Fortis Advisors LLC v. Johnson & Johnson

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
FORTIS ADVISORS LLC, solely in )
its capacity as representative of former )
stockholders of Auris Health, Inc., )
)
Plaintiff, )
)
v. ) C.A. No. 2020-0881-LWW
)
JOHNSON & JOHNSON, ETHICON, )
INC., ALEX GORSKY, ASHLEY )
MCEVOY, PETER SHEN, and )
SUSAN MORANO, )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: May 22, 2024
Date Decided: September 4, 2024
Bradley R. Aronstam, Roger S. Stronach & Dylan T. Mockensturm, ROSS
ARONSTAM & MORITZ LLP, Wilmington, Delaware; Philippe Z. Selendy,
Jennifer M. Selendy, Sean P. Baldwin & Oscar Shine, SELENDY GAY PLLC, New
York, New York; Counsel for Plaintiff Fortis Advisors LLC
William M. Lafferty, Susan W. Waesco, Elizabeth A. Mullin Stoffer & Kirk C.
Andersen, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington,
Delaware; Joshua A. Goldberg, Muhammad U. Faridi, Diana M. Conner & Lauren
S. Potter, PATTERSON BELKNAP WEBB & TYLER LLP, New York, New York;
Counsel for Defendants Johnson & Johnson, Ethicon Inc., Alex Gorsky, Ashley
McEvoy, Peter Shen, and Susan Morano
WILL, Vice Chancellor
Earnout provisions are common risk allocation tools in merger agreements,
particularly involving private company sellers. The buyer pays an upfront sum and
an additional amount if the seller’s business achieves specific targets by a deadline.
This contingent approach lessens the buyer’s risk of overpaying where the seller’s
future performance is uncertain. The seller, however, risks losing the earnout
payment along with operational control after closing. A seller may be loath to agree
to an earnout structure without contractual assurances from the buyer and a strong
belief in the value of its business.
The seller in this case had both. Auris Health, Inc. was a venture-backed
startup on a path to bring life-changing technologies to market. Led by Dr. Frederic
Moll, the visionary architect of robotic surgery, Auris had developed two novel
surgical robots in record time: Monarch and iPlatform. Monarch had unmatched
capability to diagnose and treat lung cancer. And iPlatform took Moll’s original
market-leading surgical robot to new heights with innovative features for
laparoscopic and endoscopic procedures.
While Auris was making strides, Johnson & Johnson was attempting to
develop its own surgical robot called Verb. Entering the surgical robotics market
was vital for J&J. Yet Verb was falling increasingly behind the schedule J&J had
announced to the market, despite J&J’s colossal investments. J&J looked to Auris
as a solution.
1
Auris was well funded and had strong prospects. It was wary of an
acquisition, especially by J&J since Verb was a potential competitor of iPlatform.
J&J understood Auris’s hesitations and put together a proposal it would not refuse.
J&J offered to pay $3.4 billion up front and another $2.35 billion upon the
achievement of two commercial and eight regulatory milestones—five for iPlatform,
two for Monarch, and one that could be satisfied by either robot. The regulatory
milestones were ambitious, but corresponded to approvals for procedures that the
Auris robots were on track to complete. Auris agreed to an earnout component after
securing J&J’s commitment to devote commercially reasonable efforts befitting a
“priority medical device” in furtherance of the milestones.
J&J’s promise to Auris was broken almost immediately after closing. Instead
of providing efforts and resources to achieve the regulatory milestones, J&J thrust
iPlatform into a head-to-head faceoff against Verb called “Project Manhattan.” Verb
and iPlatform were forced to complete a series of procedures to be ranked against
one another. Auris feared that a poor performance would be the end of iPlatform
since it had learned J&J’s robotics budget left no room for Verb and iPlatform to be
developed in parallel. J&J would either combine the robots or kill one.
The iPlatform alpha robot was months old. Verb was in its beta iteration after
years of development. For iPlatform to survive a surgical showdown against the
more advanced robot, the Auris team spent countless hours creating engineering and
2
software workarounds. Progress toward iPlatform’s regulatory milestones ceased
while technical debt from shortcuts in its development amassed.
Both robots successfully completed the assigned procedures. J&J decided that
iPlatform was the better bet. But for iPlatform, winning Project Manhattan was
losing. To salvage its years of investment in Verb, J&J directed that Verb’s
hardware and team be added to iPlatform. The iPlatform robot effectively became
a parts shop for Verb.
J&J knew Project Manhattan would hinder, rather than promote, iPlatform’s
achievement of the regulatory milestones. It also knew that combining iPlatform
and Verb would cause further complications. But J&J viewed the resulting delays
as beneficial since it could avoid making the earnout payment. When J&J’s actions
put the first iPlatform milestone out of reach, the other milestones fell like dominos.
J&J wrote off the iPlatform milestones under the pretext of an unforeseen
policy change that would require the robot to achieve regulatory clearance through
a different pathway than the one listed in the merger agreement. J&J then
implemented an employee incentive plan with different targets. Auris’s former
stockholders proceeded to sue for breach of contract, breach of the implied covenant
of good faith and fair dealing, and fraud.
J&J’s defenses to these claims take two main forms. First, J&J asserts that
the merger agreement gave it broad discretion to use the Auris products in a way that
3
advanced J&J’s overall robotics strategy without regard to the milestones. The
merger agreement says otherwise. Second, J&J blames the missed milestones on
iPlatform’s technical problems. This defense is dubious; it was concocted after J&J
was sued. The record indicates that the technical issues were both expected and
solvable.
After weighing an abundance of evidence, I find that J&J breached its
contractual obligations. The bespoke earnout provision negotiated by the parties
required J&J to treat iPlatform as a priority device, to provide efforts in support of
the regulatory milestones, and to avoid making decisions based on the contingent
payment. J&J violated each obligation—most blatantly when iPlatform was made
to compete against and combine with Verb. J&J also breached the implied covenant
of good faith and fair dealing when it failed to devote efforts to achieve the revised
regulatory pathway. But J&J did not breach the merger agreement in relation to the
Monarch regulatory milestones.
Additionally, Auris claims that J&J fraudulently induced it to merge by
promising vast resources and a “light touch” integration. For the most part, the
challenged statements are fluffy, forward-looking, and aspirational. There is an
exception. One Monarch milestone involved regulatory clearance by a near-term
deadline using a J&J-developed catheter. J&J told Auris that this milestone was so
certain to be met that J&J viewed the associated payment as up front consideration.
4
J&J neglected to mention that it was under a regulatory investigation because a
patient in a clinical study using the catheter had recently died, which put the
milestone in doubt.
Auris is entitled to damages for J&J’s breaches of contract and of the implied
covenant of good faith and fair dealing as they relate to the iPlatform regulatory
milestones. It is also entitled to damages for fraud concerning the Monarch
milestone. Damages with interest exceed $1 billion, which compensates Auris’s
former stockholders for the earnout payment they would have received absent J&J’s
failed efforts and fraud. What remains irretrievably lost is the transformative
potential of Auris’s robots.
