Sign Up for PublicationsDelaware Supreme Court Applies Plain Language of Merger Agreement to Reverse $300 Million Damages Award
Delaware is a frequent venue for mergers-and-acquisitions related litigation and has a “contractarian” reputation, meaning Delaware courts hold parties to the language of their agreements. This reputation was further cemented this January by the Delaware Supreme Court’s decision in Johnson & Johnson v. Fortis Advisors LLC, 2026 WL 89452 (Del. Jan. 12, 2026), which relied on the plain language of a merger agreement to reverse a lower court’s award of $300 million in damages.
Background
Johnson & Johnson v. Fortis Advisors LLC arose out of an earnout dispute after Johnson & Johnson (“J&J”), a global healthcare company, acquired Auris, a startup medical robotics company. J&J’s acquisition was prompted by the rise of robotic surgery, which posed an “existential threat” to J&J’s surgical instrument business. Id. at *2. To compete in the robotic surgery market, J&J acquired Auris, which had developed a versatile operating-room surgical robot called iPlatform. Id. at *2-3, 5. The resulting merger agreement included $3.4 billion in upfront cash plus up to $2.35 billion in earnout payments tied to post-closing milestones, many of which were triggered by regulatory approvals for Auris’s robotic platforms. Id. at *5.
The first and most valuable milestone (“Milestone 1”) promised $400 million if iPlatform obtained “510(k)” clearance for specified surgical procedures by the end of 2021. Id. at *6. The 510(k) clearance pathway is an FDA regulatory mechanism under which a manufacturer seeks clearance by demonstrating substantial equivalence to a legally marketed predicate device. Id. at *3-4. It is historically the fastest and least burdensome path to market and significantly less burdensome than De Novo classification, the other principal pathway to market. Id. To protect the earnouts, the Merger Agreement required J&J to use “commercially reasonable efforts” consistent with its usual practice for “priority medical device products,” and expressly prohibited J&J from taking any action with the intent to avoid earnout payments. Id. at *7.
After closing, J&J’s treatment of iPlatform quickly diverged from its contractual obligations. Rather than elevating iPlatform as a priority device, J&J pitted it against J&J’s own robotic surgery device program in an internal competition, merging the two programs in what the Court of Chancery called a “calamity of excess and redundancy.” Id. at *7-9. J&J also abandoned Auris’s milestone-oriented regulatory strategy, and restructured its employee incentive program so that it no longer rewarded achievement of the contractual milestones. Id. at *9-10. A further complication arose in August 2019, when the FDA informed J&J that first-generation robotic surgery devices like iPlatform would no longer be eligible for the 510(k) pathway and would instead require more burdensome De Novo clearance. Id. at *10. J&J used this shift to write down the value of all milestones to zero and it paid none of the $2.35 billion in earnouts. Id.
Auris’s former stockholders sued, and the Delaware Court of Chancery found that J&J had breached its commercially reasonable efforts obligations and acted intentionally to avoid the earnouts. Id. at *12. As to Milestone 1 specifically, the court held that because the Merger Agreement was silent on what would happen if the 510(k) pathway became unavailable, the implied covenant required J&J to pursue De Novo clearance as the functional equivalent of the 510(k) clearance specified in the contract. Id. at *12-13. Because J&J did not do so, the court used a probability-weighted approach to award $300 million for J&J’s failure to pay the portion of the earnout related to Milestone 1. Id. at *13.
The Delaware Supreme Court’s Reversal
On appeal, the Delaware Supreme Court reversed the Milestone 1 damages award, holding the Court of Chancery had erred as a matter of law in invoking the implied covenant. The court reaffirmed that the implied covenant functions as a limited “gap-filler” that applies only where there is genuine contractual silence about a truly unanticipated development, id. at *14, and it may not be used as an “equitable remedy for rebalancing economic interests after events that could have been anticipated, but were not,” id. at *21.
Applying these principles, the court concluded the Merger Agreement contained no genuine gap to fill. Id. at *18. It reasoned that the Merger Agreement did not speak in general terms about “regulatory approval”—instead, it conditioned each regulatory earnout, repeatedly and expressly, on achieving 510(k) clearance. Id. The parties had also anchored their milestones to this specific pathway exclusively, providing for neither alternative regulatory pathways nor adjustment if the FDA closed the 510(k) route. Id. at *19. Additionally, the court noted the FDA’s shift was not unforeseeable, pointing out that both J&J and Auris were sophisticated actors in a heavily regulated field, and that the FDA had specifically flagged before signing that the 510(k) pathway “might be unavailable” for iPlatform given its novelty and publicly announced in late 2018 that it was modernizing the 510(k) program. Id. at *19-20. As the court put it, a sophisticated acquiror and serial device innovator could “reasonably foresee that a first-generation RASD with new features may be steered away from 510(k), even if 510(k) remained the likeliest route at signing.” Id. at *19. Accordingly, the court held the implied covenant did not require J&J to pursue De Novo clearance in lieu of the 510(k) pathway specified in the Merger Agreement and reversed the $300 million damages award relating to Milestone 1. Id.
Key Takeaway
For parties negotiating earnout provisions tied to regulatory milestones, Johnson & Johnson v. Fortis Advisors is a sharp reminder that Delaware courts will hold sophisticated parties to the precise language they negotiated and will not use the implied covenant to supply protections that could have been—but were not—included in the agreement.