

The unanimous decision left J&J owing $811 million to former Auris shareholders, still considered the largest damages award in a case over the contingent post-deal payments. But it curtailed a favorite liability theory of the founders and startup investors who typically bring those lawsuits.

The court effectively warned that the implied covenant of good faith and fair dealing is “not a panacea for unfairness,” said Widener University law professor Lawrence Hamermesh. “The courts aren’t going to rescue people from contracts that don’t deal with things they could have addressed.”

The ruling is likely to channel earnout disputes away from implied-covenant claims—which essentially ask Delaware’s Chancery Court to rewrite a deal for changed circumstances—toward contract and fraud allegations that invite concrete findings of fact rather than judicial discretion. The related lesson for corporate planners negotiating upstream: Leave nothing to chance.

Though it’s “not really a sea change” to restrict the implied covenant to situations a contract simply doesn’t speak to, “what is critical here is that the court used this case to emphasize how narrow this gap-filling power is,” said Grellas Shah LLP partner David Siegel. The doctrine “functions like a scalpel, not a brush,” as Justice Abigail M. LeGrow wrote in her 89-page opinion Jan. 12.

“The court can only fill in the gap where the development was not only unforeseen, but really unforeseeable,” Siegel said via email.

Recipe for Bad Blood

The J&J case echoed a recurring theme for Delaware’s business courts, which frequently hear lawsuits by founders who say corporate M&A buyers duped them into the earnout structure or wrongly dodged payments pegged to post-transaction milestones. The suits—advancing a buyer’s-remorse narrative, fraud claims, or both—generally say an acquirer aimed to miss targets by sabotaging revenues, sidelining sales teams, or dropping development on a pretext.

Recent earnout-related rulings include a $181 million decision against an AstraZeneca Plc affiliate and a $50 million loss by Arthur J. Gallagher & Co. Similar suits continue to be filed on a regular basis, including cases in 2025 involving a popular video game franchise and a tequila associated with George Clooney.

The delayed-payout provisions—allocating the risk a blockbuster deal will fall short, especially during market uncertainty—are designed to close transactions that center on untested products with moonshot potential. But putting the fate of the payments in the hands of the party responsible for making them often leads to bad blood.

Read More: J&J’s Billion-Dollar Appeal Aims Spotlight at ‘Litigation Trap’

“The whole problem with earnouts is that the buyer is in a position to make or break the product that’s being purchased, and there are a lot of different ways to break it,” Hamermesh said.

The best protection is a clause mandating “commercially reasonable efforts” toward earnout triggers. The efforts provision in the Auris deal itemized factors J&J could include in its calculus about the iPlatform, but the clause also required those efforts to match its “usual practice” for priority devices—a term J&J breached by weighing the cost of the earnouts themselves, the state high court said.

“The fact that they made it so detailed is what let the court rule, factually, that the contract was violated when J&J abandoned the strategy, rewrote incentives, shelved the iPlatform, and prioritized other devices,” said Widener University law professor Geeta Kohli. The specificity of the efforts clause contrasts with the more nebulous implied-covenant arguments Delaware’s justices shot down in other sections of the ruling, according to Kohli.

“Courts, especially in Delaware, don’t like to make assumptions about what a corporation should’ve or could’ve done,” she said.

In the Drafting Trenches

The decision also affirmed $100 million in fraud damages over J&J’s rosy forecasts about a second robot platform, the Monarch, despite a patient death during a clinical trial. Although J&J stated it hadn’t relied on any claims made outside the contract, the court stressed that Auris didn’t offer reciprocal assurances—another key takeaway for M&A drafters, according to Siegel.

“Where a party expressly agrees that it is not relying on any statements outside the four corners of the agreement, that can defeat fraud liability,” but only if the language “is mutual and specific,” he said.

Taken together, the three main parts of the ruling align with broader principles underlying the deep structure of Delaware corporate law, Kohli said. She pointed to the business judgment rule, a foundational doctrine appearing in the fiduciary breach context that counsels court deference to company decisions made in good faith, even when they don’t pan out.

It’s only natural for a creator parting ways with a labor of love to have strong feelings about next steps, according to Kohli. “They might not like how those other people are managing the product,” she said. “It doesn’t mean the new business is doing it wrong.”

But despite the additional guidance for dealmakers, earnout litigation will remain a fact of life in Delaware as long as founders and acquirers take divergent, self-serving approaches to valuation.

“The opportunity for corner-cutting and abuse is high, so it demands really careful contracting,” Hamermesh said. “The response in the drafting and negotiating trenches—that’s where this opinion is going to play forward.”