5
I. BACKGROUND
The following facts were stipulated to by the parties or proven by a
preponderance of the evidence at trial.1 The record supporting these findings of fact
includes the testimony of 23 fact and 9 expert witnesses over 10 trial days, 78
deposition transcripts, and 6,209 joint exhibits.2
A. Dr. Moll and the da Vinci Robot
Robotically assisted surgery allows physicians to perform minimally invasive
operations with computer-assisted equipment.3 Surgical robots, or Robotically
Assisted Surgical Devices (RASDs), are used to perform these procedures. RASDs
typically comprise several components and subsystems, including a surgeon
console, a computing tower, and a surgical bed or cart with mounted robotic arms
attached to instruments.4
Dr. Frederic Moll first witnessed early progress in robotic surgery as part of a
Stanford Research Institute (SRI) project funded by the United States Department of
1
Joint Pre-trial Stipulation and Order (Dkt. 523) (“PTO”).
2
Facts drawn from exhibits jointly submitted by the parties are referred to by the numbers
provided on the parties’ joint exhibit list and cited as “JX –” unless otherwise defined. See
Dkt. 575. Pin cites for joint exhibits refer to the page of the exhibit as marked rather than
internal or Bates pagination, unless otherwise noted. Deposition transcripts are cited as
“[Name] Dep.” See Dkt. 509. Trial testimony is cited as “[Name] Tr.” See Dkts. 545-54.
3
PTO ¶ 75.
4
Id. ¶ 76.
6
Defense several decades ago.5 SRI’s objective was to create a means for surgeons
to operate remotely on patients in the battlefield.6 Though rudimentary, the device
SRI developed could transmit a surgeon’s hand movements from a computer to
actuators in the field that controlled a robotic instrument.7
Moll saw the “potentially transformative” promise of robotic-assisted surgery
as having “enormous implications in laparoscopy.”8 Laparoscopy is a minimally
invasive surgical technique in which narrow tubes are inserted into the abdomen or
pelvis through puncture wounds.9 Moll had been exposed to emerging laparoscopy
techniques during his medical residency and turned his focus to developing safe
laparoscopic tools and methods.10 He observed that a trade-off to minimal openings
in the body is the difficulty surgeons face in reaching the relevant anatomy.11 Using
the insights gained at SRI, Moll imagined that computer replication of hand
movements outside the body to robotic hands inside the body could resolve
laparoscopic access barriers.12
5
Moll. Tr. 9-10.
6
Id.
7
Id. at 10.
8
Id.
9
Id. at 6-7.
10
Id. at 6.
11
Id. at 10.
12
Id.
7
In 1995, Moll founded Intuitive Surgical, Inc. to pursue the objective of
making laparoscopic surgery intuitive.13 He developed a product called the da Vinci
robot—a cart-based system with two arms to hold surgical instruments and a third
arm for a viewing laparoscope.14 Moll’s vision was to “mimic the capabilities of
open surgery inside the body” by using a computer interface to transmit movements
to tiny tools inside the abdomen in a “systematic and controlled way.”15
Developing the da Vinci robot was no small feat. The Intuitive team
encountered many technical challenges, including problems with tool function,
software stability, arm collisions, and intra-device heat distribution.16 The issues
were addressed with mitigation strategies now typical to robotic surgery.17 Dr. Barry
Gardiner, a physician who pioneered laparoscopy in general surgery, contributed
vital clinical knowledge to solve these issues and develop the robot.18
The da Vinci system was not Moll’s only innovation at Intuitive. He also
instituted the minimally viable product (MVP) approach, which has become the
13
PTO ¶ 77; Moll Tr. 11-12.
14
Moll Tr. 11-12.
15
Id. at 13.
16
Id. at 16-17.
17
Id. at 17-19 (discussing the use of surgical assistants to move and adjust the robot during
a procedure, which remains standard today).
18
Moll Tr. 14; see JX 2598 at 3.
8
industry standard for bringing new, complex medical devices to market.19 The MVP
development strategy involves creating a functional prototype to gain feedback from
an engineering and clinical standpoint before adding more complex features.20 This
method increases efficiency by allowing for testing of a lower-risk device before
making further investments.21 Regulatory approval is sought for the stripped-down
version, ensuring that it meets patient safety and effectiveness requirements.22
Intuitive followed an MVP strategy with the da Vinci system. It first sought
regulatory approval for a basic three-arm version of the device.23 In 2000, the Food
and Drug Administration (FDA), which regulates the sale of medical devices in the
United States and monitors their safety and effectiveness, approved the minimally
viable da Vinci robot through the 510(k) process.24
The 510(k) (or Premarket Notification) process is one of three regulatory
pathways through which high or moderate risk medical devices obtain FDA
approval.25 The 510(k) pathway is for low to moderate risk devices with a legally
19
Moll Tr. 15-17; see Gompers Tr. 1935-36; Grennan Dep. 71-72; Shen Tr. 1169.
20
Moll Tr. 15-16.
21
Id. at 16; see Khan Tr. 3041-3042.
22
Moll Tr. 16.
23
JX 14; see Moll Tr. 15-16.
24
Moll Tr. 19; PTO ¶ 79.
25
PTO ¶ 81.
9
marketed predicate device.26 It involves a comprehensive review of appropriate
safety and performance data to determine if a new device is substantially equivalent
to an approved predicate.27 The second pathway is a De Novo Classification
Request, which is used when a novel low to moderate risk device lacks a legally
marketed predicate.28 De Novo approval often requires clinical testing data to
demonstrate a device’s safety and effectiveness.29 The third pathway, called
Premarket Approval (PMA), is the most onerous and required for high risk devices.30
Consistent with its MVP strategy, Intuitive went on to pursue and receive
510(k) clearance for a four-arm version of the robot in 2002.31 The da Vinci robot
was rapidly adopted by customers and Intuitive became focused on manufacturing
and selling the system. Moll, having achieved his objective, moved on to “continue
down a path of innovation.”32
Today, Intuitive is considered the market leader in RASDs.33 It has a market
capitalization of over $100 billion and controls a majority of the surgical robotics
26
Id.
27
Id. ¶ 82; see JX 4492 (“Wittwer Rep.”) ¶ 137.
28
PTO ¶ 81.
29
Wittwer Rep. ¶ 137.
30
PTO ¶ 81; see Wittwer Rep. ¶ 148.
31
See JX 4511 (“Tillman Rep.”) ¶ 94.
32
Moll Tr. 21.
33
PTO ¶ 77.
10
market.34 Intuitive’s robots have performed hundreds of thousands of procedures
worldwide, cementing Moll’s legacy as the “father of robotic surgery.”35
B. Auris and the Next Generation of Surgical Robots
Moll set out to start a new RASD innovation company called Auris Health,
Inc. In 2009, Moll raised Auris’s seed funding.36 Early investors included venture
capital funds such as J&J Innovation, a subsidiary of Johnson & Johnson.37
Moll intended that Auris would advance RASDs beyond the base architecture
of da Vinci to match strides in minimally invasive surgery—specifically in
endoscopy.38 Endoscopy involves inserting a flexible tube called an endoscope
into the body through its natural openings.39 He hoped to improve endoscopic
technique with robotics as he had done for laparoscopy.40
Early-stage Auris was a “vision-oriented, mission-oriented” company.41 Its
visionary leaders included not only Moll but also Gardiner, who remained
34
Moll Tr. 21; see JX 711 at 19-22; Royan Tr. 1376-77.
