J&J Loses Bid to Nix Fraud Lawsuit Over $3.4 Billion Auris Deal

Johnson & Johnson must face fraud litigation over its Ethicon unit’s $3.4 billion acquisition of Auris Health Inc., which was developing a surgical robot with blockbuster potential, a Delaware judge ruled.

Vice Chancellor Lori W. Will let the case move forward Monday in Delaware Chancery Court with claims that Ethicon duped Auris investors into making billions in post-deal payments contingent on unachievable regulatory and sales milestones related to the “iPlatform” surgical system.

Will advanced allegations that Ethicon misled the former Auris shareholders about the way it would allocate resources between the iPlatform and another surgical robot in its pipeline, then diverted funding and held a “bakeoff” to determine which should be prioritized.

The lawsuit “alleges that the purported bakeoff and the defendants’ restrictions on Auris’ hiring and expansion needs began immediately upon closing,” she wrote. “A reasonable inference can be drawn that the defendants planned those actions during negotiations.”

The judge did, however, dismiss several executives from the case on jurisdictional grounds, saying the suit’s civil conspiracy claims failed to tie them to Delaware.

The dispute, which began in 2020, stems from the Food and Drug Administration’s decision to change the regulatory pathway for “robotically assisted surgical devices” like the iPlatform.

Because payments totaling up to $1.35 billion were linked to an approval process that was no longer possible, J&J decided to “release” reserves it had been holding to cover them.

The former Auris investors—including its founder, who had previously started Intuitive Surgical Inc., maker of the industry-leading Da Vinci surgical robot—sued.

In addition to fraud, they alleged unjust enrichment, breach of contract, and breaches of the implied covenant of good faith and fair dealing. The suit also sought to rescind or reform the agreement based on the “mutual mistake” about the FDA approval process.

Will trimmed the case slightly Monday but let its core claims proceed. She rejected the argument that the transaction’s “exclusive remedy” provision barred the ex-shareholders from pursuing fraud claims based on promises Ethicon allegedly made during negotiations.

The agreement’s “one-sided anti-reliance provision” stated only that Ethicon wouldn’t rely on any “extracontractual” representations, the judge noted.

She also gave a green light to the unjust enrichment and implied-covenant claims, based on the theory that the parties would have negotiated a different deal structure if they’d realized the FDA was going to change its policy.

“The implied covenant comes into play in precisely this scenario,” Will wrote.

But she tossed a claim for equitable fraud, saying it requires a fiduciary relationship between the parties, and rejected another count seeking to reform the deal. The ex-investors can, however, seek to rescind it altogether, the judge said.

The ruling didn’t address the contract claims, which J&J hasn’t moved to dismiss.

The Auris ex-investors are represented by Ross Aronstam & Moritz LLP, Selendy & Gay PLLC, and Cooley LLP. J&J is represented by Morris, Nichols, Arsht & Tunnell LLP and Cravath, Swaine & Moore LLP.

The case is Fortis Advisors LLC v. Johnson & Johnson, Del. Ch., No. 2020-0881, 12/13/21.