In Johnson & Johnson v. Fortis Advisors LLC, the Delaware Supreme Court, in pertinent part, affirmed the Court of Chancery’s finding of extracontractual fraud in the earnout context against the buyer (J&J). The underlying merger agreement contained a one-way anti-reliance provision enforceable against J&J and no reciprocal anti-reliance provision from the seller (Auris). The Court of Chancery held, and the Delaware Supreme Court affirmed, that the one-way anti-reliance provision, taken with the rest of the agreement, did not bar the seller representative’s extracontractual fraud claims against J&J with respect to the earnout, and that J&J fraudulently induced Auris through pre-closing extracontractual statements to agree to earnout consideration. This opinion has ramifications for both buyers and sellers in any earnout deals.
A more fulsome summary of the Johnson & Johnson decision (including some key takeaways) is below, and the opinion is linked here. The opinion also includes some important holdings on the implied covenant and commercially reasonable efforts obligations in Delaware.
Overview
On January 12, 2026, the Delaware Supreme Court, sitting en banc, issued its decision in Johnson & Johnson v. Fortis Advisors LLC (352 A.3d 229 (Del. 2026)), a landmark post-closing earnout dispute arising from J&J’s $3.4 billion acquisition of Auris Health, Inc. (Auris), a medical robotics company. The court affirmed in part, reversed in part, and remanded the Court of Chancery’s judgment, which had originally awarded Fortis Advisors LLC (Fortis)—representative of Auris’ former stockholders—over $1 billion in contract and fraud damages.
Background
Under the Merger Agreement, Auris’ former stockholders were entitled to up to $2.35 billion in contingent earnout payments tied to ten milestones, primarily Food and Drug Administration (FDA) 510(k) clearances—the fastest and least burdensome pathway for low-to-moderate-risk medical devices—for Auris’ robotic surgical devices, iPlatform and Monarch. J&J agreed to a “commercially reasonable efforts” clause benchmarked against its treatment of “priority medical device products.”
Pre-closing, when J&J’s CEO pitched a $100 million earnout milestone tied to the Monarch platform to Auris, he characterized it as “high[ly] certain” and an “effective up front” payment. In reality, a participant in J&J’s 10-patient clinical study had recently died, prompting the FDA to open a for-cause inspection and jeopardizing the milestone, and J&J’s deal team had been briefed on the situation 10 days before the CEO’s pitch. J&J did not disclose the death or the investigation to Auris until after the closing. Post-closing, among other issues, J&J launched an internal competition between iPlatform (an Auris platform) and its own Verb platform, then merged the two—sidelining Auris leadership, causing engineer attrition, and abandoning the original regulatory strategy. J&J ultimately wrote down all milestones to zero; none of the $2.35 billion in earnouts was ever paid.
Key Holdings
Implied Covenant of Good Faith and Fair Dealing (Reversed)
The Delaware Supreme Court reversed the Court of Chancery’s holding that the implied covenant required J&J to pursue de novo FDA review—a more rigorous pathway for novel medical devices lacking an appropriate predicate—to achieve earnout milestones after the FDA closed the 510(k) pathway. The court found no contractual gap for the covenant to fill because, according to the court, the Merger Agreement expressly conditioned every regulatory earnout on “510(k) premarket notification” alone without referencing de novo or any alternative pathway. Moreover, the agreement’s definition of “commercially reasonable efforts” expressly permitted J&J to calibrate its efforts in light of “guidance or developments from the FDA” and the “likelihood and difficulty of obtaining FDA or other regulatory approval given the nature of the product and the regulatory structure involved,” while a separate provision warned that the milestones were “subject to a variety of factors and uncertainties, including many outside of [J&J’s] control, and as a result, some or all of the Earnout Payments may never be paid.” Taken together, the court held that the risk that the FDA would require de novo review was “both foreseeable and addressed in the parties’ carefully negotiated agreement.” Id. at *1. Reaffirming established implied covenant principles, the court stressed that the doctrine is a narrow gap-filler reserved for truly unanticipated developments and “cannot be used to retrofit an earnout to match the disappointed seller’s expectations after-the-fact[.]” Id. at *18 n.142.