35
JX 1868; see Moll Tr. 21; JX 1868; Shen Tr. 1106; Grennan Tr. 2555.
36
PTO ¶ 87.
37
Id. ¶ 88.
38
Moll Tr. 22-23.
39
Id. at 23.
40
Id. at 23-24.
41
DeFonzo Tr. 316, 319.
11
instrumental in providing clinical expertise.42 A combination of leadership and
dynamism gave Auris the momentum to rapidly develop its first RASD, called
ARES, and secure FDA clearance.
1. ARES
Auris began developing the ARES robot in 2012.43 It was designed for
endoscopic procedures.44 David Mintz, an engineer who had worked alongside Moll
since Intuitive’s early days, was tapped to spearhead the project.45
After 18 months of development, Auris began using ARES in overseas
clinical studies for endourology (or urology) and bronchoscopy.46 Endourology
involves the use of endoscopic surgical techniques to treat conditions affecting the
urinary tract.47 Bronchoscopy is a procedure in which a flexible tube called a
bronchoscope is passed through a patient’s throat to view or treat the lungs and
airways.48
42
Moll Tr. 27.
43
Mintz Tr. 554-55.
44
Id.
45
Moll Tr. 24-25.
46
Mintz Tr. 555.
47
See Moll Tr. 64; see also PTO ¶ 154.
48
See Moll Tr. 33; see also PTO ¶ 147.
12
ARES received 510(k) clearance for bronchoscopy in May 2016, using
Intuitive’s da Vinci robot as its predicate device.49 It was never commercialized.
ARES was, instead, a step in Auris’s MVP strategy. Auris assessed ARES’s clinical
capabilities first before building commercial RASDs with the benefit of that
knowledge.50
2. Monarch
Auris’s Monarch robot was the “commercial embodiment” of ARES.51 In
2016, Moll hired Richard Leparmentier, an experienced engineering manager, to
lead the Monarch project.52
Monarch is a revolutionary RASD. It can send a flexible endoscope through
lung airways to locate, identify, and biopsy lesions found on preoperative computed
tomography (CT) scans.53 Its initial iteration, called Monarch Bronch 1.0, could
navigate the outer lung non-invasively. In March 2018, it became the first in the
Monarch device line to receive 510(k) clearance.54 The next iteration of Monarch—
49
JX 275.
50
Moll Tr. 25.
51
Id. at 26.
52
Id. at 32-33.
53
JX 5054; Moll Tr. 33.
54
PTO ¶ 91; JX 334; JX 331; see Leparmentier Tr. 979.
13
an endourology-focused device called Monarch Uro—received pre-submission
feedback from the FDA in November 2018.55
3. iPlatform
In 2016, Auris began to create another robot in parallel with Monarch: the
iPlatform surgical system. Mintz was put in charge of the iPlatform project.56 Josh
DeFonzo was hired as Auris’s head of operations to oversee both the iPlatform and
Monarch programs.57
iPlatform was devised as a bed based RASD with integrated surgical arms, a
physician console, and a control tower.58 It would be differentiated from da Vinci
in several ways. Unlike the cart-based da Vinci system, which could only fit in large
or custom-built operating rooms, iPlatform had “zero footprint” since its robotic
arms were mounted beneath a surgical bed.59 Though iPlatform would first be
developed for laparoscopic applications (like da Vinci), it would eventually gain
concomitant (laparoscopic and endoscopic) capabilities.60 iPlatform had six robotic
arms versus da Vinci’s four.61
55
JX 858; see JX 637.
56
Moll Tr. 26.
57
Id. at 27.
58
PTO ¶ 99; Moll Tr. 26-31; JX 5064.
59
Mintz Tr. 566.
60
Mintz Tr. 567; Moll Tr. 32; see JX 1347 at 5.
61
Mintz Tr. 567; see JX 1347 at 5.
14
Within a year, the iPlatform prototype was completing labs on human
cadavers using three robotic arms.62 Cadaver labs are considered the ideal, ethical
way to test a RASD’s safety and effectiveness before live experimentation.63 By
summer 2017, iPlatform was completing cadaver lab procedures using five robotic
arms.64
In December 2017, iPlatform reached “concept freeze”—a “critical step”
where a design concept is deemed viable.65 The design included iPlatform’s bed-
based architecture, six so-called “Silverton” robotic arms, insertion tools, and
more.66 Mintz presented its risk case and solutions to Auris’s executive team for
approval.67 The conceptual design was approved, and iPlatform proceeded to the
next stage of product development.
Auris began to work iteratively with the FDA on a plan for regulatory
approval for iPlatform. In August 2018, Auris made its first 510(k) pre-submission
to the FDA, listing a cart-based da Vinci RASD as the predicate device.68 Auris’s
pre-submission form discussed a bronchoscopy indication for iPlatform.
62
JX 292 at 7; Gardiner Tr. 743-47; see also JX 5012 at 1.
63
Gardiner Tr. 745.
64
JX 292 at 7; see JX 1347.
65
Mintz Tr. 557-59; JX 1347.
66
JX 292 at 5-6, 30, 35-37, 57, 84.
67
Mintz Tr. 560-6; JX 292 at 20, 141.
68
JX 545 at 34.
15
In October 2018, the FDA provided feedback to Auris, including that it would
require clinical testing and data to be presented with iPlatform’s application.69 The
FDA also explained that the listed indication was a mismatch for the predicate
device.70 Because the cited predicate device lacked a bronchoscope and did not
perform the bronchoscopic procedures iPlatform’s application contemplated, the
FDA said that it was “unclear if the 510(k) pathway [wa]s appropriate.”71 In
response, Auris withdrew bronchoscopy from iPlatform’s 510(k) application and
changed the predicate device to a more apt da Vinci robot.72 Auris believed that if
it addressed the FDA’s feedback and provided appropriate clinical data, iPlatform
would receive 510(k) clearance.73
Auris continued to refine its iPlatform prototype. Prostatectomy and Nissen
fundoplication cadaver procedures were successfully completed in the fall of 2018.74
69
JX 743 at 5.
70
Id. at 4.
71
Id. at 3.
72
JX 2468 at 5; Mintz Tr. 604-06.
73
JX 743 at 3; Mintz Tr. 605-06; see also JX 2468.
74
JX 699; Gardiner Tr. 748-49. A prostatectomy is a procedure to remove all or part of
the prostate. A Nissen fundoplication is an upper abdominal procedure that treats
gastroesophageal reflux disease. See Prostatectomy, Mayo Clinic, https://www.
mayoclinic.org/tests-procedures/prostatectomy/ about/pac-20385198 (last visited Aug. 31,
2024); Nissen Fundoplication, Cleveland Clinic, https://my.clevelandclinic.org/
health/treatments/ 4200-nissen-fundoplication (last visited Aug. 31, 2024); see also
Gardiner Tr. 728-30; Mintz Tr. 580.
