Johnson & Johnson (J&J) is taking its billion-dollar legal fight to the Delaware Supreme Court, challenging a landmark ruling that has rattled the mergers and acquisitions world and put a sharp spotlight on the growing risks of “earnout” agreements. The pharmaceutical and medical device giant seeks to overturn a $1 billion judgment tied to its $3.4 billion acquisition of surgical robotics startup Auris Health, arguing that the lower court’s decision misinterpreted its contractual obligations and could have far-reaching implications for dealmaking.
The Heart of the Dispute
At the center of the appeal is J&J’s alleged failure to uphold “commercially reasonable efforts” in advancing Auris’s surgical robot technology following the acquisition. The Delaware Chancery Court found that J&J deliberately favored a competing internal robotics project, effectively depriving Auris of the support and funding necessary to meet key performance milestones that would trigger additional earnout payments.
Vice Chancellor Lori W. Will ruled that J&J breached its contractual duty and the implied covenant of good faith and fair dealing—two pillars of M&A law meant to ensure fairness when earnout payments hinge on post-closing performance. Her ruling awarded $1 billion to Auris founders and investors, marking one of the largest judgments in the history of earnout litigation.
J&J’s appeal argues that the ruling stretches Delaware contract law beyond its intent, warning that it could set a precedent making buyers liable for strategic decisions that were never contractually guaranteed.
The Growing Risk of Earnouts
Earnouts—clauses that tie part of an acquisition price to future performance targets—have become increasingly common in volatile markets. They help bridge the valuation gap between what a seller believes their company is worth and what a buyer is willing to pay upfront. However, these provisions often lead to disputes when the buyer controls operations post-acquisition, leaving the seller dependent on the buyer’s actions to hit the agreed milestones.
Legal scholars and deal experts have long cautioned that earnouts, while attractive on paper, are a frequent breeding ground for litigation. Boston College Law Professor Brian Quinn summed up the sentiment bluntly: “My general advice for anyone thinking of doing an earnout is to run away.”
In recent years, courts have seen a surge in high-value earnout battles. AstraZeneca was hit with a $181 million judgment in 2023 over a biotech earnout dispute, and insurance broker Arthur J. Gallagher & Co. faced a $50 million award under similar circumstances. These cases underscore the perilous nature of earnouts in an era of economic uncertainty, where inflation, supply chain disruptions, and rising interest rates often derail performance projections.
The “Efforts” Clause Debate
One of the thorniest issues in earnout litigation is interpreting what it means to use “commercially reasonable efforts,” “best efforts,” or simply “reasonable efforts.” These phrases, though common in M&A contracts, are notoriously vague and often litigated.
In J&J’s case, the Chancery Court found that the company’s internal decisions—diverting resources to a rival project—fell short of commercially reasonable conduct. J&J insists that such interpretations risk turning subjective business judgments into grounds for legal liability, effectively punishing companies for exercising strategic discretion.
Vice Chancellor Will’s opinion also addressed the dangers of overcomplicated contract drafting. She noted that “short sentences, plain English, and clear obligations” help avoid disputes—advice that many corporate lawyers are taking to heart as they rethink how they structure earnouts going forward.
A Cautionary Tale for Dealmakers
The J&J appeal has already become a case study in how earnouts can spiral into multimillion—or even billion-dollar—battles. Deal lawyers say that while earnouts help close deals in uncertain markets, they require extraordinary clarity around post-closing obligations, integration plans, and performance metrics.
In some cases, buyers choose to pay even when milestones aren’t met, simply to preserve relationships or reputations. In others, sellers accuse buyers of deliberately sandbagging performance to avoid making contingent payments. As one M&A attorney put it, “Earnouts can turn friendly negotiations into bitter litigation faster than any other deal term.”
The problem is compounded when the stakes are high. With potential payouts worth hundreds of millions, both sides are incentivized to fight rather than settle. Each party believes the other failed to honor the spirit—or the letter—of the deal.
Implications Beyond J&J
Legal experts say the Delaware Supreme Court’s upcoming decision could reshape the future of earnout enforcement nationwide. If the court sides with J&J, it may curb the use of implied obligations in interpreting contracts, reassuring corporate buyers that they will not be second-guessed for business decisions made in good faith. But if the ruling is upheld, it could embolden sellers to pursue similar claims, leading to even more litigation in an already fraught area of M&A law.
Regardless of the outcome, the case serves as a stark warning. Companies negotiating acquisitions must anticipate post-closing dynamics with precision and document them unambiguously. As one transactional attorney observed, “The J&J case shows that ambiguity isn’t just a drafting issue—it’s a billion-dollar liability.”
The Bigger Picture
Earnout disputes highlight a fundamental tension in M&A: the difference between buying potential and buying control. When a deal’s success depends on the buyer’s future decisions, both sides must define expectations in granular detail or risk ending up in court.
As the J&J appeal unfolds, dealmakers are watching closely. The ruling will not only determine whether the healthcare giant must pay a billion-dollar penalty but may also redefine how corporate America manages risk in complex acquisitions.
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