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Illustration: Aïda Amer/Axios

It's been a tough week for Johnson & Johnson, and not just because its COVID-19 vaccine may falter when faced with the Omicron variant.

Driving the news: A Delaware judge on Monday denied the pharma giant's motion to dismiss a fraud suit brought by former shareholders of Auris Health, a Silicon Valley-based robotic surgery platform that J&J bought two years ago for $3.4 billion in cash.

  • At issue are $2.35 billion in prospective milestone payments included in the original merger agreement, tied to both FDA approval and sales.
  • The listed plaintiff is Fortis Advisors, an advisory firm that represents shareholders post-close of M&A transactions. Auris had raised over $830 million in VC funding from firms like Mithril Capital, Wellington Management, Partner Fund Management, D1 Capital Partners, Senator Investment Group, Lux Capital and Viking Global Investors.

Fortis essentially argues that J&J misled the former Auris backers about how resources would be allocated and prioritized between Auris and an existing surgical robotics effort inside of J&J subsidiary Ethicon, with the end result being that the milestones became nearly impossible to achieve.

  • It also is upset that J&J released some of the milestone reserves after the FDA changed a regulatory pathway.

The Delaware judge did slightly limit the lawsuit's scope and let some individual J&J executives off the hook, but she let Fortis' core complaints against the company stand.

Look ahead: A trial would begin next December unless the two sides were to settle beforehand. One possible outcome could be an entire rescission of the deal.

The bottom line: Milestone earnouts are inherently perilous, and healthcare VCs typically are satisfied if they get 30-50% payouts. But investors also believe those earnouts are tied to good faith efforts by acquirers. Particularly if that acquirer has very deep pockets. In this case, however, they feel those efforts weren't on the level.

Go deeper

Supreme Court agrees to hear challenge to affirmative action at Harvard, UNC

Photo: Al Drago/Getty Images

The Supreme Court on Monday agreed to hear a pair of cases challenging the consideration of race in the college admissions processes.

Why it matters: The conservative high court's ruling could determine the future of affirmative action in higher education.

Europe's energy reliance on Russia is a crucial shield for Putin

Photo: Pavel Bednyakov/Sputnik/AFP via Getty Images

Cracks in the NATO alliance regarding sanctions for Russia should President Vladimir Putin order troops into Ukraine are in large part based on energy supply concerns.

Why it matters: Russia holds tremendous leverage over some European countries because it provides roughly 40% of Europe's natural gas supply. In Germany, this figure is greater than 50%.

Why the Fed might want to jolt the markets

Fed chair Jerome Powell at a hearing earlier this month. Photo: Brendan Smialowski-Pool/Getty Images

So far, financial markets are cooperating nicely with the Federal Reserve's efforts to restrain inflation. They're doing the Fed's work for it by creating tighter financial conditions, in a distinctly non-panicky way.

  • But as the central bank's policymakers meet this week, an underlying question they face is whether the adjustment is happening too slowly.