16
By December 2018, the “alpha” version of iPlatform had been built, roughly a year
after the concept freeze stage.75
C. J&J’s Verb Robot
As robotic surgery gained momentum, Johnson & Johnson desired RASD
market share. A significant portion of J&J’s revenue came from its subsidiary
Ethicon, Inc.’s sales of surgical instruments.76 J&J recognized an “existential threat”
to its instrument business as Intuitive-branded instruments were sold for the growing
number of da Vinci robots in hospitals.77
In 2012, with new Chief Executive Officer Alex Gorsky at the helm, J&J
partnered with SRI to develop a RASD to compete with da Vinci.78 Pablo Garcia
Kilroy was the lead engineer on the project.79 When the RASD showed commercial
potential in 2015, J&J formed a joint venture called Verb Surgical Inc. with Verily
Life Sciences LLC (a subsidiary of Alphabet Inc.).80 Kilroy became Verb’s lead
engineer.81
75
Mintz Tr. 569-70; PTO ¶ 99.
76
JX 1529 at 7 (2018 tax form showing the largest portion of J&J’s revenues was from
surgical and medical instruments sales, totaling over $4.149 billion). This decision refers
to Ethicon and Johnson & Johnson as “J&J.”
77
JX 215 at 4; Morano Tr. 1435; see also JX 5019 at 23.
78
Kilroy Tr. 2139; Shen Dep. 10-12; JX 2661 at 6.
79
Kilroy Tr. 2078.
80
PTO ¶ 72; Kilroy Tr. 2078.
81
Kilroy Tr. 2079.
17
Verb’s robotic surgery system had three main structures: a table-mounted
center component with four robotic arms, a user console for the surgeon to operate
the robot, and a tower containing the controller for the robot and a vision system.82
The user input devices for controlling the Verb robot were novel. Instead of using
physical controls, magnetics tracked the surgeon’s hand movements in an open
console and reproduced them to guide the robot.83
Like iPlatform, Verb encountered challenges during the design process. They
included dexterity issues both inside the body (like suturing and tying knots) and
outside the body (involving arm collisions and maneuverability).84 Dexterity came
with a trade-off in stiffness, which allowed for control of flexible apparatuses and
surgical tools.85 Verb also faced user interface issues, impairing the surgeon’s ability
to complete a procedure with ease in the open console.86
But unlike iPlatform, Verb was plagued by delays. By fall 2017, Gorsky
learned that Verb had fallen significantly behind schedule.87 J&J nonetheless aimed
82
Id. at 2082.
83
Id. at 2084.
84
Id. at 2085, 2087-88; see also JX 912 at 13-18; Kilroy Dep. 62:4-17.
85
Kilroy Tr. 2084-85
86
Id. at 2087.
87
See JX 224 at 21 (J&J Sept. 28, 2017 Digital Surgery Update to Gorsky: “Verb launch
is delayed, increasing hurdles to achieving the plan . . .”); id. at 33 (“Verb is our largest bet
to establish a leading robotics presence. However, we do not believe it is currently on a
path to deliver this.”); id. at 41 (reflecting that since Q1 2015 to the present (3Q 2017),
18
for a 2020 commercial release. During an earnings call in January 2018, Gorsky
said that Verb was “on track” for a 2020 launch date.88
The next month, Gorsky asked J&J’s Board of Directors for an additional
$400 million of funding for Verb to advance a “Gen 1 system towards launch in
2020.”89 While preparing for the meeting, Gorsky recognized the “significant
importance of the project” and questioned whether J&J had the “right capabilities”
to deliver the robot.90 Susan Morano, J&J’s Vice President of Business
Development for the Medical Devices group who reported to Gorsky, conveyed to
her colleagues that Gorsky had asked her “[h]ow did we get this so wrong (internally
and with Verb)[?]”91
In June 2018, Ashley McEvoy became J&J’s Executive Vice President,
Worldwide Chairman of MedTech (f/k/a Medical Devices).92 She reported directly
to Gorsky during his tenure.93 As the head of MedTech, McEvoy appreciated the
Verb had fallen two years behind schedule for a U.S. launch date and required pre-launch
funding of $430 million versus the anticipated $200 million).
88
JX 290 at 18 (Gorsky: “I got a chance to visit see the prototype. I would say overall that
it[’]s on track and we’re continuing to make refinements in it . . . So overall the project
remains on track with our timelines and we’re excited about it.”).
89
JX 647 at 2, 17.
90
JX 295 at 2-3.
91
Id. at 2.
92
McEvoy Tr. 2565.
93
Id.
19
need for J&J to disrupt the RASD market before more competitors could enter the
space.94 Gorsky told McEvoy to “take lead” on the Verb initiative and tackle risks
to the project’s announced 2020 launch date.95
Two months later, in August 2018, McEvoy sent Peter Shen to visit Verb for
a “deep dive.”96 Shen, a mechanical engineer by training with limited robotics
experience, was J&J’s Global Head of MedTech Research & Development.97 After
his visit, Shen told McEvoy that despite some progress, the Verb team had yet to
“declare [a] design concept” and suffered from “[c]hurning and lack of focus.”98
J&J’s internal consulting group, Accelerando, was then asked to assess Verb’s
status. Its conclusions resulted in a revised launch date of 2022, which was given
an 85% probability of success.99 In October 2018, J&J set a reduced scope for the
Verb RASD with a planned initial release outside the United States.100
94
Id. at 2567.
95
JX 504; JX 711.
96
JX 533; see McEvoy Tr. 2573.
97
Shen Tr. 1102.
98
JX 533.
99
JX 711 at 3 (“Accelerando process was initiated resulting in revised delivery timelines
of 2022 (vs. 2020).”); id. at 9 (“85% confidence date: Q4 2022”).
100
Id.
20
D. J&J’s Interest in Auris
While Verb’s setbacks compounded, J&J began to consider other ways to
enter the RASD market. In early 2017, it evaluated investing in Auris, which J&J
personnel had been aware of and impressed by since 2015.101 Morano visited Auris
and described it as a “key hedge” for J&J.102
In May 2017, J&J invested $45 million in Auris’s Series D round and secured
a board observer seat.103 The investment followed extensive due diligence by J&J
into the Monarch platform, including technical assessments by third-party product
development consultant Sagentia Innovation.104 By late 2017, J&J (including
Morano) had learned about iPlatform and worried it could “take the wind out of
Verb.”105
In May 2018, J&J’s Chief Scientific Officer William Hait, who led the
company’s Lung Cancer Initiative, visited Auris. After seeing Monarch’s potential
to diagnose and treat cancer in otherwise inaccessible areas of the lung, he became
101
JX 142; JX 186; Morano Tr. 1438-40.
102
Morano Tr. 1438-40; JX 186 at 3-4.