Commercially Reasonable Efforts Obligations (Affirmed)
The court affirmed the finding that J&J breached its “commercially reasonable efforts” obligation as to the remaining iPlatform milestones. The “priority medical device” language in the agreement established a baseline requiring J&J to treat Auris’ robotics with the same caliber of effort it devoted to its own priority devices. The court credited unchallenged findings that J&J’s post-closing actions fell below the efforts J&J devoted to its comparable priority device. The court also held that J&J’s factoring of contingent-payment savings into its strategic decision-making was “exactly the kind of earnout-avoiding decision making that the parties agreed to prohibit” under the earnout’s anti-avoidance clause.
Fraud (Affirmed)
The court affirmed the finding that J&J’s CEO fraudulently induced Auris to accept the $100 million Monarch milestone as contingent consideration by characterizing it as “high[ly] certain” and an “effective up front” payment without disclosing a recent patient death and resulting FDA investigation. The court upheld both false representation and scienter under clear error review, noting that J&J’s deal team was actively running a sensitivity analysis on the milestone’s valuation at the time of the misrepresentation. As discussed further below, the fraud claim survived J&J’s exclusive remedy defense because the Merger Agreement’s anti-reliance clause was one-sided—J&J disclaimed reliance on Auris’ extra-contractual statements, but Auris never made a comparable disclaimer as to J&J’s. Id. at *31–2 (“Each of Parent and Merger Sub disclaims any representations and warranties other than those that are expressly set forth in Article III.”).
Exclusive Remedy Provision and Anti-Reliance (Affirmed)
The court held that the Merger Agreement’s exclusive remedy clause could not bar Fortis’s extra-contractual fraud claim. Applying the framework established in Abry Partners V, L.P. v. F & W Acquisition LLC—the leading Delaware precedent on contract-based limitations on extra-contractual fraud liability—the court emphasized that Delaware will enforce only “clear anti-reliance clauses” in which the party seeking to rely on extra-contractual statements has “unambiguously” promised that it did not rely upon statements outside the contract’s four corners. Id. at *31–32 (citing Abry Partners, 891 A.2d at 1059). Here, the anti-reliance clause ran only against J&J; Auris never disclaimed reliance, so the exclusive remedy provision could not shield J&J from post-closing fraud claims.
Practical Takeaways
The decision carries significant implications for M&A practitioners:
- Implied Covenant in Earnouts. The court set a high bar for invoking the implied covenant to supplement express earnout triggers. Where an earnout is tied to a specific pathway, a foreseeable change in that pathway will not create an implied obligation to pursue alternatives—practitioners should negotiate express fallback provisions if that is the parties’ intent.
- Anti-Avoidance Provisions. The court gave real teeth to the anti-avoidance clause (prohibiting J&J from taking “any action . . . with the intention of avoiding . . . any Earnout Payment or . . . based on taking into account the cost of making any Earnout Payment(s) made, or actually or potentially to be made, pursuant to this Agreement”). Decision-making that factors in the savings from missed milestones may violate these provisions.
- Anti-Reliance and Fraud Carveouts. Under Abry Partners, a party can only be shielded from liability for extra-contractual fraud if “the [party] who is seeking to rely on extra-contractual statements” has itself unambiguously disclaimed such reliance. Here, J&J (the buyer) disclaimed reliance on Auris’ statements, but Auris (the seller) never disclaimed reliance on J&J’s—so the exclusive remedy clause could not bar Auris’ fraud claim. One-sided anti-reliance provisions like this are not uncommon in M&A agreements, and this case underscores that dealmakers should ensure the disclaimer runs in both directions if both parties intend to foreclose post-closing extracontractual fraud claims.
- Damages. The original trial court awarded over $1 billion (contract and fraud damages plus prejudgment interest); on remand, the judgment was to be recalculated based on the court’s reversal of the Court of Chancery’s decision with respect to the implied covenant.
Please contact the authors if you have any questions about how this opinion will impact your business.