J&J’s Earnout Appeal Turns on Gaps in $3 Billion Robot Deal (1)

Johnson & Johnson’s attempt to undo a record $1 billion ruling Wednesday forced Delaware’s top court to confront the messy fallout of a deferred-payment transaction structure deployed to allocate the risk that a potential blockbuster deal will dead-end.

The pharmaceutical giant is looking to overturn a decision that held it liable for allegedly lackluster efforts to commercialize surgical robots it acquired in its $3.4 billion deal for Auris Health Inc. A Delaware Chancery Court judge last year said J&J “almost immediately” broke its promise to prioritize regulatory approvals for the deal’s flagship product.

The hearing required the state’s justices to grapple in depth with technical aspects of the Food and Drug Administration’s process for medical devices, including an unanticipated change J&J has blamed for its failure to bring the robot to market. Although they probed several technical aspects of the dispute, they largely refrained—as they typically do—from the sort of leading questions that can tip a judge’s hand.

The dispute echoes a recurring theme for the elite business tribunal, which regularly hears claims by corporate founders who say acquirers duped them into the deal structure or sabotaged sales to sidestep contingent post-transaction payments known as “earnouts.” In the J&J case, more than $2 billion hinged on the regulatory process.

Other similar recent rulings include a $181 million decision against an AstraZeneca Plc affiliate and a $50 million loss by Arthur J. Gallagher & Co. New earnout-related lawsuits, meanwhile, continue to be filed on a regular basis, including cases this year involving a popular video game franchise and a tequila associated with George Clooney.

Rewriting the Contract?

Wednesday’s roughly 50-minute hearing—which set the state supreme court up to review the largest-ever trial record produced by its elite business tribunal—homed in on two related but distinct sections of the September 2024 decision by Vice Chancellor Lori W. Will.

E. Joshua Rosenkranz, an attorney for J&J, focused at length on the judge’s conclusion that the company breached its contractual pledge to put “commercially reasonable efforts” toward securing additional approvals when it held a “faceoff” between two surgical platforms, knowing its internal product would win. Similar breaches often form the basis for liability in earnout cases.

Will “invoked equity to line-edit a contract and override an explicit contractual condition” when she ruled J&J breached the deal’s “efforts” clause by deciding not to pursue the Auris robot further, Rosenkranz said. “This case is all about respecting the contract that the parties actually wrote.”

Philippe Z. Selendy, counsel for the Auris ex-shareholders who brought the case, pushed back. The judge looked only at the factors expressly found in the contract to determine that shelving the robot was commercially unreasonable, according to Selendy.

Although the company has framed its argument as an attack on the legal framework Will applied, it’s really trying “to relitigate the facts,” he said. “J&J lost conclusively despite its efforts to create what the court identified as a new narrative concocted after J&J was sued.”

‘Free-Roving Power’

Rosenkranz also targeted sections of Will’s decision that relied on the implied covenant of good faith and fair dealing, a legal doctrine designed to prevent one party from taking advantage of the other by exploiting unforeseen contract loopholes. J&J has said its obligations toward the Auris product became impossible to fulfill when regulators changed the device approval process.

The implied covenant “is not some free-roving power to reform contracts to better align them with the court’s own sense of equities,” Rosenkranz said.

Selendy countered that the regulatory change was unforeseeable to either party, which is why the agreement was silent as to how it should be handled. Under the circumstances, it made sense for Will to fill the contractual gap by ruling J&J should have pursued an alternative process that involved the same time, expense, and odds of approval, according to Selendy.

Letting J&J walk away from the transaction based on a regulatory surprise would give it “an economically unjustified windfall,” he said. “Neither party bargained for or considered any risk allocation in the event of a change in the pathway.”

J&J is represented by Morris, Nichols, Arsht & Tunnell LLP, Orrick Herrington & Sutcliffe LLP, and Patterson Belknap Webb & Tyler LLP. The ex-shareholders are represented by Ross Aronstam & Moritz LLP and Selendy Gay PLLC.

The case is Johnson & Johnson v. Fortis Adv. LLC, Del., No. 490, 2024, argument 10/15/25.