103
JX 195; PTO ¶ 107.
104
JX 475; Kozak Tr. 1579.
105
JX 261 (“Big learning is that [Auris has] been quietly developing a mainframe [with]
the potential to really disrupt as it combines their arms with their endoluminal . . . And
they say it will launch in 2 years which if true will completely take the wind out of Verb.”).
21
“maniacally focused” on gaining access to the robot.106 Hait returned to J&J and
gave a presentation to its executive committee on Monarch’s unique potential to
advance the Lung Cancer Initiative.107 Gorsky asked Hait to be a point of contact
for a J&J team exploring a deeper relationship with Auris.108 Sagentia was charged
with conducting additional technical due diligence into Auris’s technology.109
In July 2018, Morano recommended to Gorsky that J&J invest another $200
million in Auris (called “Antwerp” internally at J&J).110 Although the initial focus
was on accessing Monarch given Hait’s enthusiasm, iPlatform became a crucial
factor. Shen expressed to Morano that he was “very concerned” Verb was
“significantly behind” and suggested “explor[ing]” “iPlatform as a backup plan” for
Verb.111 At the same time, Gorsky told Morano that he “want[ed] [A]ntwerp added
to [V]erb” with the “back end tech” shared.112 To address this directive, Morano and
her team prepared a presentation for Gorsky that outlined Auris’s “‘hybrid’
106
Hait Tr. 921-23; see Hait Dep. 266-68.
107
Hait Tr. 922-23; see JX 95.
108
JX 95.
109
JX 447; JX 487; Kozak Tr. 1580-82.
110
JX 495 at 9.
111
JX 481.
112
JX 485 (Morano reporting her conversation with Gorsky to McEvoy: “He wants antwerp
added to verb – which I told I don’t think makes sense but that it could absolutely be a
separate endoluminal system . . . which he was ok with but wants the ‘back end tech’ shared
– which I believe is our strategy.”).
22
laparoscopic/[e]ndoluminal opportunity,” including a “potential partnership with
Verb.”113
At Gorsky’s request, Hait and Shen began collaborating on a plan to “mesh”
Verb and iPlatform.114 Gorsky felt the need to be “fully engaged” beyond his typical
involvement with an investment because of Auris’s importance to J&J’s “future
surgical and digital/robotics platform.”115
E. J&J’s Acquisition Strategy
By August 2018, J&J hoped to obtain a controlling interest in or outright
acquire Auris. McEvoy approved an acquisition assessment but asked that it be
“done VERY quietly” since “Verb [was] in a fragile state.”116 Due diligence
continued.117 J&J’s engineers visited the Auris site, spending hours asking Mintz
113
JX 495 at 10.
114
JX 507 (Hait to Shen: “I am now more fully aware of Antwerp in the context of your
broader robotic/digital surgery initiative and would be happy to work closely with you to
plan a strategy where we can mesh the two.”); see Hait Tr. 941; see also JX 598 (Hait to
McEvoy: “I reviewed VERB with the Med Device team and was impressed with the
passion and progress but also heard significant challenges. Auris will likely be best in-
class endoluminal robotic surgery and have a competitive laparoscopic instrument whereas
VERB is likely to have the most sophisticated data analytics. Alex has challenged us to
find a way to ‘mesh’ the two projects.”).
115
JX 506.
116
JX 527 at 1.
117
See JX 557.
23
“good, hard, technical questions, challeng[ing] [Auris] on the right points,” and
examining the robot.118 Sagentia participated in J&J’s technical diligence.119
Given the sensitivities with Verb, J&J proceeded cautiously. In September,
Hait wrote to Shen: “[W]hat if we combine the engineering expertise of Auris and
the iPlatform laparoscopic and endoluminal device with the data analytics of
VERB[?] In this way, we will have hedged out bets in robotics, take[n] the lead in
endoluminal, and protect[ed] at least some of our investment in VERB.”120 Shen
responded that “there [were] major complexit[ies] and implications to this
discussion” and asked to keep “the conversation within a small group for now.”121
Shen asked to talk when the two were together in Shanghai later that month.122
In the interim, J&J learned that Medtronic—a competitor—was interested in
acquiring Auris.123 The news prompted “a critical moment that require[d] [J&J] to
accelerate.”124 Auris falling into a competitor’s hands was a “doomsday scenario”
for J&J.125 In considering next steps, Shen told Morano that “iPlatform c[ould] be a
118
Mintz Tr. 575-77.
119
JX 557 at 3.
120
JX 600.
121
Id.
122
Id.
123
JX 619.
124
Id.
125
JX 670 (Hait to Shen); see also JX 679.
24
plan B for [J&J]” but questioned whether J&J could “do both (Verb and
iPlatform).”126
In late September, Shen and Hait met in Shanghai and discussed plans for
Auris.127 Shen later recapped the meeting for McEvoy, highlighting a
“complementary” approach where Verb would focus on general surgery and
iPlatform would have “combo capabilities” including endoluminal surgery.128 He
believed this was a “‘Fail Safe plan for [J&J’s] robotic strategy.”129 With the “go”
from McEvoy, Shen and Hait presented their plan to Gorsky, who was “pleased.”130
F. J&J’s Acquisition Strategy
Hait was tasked with initiating acquisition discussions with Moll.131 In his
first outreach on October 1, 2018, Hait praised Monarch’s unmatched capability to
screen for lung cancer. He also shared that “[J&J’s] medical device group ha[d]
become increasingly impressed with iPlatform, as [the Auris] team makes
126
JX 619.
127
JX 664.
128
JX 660.
129
Id.
130
Id.; JX 664.
131
JX 661 at 2.
25
extraordinary progress.”132 Hait told Moll that J&J was interested “in exploring a
more substantial relationship.”133
Auris was, at the time, considering a new investment round to support the
independent development of its robots. It was not searching for a buyer.134 Auris’s
leadership felt that a merger, particularly with a large company, could cause a loss
of the autonomy that had made its success possible.135 With J&J in particular, Auris
feared that Verb could displace iPlatform.136
J&J understood these concerns and strategized on finding “what matter[ed]
most” to Auris.137 Given the “criticality” of this issue, McEvoy and Gorsky “le[d]
from the top” on strategy.138 They—with Shen, Hait, Morano, and other senior
leadership—prepared for an in-person meeting at Auris’s Redwood City, California
headquarters by assessing Auris’s “[v]ision and [i]nterests.”139 These interests
included Auris’s desire to understand J&J’s “vision [on] how Antwerp and Verb
132
JX 661 at 2.
133
Id. at 2.
134
See Hebert Tr. 1398-99; Salehizadeh Tr. 1345.
135
Moll Tr. 38-40.
136
Id. at 40.
137
JX 736 at 1.
138
Id.
139
JX 838 at 4.
