Court tells J&J to pay $1 billion more for 2019 robotics deal
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Johnson & Johnson broke its promises to investors in Auris Health, a surgical robotics startup it bought five years ago for $3.4 billion. Now it must shell out another $1 billion, based on a ruling yesterday from Delaware Chancery Court.
Why it matters: This appears to be the largest legal reward ever granted in an investor earnout dispute, and could change the way that such provisions are written.
Catch up quick: Auris had raised over $830 million in VC funding, and was concerned during deal negotiations that there could be internal competition for resources with an existing J&J surgical robotics effort called Verb that was championed by then-CEO Alex Gorsky.
- The result was specific language around $2.35 billion in prospective earnouts, tied to both FDA approval and sales, whereby J&J was essentially required to provide Auris with the time and resources to meet its milestones.
- J&J also was not allowed to even consider earnout payment obligations when making strategic decisions.
- Auris shareholders, which included Wellington Management and Lux Capital, would later sue for fraud — arguing that J&J took actions that made the milestones impossible to achieve, in violation of its contract.
The ruling: "J&J's promise to Auris was broken almost immediately after closing," Vice Chancellor Lori Will wrote in her 144-page ruling, adding that Auris "effectively became a parts shop for Verb."
- For example, J&J launched an internal bakeoff between the two platforms, rather than let them be developed in parallel.
- The Auris system won out, but J&J insisted that that Verb hardware and staffers be incorporated. The entire process caused delays and other complications that helped put the milestones out of reach.
- J&J then canceled the earnouts entirely, creating new employee incentives, after claiming that the Auris system would need to achieve FDA approval via a different regulatory pathway than was included in the merger agreement.
- The judge eviscerated all of J&J's defenses, ruling that they misstated the actual merger agreement and were "concocted" after being sued.
Look ahead: J&J says it disagrees with the ruling and is considering an appeal.
- But an appeal is likely to spark a cross-appeal from the plaintiffs, who would like a crack at getting even more of their earnout.
- Gorsky, who features prominently in the ruling and is now a partner with Iconiq Growth, didn't return an email request for comment.
The bottom line: This ruling could provide a roadmap for VCs writing future earnout agreements, particularly in biotech where they're prevalent. Namely by including specific obligations that constrain what the buyer can do.
