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Johnson & Johnson told the Delaware Supreme Court on Wednesday that a lower court overreached its authority by “rewriting” its $3.4 billion merger deal for the acquisition of Auris Health, wrongly using an implied covenant of good faith to force a billion-dollar payout the company says it never agreed to.

J&J and its subsidiary Ethicon Inc. are pushing back against a Chancery Court order requiring the company to pay $1 billion to Auris’ former shareholders, represented by Fortis Advisors LLC, after Vice Chancellor Lori W. Will ruled the healthcare giant violated its milestone payment obligations.

At the center of the J&J merger deal suit is whether the company’s shift from the FDA’s 510(k) clearance process to a tougher de novo review for Auris’ iPlatform surgical robot breached the merger contract or was a legitimate business adaptation to changing regulatory conditions.

J&J Says Court Ignored Contract’s “Explicit Terms”

“This contract is far from silent,” argued E. Joshua Rosenkranz of Orrick Herrington & Sutcliffe LLP, representing J&J. “The phrase 510(k) appears more than any other. A contract that explicitly imposes a condition on performance is not silent on performance.”

Rosenkranz insisted the Chancery Court distorted the parties’ negotiated risk allocation, claiming the implied covenant was used to impose new obligations after the fact. The de novo pathway, he said, doubled regulatory risk and would have altered the original deal price and payout structure.

He added that J&J “devoted more people and resources to iPlatform than to any other device in its history,” investing $1.25 billion into development — evidence, he said, that the company acted with commercially reasonable efforts, as required by the contract.

Rosenkranz further accused the lower court of unfairly comparing Auris’ iPlatform to J&J’s Velys system, despite the merger agreement allowing J&J flexibility to prioritize projects based on profitability and commercialization risk.

Fortis Fires Back: “J&J Got a Windfall”

Representing Fortis Advisors, Philippe Z. Selendy of Selendy Gay PLLC countered that the Chancery Court correctly applied the implied covenant to uphold the spirit of the merger deal amid an unforeseen regulatory twist.

“The merger agreement was drafted based on what was reasonably foreseeable,” Selendy said. “510(k) was the only logical path at the time of contracting. No one expected the FDA to reverse course.”

He argued that J&J’s move to abandon the 510(k) route was not permitted under the contract, and the company should not benefit from a “windfall” at the expense of Auris shareholders.

“There was no reservation of rights to avoid milestone obligations,” Selendy added. “To deny the implied duty is to give J&J an unbargained-for escape.”

Justices Question Damages and Risk Allocation

The justices pressed both sides on whether reversing the implied covenant finding would require a recalculation of damages. Fortis maintained that the Chancery Court’s findings were independently supported by breach of contract claims tied to later milestone payments under Section 2.07(a).

According to the court record, Ethicon’s 2019 acquisition of Auris included $3.4 billion in cash and up to $2.35 billion in milestone payments linked to regulatory milestones for the iPlatform.

Fortis sued in October 2020, alleging J&J failed to treat iPlatform as a priority project, undermining its regulatory progress. In September 2024, Vice Chancellor Will awarded $968.8 million in damages plus $42.4 million in interest — a total nearing $1 billion.

Legal Teams

J&J and Ethicon are represented by Morris Nichols Arsht & Tunnell LLP, Orrick Herrington & Sutcliffe LLP, and Patterson Belknap Webb & Tyler LLP.

Fortis Advisors is represented by Ross Aronstam & Moritz LLP and Selendy Gay PLLC.

The Delaware Supreme Court’s decision could redefine how implied covenants are applied in high-stakes merger disputes, especially when shifting regulatory winds threaten to change the rules midstream.