26
coexist.”140 Gorsky’s talking points for the Redwood City meeting said: “We see
the Verb and Antwerp programs as complementary.”141 Gorsky represented as much
to Moll during dinner in California, emphasizing that Verb and iPlatform would be
developed in parallel and that iPlatform was a priority for J&J.142
On November 28, Gorsky called Moll to propose acquiring a 51% equity stake
in Auris.143 Auris had no interest in selling a majority of its business.144 By mid-
December, J&J began preparing a full acquisition proposal, including an earnout
component based on regulatory and sales milestones.145
On January 2, 2019, Gorsky presented Moll with an offer to acquire Auris for
a $3 billion upfront payment and $2 billion in potential earnout payments.146 Gorsky
represented that J&J would “spend multiples” of what Auris alone could invest in
developing its robots.147 Further diligence and negotiations ensued, with Auris
140
Id.
141
Id. at 7.
142
Moll Tr. 42; see also JX 838 (prepared talking points for Auris meeting); Morano
Tr. 1517; DeFonzo Tr. 326-331.
143
Gorsky Dep. 210-13; Morano Tr. 1458; JX 852; JX 837 at 28; JX 5100 at 4.
144
See JX 929; Huffines Dep. 426-27.
145
JX 934.
146
PTO ¶ 110.
147
JX 1004 at 6; Moll Tr. 45.
27
continuing to question whether J&J would expect iPlatform to compete with Verb,
and J&J assuring Auris that it planned to fund and launch both products.148
G. The Ashley Challenge
Meanwhile, J&J was exploring a budget for its entire robotics division.
McEvoy decided that the total robotics budget including “[V]erb, instruments, IT,
[and] Antwerp” would be capped at “$500-$600” million per year.149 This budget
cap would later be called the “Ashley Management Decision” or “Ashley
Challenge.”150 At J&J, a “management decision” is a top-down “budget challenge”
for a division.151
On January 10, 2019, McEvoy’s team sent her an estimated profit and loss
statement for the robotics program.152 The total expenses for Verb, Auris, and
“Orthopedics” for 2019 through 2022 were projected to be $3.167 billion.153 Hours
later, a revised draft was circulated reflecting McEvoy’s feedback.154 A line item
called “AAM RISK ADJUSTMENT” was added, which reduced total projected
148
JX 1028; JX 1032; see DeFonzo Tr. 480; Morano Dep. 218.
149
JX 846.
150
Id.; see JX 1090; McEvoy Tr. 2603-06.
151
See Lenard Tr. 1787; Shen Tr. 1247.
152
JX 1118 at 5.
153
McEvoy Tr. 2610-15.
154
JX 1119 at 1.
28
expenses for 2019 through 2022 to $2.296 billion.155 McEvoy explained that the
“AAM risk adjusted line-item” was “in reference to a proposed synergy between
Verb/[iP]latform.”156 She felt these “synergies” were “potentially achiev[able]”
once J&J brought “both platform teams together,” after J&J had “more time to
understand the synergy opportunities.”157
H. Negotiations Progress.
J&J continued to conduct diligence throughout January. It learned about
trade-offs in iPlatform’s design and other system issues that the Auris team was
working to resolve.158 Both parties agreed to a three-stage diligence process and to
defer further technical due diligence.159
Negotiations on deal terms progressed. On January 18, Auris sent J&J a
counteroffer for $3.9 billion in upfront consideration and $3.5 billion in contingent
payments based on regulatory and sales milestones for iPlatform and Monarch.160
The regulatory milestones would be tied to 510(k) approval, which was the expected
155
Id. at 6.
156
JX 1139 at 1; see McEvoy Tr. 2607-16.
157
JX 1135 at 1.
158
JX 1141; JX 1145; JX 1284.
159
Morano Tr. 1477; JX 1077; JX 1052.
160
JX 1210.
29
pathway.161 J&J offered that net sales milestones include sales of not only iPlatform
and Monarch but also Verb “to address [Auris’s] concerns about Verb.”162
On January 24, Gorsky called Moll to deliver J&J’s formal counteroffer. It
included upfront cash consideration of $3.4 billion and a total potential earnout of
$2.2 billion.163 J&J spread the contingent payments across six milestones—four
regulatory and two sales based.164 One of the proposed milestones provided Auris
with $100 million upon Monarch receiving FDA 510(k) approval for lung tissue
ablation. Gorsky told Moll that this milestone was so “high[ly] certain[]” of being
achieved that J&J viewed it as “effective ‘up front’” consideration.165
I. The NeuWave Patient Death
The Monarch lung tissue ablation milestone required the use of an Ethicon
device called the NeuWave FLEX Microwave Ablation System. The NeuWave
FLEX is a catheter-based instrument that delivers microwave energy to ablate or
destroy tissue.166 At the time of J&J’s January 24 offer, FLEX had regulatory
approval for soft tissue ablation but not a lung-specific use.167 Monarch, by contrast,
161
JX 1072 at 4; DeFonzo Tr. 363-64; Moll Tr. 58-59.
162
JX 1072; JX 1027; JX 1077; JX 1145.
163
JX 1215 at 5.
164
Id.
165
Id. at 6; see also JX 1249 at 3; Moll Tr. 51.
166
Moll Tr. 50.
167
JX 161 at 3.
30
had already attained FDA clearance for bronchoscopy and was approved only for
lung procedures.168
In June 2018, NeuWave Medical (a subsidiary of J&J’s Ethicon subsidiary)
initiated a ten-patient study using FLEX to treat lung lesions.169 On December 4,
2018, a study participant died weeks after being treated with FLEX.170 J&J
immediately reassigned leadership of the study to Hait, who suspected that the FDA
would place the study on hold for some period.171
Hait was right. Nine days after the patient death was reported to the FDA, the
FDA launched a for-cause inspection into whether the study violated FDA rules
because NeuWave had not obtained an investigation device exemption (IDE) in
advance.172 An IDE provides FDA approval to perform a clinical trial of a device
that has not been cleared for marketing or the intended indication.173 The FDA
investigation involved an in-person investigation at Ethicon’s “sponsor site from
December 13, 2018 to December 19, 2018.”174
168
See supra note 54 and accompanying text.
169
JX 1901 at 25; see JX 4511 at 88.
170
JX 1901 at 30.
171
Hait Tr. 961-63.
172
JX 1673; JX 1550 at 157; see JX 2648 at 35, 36; JX 2313 at 8-9, 13.
173
Wittwer Rep. ¶ 87.
174
JX 1673 at 2; see also Wittwer Tr. 1964-65.
31
On January 14, 2019, J&J’s Auris deal team was briefed on the NeuWave
patient death.175 They sought to understand whether the “patient death was going to
affect the overall value of Auris.”176 Team members preparing talking points for
Gorsky to deliver to Moll were mindful of the “nuances” to the Monarch lung tissue
ablation milestone “and what will be required for the FDA approval (still in
discussion).”177 As of January 22, J&J’s team believed that a to-be-offered year-end
2022 target for the Monarch lung tissue ablation milestone remained “achievable.”178
On March 20, the FDA sent J&J a letter stating that it had concluded the use
of FLEX on lung lesions posed a “significant risk” to participants and that J&J
should have applied for an IDE before launching the study.179 J&J received the
FDA’s letter on April 3.180 J&J would need to conduct a new clinical study under
an IDE, then obtain a lung-specific approval for FLEX—a process that could take
several years.181 Only then could Monarch obtain clearance for use with FLEX.182
175
JX 1182; JX 1171.
176
Kozak Tr. 1572; see JX 1182 at 1.
177
JX 1239.
178
JX 1220; see also JX 1239; JX 6028.
179
JX 1673 at 2.
180
Id. at 1; Bryant Tr. 2490-91.
181
Wittwer Tr. 1966-68; Wittwer Rep. ¶¶ 95-101.
182
Wittwer Tr. 1967-68.
32
Moll was not told about the NeuWave patient death until shortly after the
merger closed in early April 2019.183
J. The Merger Agreement
J&J’s preliminary draft merger agreement included ten potential earnout
milestones.184 Two Monarch-specific milestones concerned 510(k) approval for
certain indications, including lung tissue ablation.185 Six milestones concerned
iPlatform regulatory approvals for general surgery, a gastrointestinal (GI) surgery,
and four to-be-determined “umbrella” procedures that Auris was to fill in.186 There
were also two net sales milestones.187
Auris sent back a revised draft of the merger agreement with revisions to the
proposed milestones.188 The Monarch lung tissue ablation milestone was changed
to “soft tissue ablation,” which Auris believed would not require clinical testing.189
As for iPlatform, Auris proposed milestones in line with its MVP strategy that began
with less complex procedures and built to more complex procedures.190
183
JX 1730; Moll Tr. 174.
184
JX 5016 § 2.07.
185
Id. § 2.07(a)(i)-(ii); see supra note 165 and accompanying text.
186
JX 5016 § 2.07 (a)(iii)-(vii); DeFonzo Tr. 366-68.
187
Id. § 2.07 (a)(ix)-(x).
188
JX 1278; JX 1285.
189
JX 1278 at 227; DeFonzo Tr. 361-63; JX 1334.
190
DeFonzo Tr. 369; see JX 1620 (the “Merger Agreement”) § 2.07(a).
33
All of the iPlatform milestones were for laparoscopic procedures, rather than
more complex concomitant ones.191 Auris insisted that approval of any “upper
abdominal” and “lower abdominal” procedures by year end 2021 would satisfy the
first iPlatform regulatory milestone.192 This was in contrast to the “general surgery”
indication suggested by J&J, which would have required Auris to demonstrate the
safety and effectiveness for the most complex procedure in the “general surgery”
umbrella.193 The subsequent milestones matched specific umbrella procedures that
Auris was targeting.194 J&J accepted these changes.
The agreed-upon regulatory milestones for iPlatform were:
1. General Surgery Milestone: $400,000,000 if iPlatform obtained
“510(k) premarket notification(s) allowing marketing and sale of
an iPlatform Product offering, with a specific indication for one
upper abdominal surgical procedure and one lower abdominal
procedure” by the end of 2021 (the “General Surgery
Milestone”);195
2. Upper Abdominal Umbrella Milestone: $150,000,000 if
iPlatform obtained “510(k) premarket notification(s) allowing
marketing and sale of an iPlatform Product offering(s) for . . .
191
Merger Agreement § 2.07(a)(i)-(viii); see Moll Tr. 49-50.
192
See JX 5016 at 3-4; Merger Agreement § 2.07(a)(iii); DeFonzo Tr. 365-67.
193
DeFonzo Tr. 364-65; compare JX 5016 § 2.07(a)(iii) (J&J draft proposing regulatory
approval on iPlatform “for general surgery procedures”), with Merger Agreement
§ 2.07(a)(iii) (final version requiring iPlatform regulatory approval for “one upper
abdominal surgical procedure and one lower abdominal surgical procedure”).
194
DeFonzo Tr. 366-68; compare JX 5016 § 2.07(a)(iv)-(vii) (J&J leaving brackets for
umbrella milestones for Auris to fill in), with Merger Agreement § 2.07(a)(iv)-(vii) (listing
specific indications).
195
Merger Agreement § 2.07(a)(iii).
34
upper abdominal Umbrella Procedure(s)” by the end of 2023 (the
“Upper Abdominal Milestone”);196
3. Colorectal/Lower Abdominal Umbrella Milestone:
$150,000,000 if iPlatform obtained “510(k) premarket
notification(s) allowing marketing and sale of an iPlatform
Product offering(s) for . . . urological Umbrella Procedure(s)” by
the end of 2023 (the “Lower Abdominal Milestone”);197
4. Urologic Umbrella Milestone: $150,000,000 if iPlatform
obtained “510(k) premarket notification(s) allowing marketing
and sale of an iPlatform Product offering(s) for . . .
colorectal/lower abdominal Umbrella Procedure(s)” by the end
of 2023 (the “Urologic Milestone”);198 and
5. Gynecologic Surgery Umbrella Milestone: $150,000,000 if
iPlatform obtained “510(k) premarket notification(s) allowing
marketing and sale of an iPlatform Product offering(s) for . . .
gynecological Umbrella Procedure(s)” by the end of 2023 (the
“Gynecologic Milestone”).199
The Monarch-related milestones were:
6. Endourology Milestone: $100,000,000 if Monarch obtained
“510(k) premarket notification(s) allowing marketing and sale of
a Monarch Product offering, with a specific indication for
endourology procedure(s)” by the end of 2020 (the
“Endourology Milestone”);200 and
7. Robotic Soft Tissue Ablation Milestone: $100,000,000 if
Monarch obtained “510(k) premarket notification(s) allowing
196
Id. § 2.07(a)(iv). “Umbrella Procedure” is defined as “any procedure or procedure
category within a specialty, which represents higher complexity or risk and when cleared
by the FDA includes covered procedures of less complexity or lower risk within that
specialty.” Id. § 10.03(uuu).
197
Id. § 2.07(a)(v).
198
Id. § 2.07(a)(vi).
199
Id. § 2.07(a)(vii).
200
Id. § 2.07(a)(i).
35
marketing and sale of a Monarch Product offering, with a
specific indication for robotically driven (or controlled) soft
tissue ablation” by the end of 2022 (the “Soft Tissue Ablation
Milestone”).201
An additional regulatory milestone could be satisfied by either iPlatform or
Monarch:
8. Robotic GI Endoluminal Milestone: $150,000,000 if either
iPlatform or Monarch obtained “510(k) premarket notification(s)
allowing marketing and sale of an iPlatform Product offering (or,
alternatively . . . a Monarch product offering), with a specific
indication for procedure(s) specifically including Endoscopic
Submucosal Dissection (ESD)” by the end of 2023 (the “GI
Milestone”).202
Finally, there were two commercial milestones that could be satisfied by either Verb
or Auris products:
9. First Step Net Sales Milestone: $500,000,000 if Robotics Net
Sales before the end of 2022 reached or exceeded “$575 million
in the aggregate”; 203 and
10. Second Step Net Sales Milestone: $500,000,000 if Robotics Net
Sales before the end of 2022 reached or exceeded “$575 million
in the aggregate.”204
Auris’s markup of the draft merger agreement proposed a one-way anti-
reliance clause favoring Auris. It also included a provision that would obligate J&J
to take efforts to develop and commercialize the Auris robots consistent with “a
201
Id. § 2.07(a)(ii).
202
Id. § 2.07(a)(viii).
203
Id. § 2.07(a)(ix).
204
Id. § 2.07(a)(x).
36
company in the medical devices industry of comparable size and resources to
J&J.”205 Auris had Intuitive in mind as the measure of industry standard efforts.206
J&J accepted the one-way anti-reliance clause but proposed an inward-facing
efforts provision.207 The efforts supplied were to be measured by J&J’s own
standards, which J&J assured Auris was beneficial since J&J was “the biggest
healthcare company in the world” with standards exceeding the industry.208 J&J
agreed that these “commercially reasonable efforts” would be to the end of achieving
the iPlatform and Monarch regulatory milestones.209 As a residual assurance, Auris
negotiated for language that tied J&J’s efforts to its “usual practice” for “priority
medical device products.”210
The final Merger Agreement was executed on February 12, 2019 by Ethicon,
Antwerp Merger Sub, Inc., Auris, and Fortis as the Auris stockholders’
representative.211 At the time, Auris had a high level of confidence in achieving
regulatory clearance via the 510(k) pathway, in iPlatform’s and Monarch’s ability to
205
JX 1278 at 159, 232; see DeFonzo Tr. 381-82.
206
DeFonzo Tr. 381.
207
Id. at 381-83; see also Hinchliffe Tr. 3145-46; Hinchliffe Dep. 206-07.
208
DeFonzo Tr. 382.
209
Merger Agreement § 2.07(e)(i), (ii); see Shen Tr. 1152.
210
Merger Agreement § 2.07(e)(ii); see DeFonzo Tr. 382-83; Hinchliffe Tr. 3145-46.
211
PTO ¶ 111.
37
deliver on the milestones, and a shared vision with J&J for the robots.212 The merger
was set to close on April 1.
K. Pre-Closing Preparations
Verb continued to struggle. McEvoy told Gorsky as much on March 10,
prompting Gorsky to ask why Verb’s timelines “continue to change with multiple
explanations for delays and issues.”213 To address Gorsky’s concerns, Shen
proposed an “assessment between Verb and iPlatform from a portfolio
perspective.”214 Celine Martin, who oversaw J&J’s robotics and digital surgery
program, was “aligned” with the proposal.215
Shen’s “worry” about “Verb vs. iPlatform” was that the “Verb team [would]
know [the J&J’s leadership team’s] hesitation.”216 As he told McEvoy, they must be
“all in for Verb.”217 Shen believed that “Verb + iPlatform [wa]s [J&J’s] bullet proof
strategy to compete.”218 As he wrote on the day the Auris merger closed:
“Delivering of Verb milestones is our No. 1 priority.”219
212
DeFonzo Tr. 363-64; Gardiner Tr. 748-61.
213
JX 1581; see also JX 1590 at 2; Shen Tr. 1112-14.
214
JX 1581 at 1.
215
Id.
216
JX 1630.
217
Id.
218
Id.
219
JX 1663; see Shen Tr. 1152, 1308. During his testimony, Shen said that this was “not
false.” Shen Tr. 1308.
38
L. Project Manhattan
Four days after closing, Shen drafted a “Plan to Technically Assess Verb
Platform and iPlatform.”220 He wrote that the objective was “to assess the robotic
system (Digital Surgery) development status from Verb and Auris and recommend
an optimal path to bring the system(s) to market, considering factors such as launch
schedule, project risk identification and mitigation, specialty indication launch
cadence, surgeon preference, etc.”221 He described three possible outcomes. First,
J&J could “[d]evelop both systems in parallel and the[n] make the final
commercialization decision.” Second, it could “[c]hoose one of the two” systems.
Or, third, it could “[m]erge them into a single development by combining the best
of each.”222
Shen sent a draft of the plan to Martin, writing: “I am still thinking about how
we do this highly sensitive assessment work. We cannot lose [the] Verb team at this
point.”223 He also sent a draft to Kilroy—Verb’s lead engineer. Kilroy envisioned
220
JX 1702.
221
JX 1703.
222
JX 1702.
223
JX 1703.
39
that the robots would be merged into a combined system.224 He suggested that Shen
revise “framing the project objective in a way that is less controversial.”225
Shen then edited the document. The new version stated that the objective of
the assessment was to “find synergies between platforms to decrease project risk and
accelerate time to commercialization.”226 He removed the description of the three
post-assessment “potential scenarios” outlined in his prior draft.227 He titled the
assessment “Project Manhattan.”228
Shen sent the revised version to Moll on April 9.229 Moll was aghast. During
negotiations, J&J had told Auris it would perform a post-closing “technology audit”
to understand Auris’s systems and ways that J&J’s “global candy store” of resources
could be beneficial to Auris.230 DeFonzo’s discussions with J&J similarly led him
to understand that a “technology audit” would be conducted to understand
“technologies available within Ethicon unrelated to Verb” that could help Auris.”231
224
Kilroy Tr. 2143; Kilroy Dep. 43-44.
225
JX 1710.
226
JX 1725 at 2.
227
JX 1703 at 2; see JX 1725.
JX 1725. “Manhattan” was an internal code name for Verb. See JX 2833 (discussing
228
“Manhattan” as “Verb”); Lenard Tr. 1799; JX 2658 at 1.
229
JX 1719; JX 1725. The version sent to Martin and Kilroy was never shared with Moll.
230
Moll Tr. 47-48.
231
DeFonzo Tr. 400-01.
40
But a comparative assessment between Verb and iPlatform had not been
mentioned.232
On April 22, Shen formally introduced Project Manhattan to the Verb and
Auris teams, describing it as a “Technical Assessment of Verb Surgical Platform and
Auris iPlatform.”233 He said that a “deep dive assessment” would be conducted “in
the following areas” for each platform:
• Master controller or [user input device]
• Robotic components and systems
• Instrumentation
• Visualization system
• Data connectivity
• Machine learning and [d]ata analytics.234
Shen said that Project Manhattan would be “co-le[d]” by Kilroy and Mintz and
completed over the “next 60-70 days.”235
Moll promptly told Shen of his concern that “[s]upporting a complex and
detailed 90 day technical review by all Auris technical heads w[ould] affect [Auris’s]
ability to stay on schedule.”236 Shen responded that “the system should stay as it is
(no need to be dressed up) for review.”237 By this point, though, Moll and the Auris
232
See Moll Tr. 70-72; JX 1500.
233
JX 1813; see Shen Tr. 1158.
234
JX 1813 at 1-2.
235
Id.
236
JX 1830; see Moll Tr. 76.
237
JX 1838.
41
team had learned that J&J capped the robotics budget (i.e., the Ashley Management
Decision), leading them to doubt that Verb and iPlatform would be developed on
“parallel path[s].”238 It seemed to them that Project Manhattan was a “bakeoff”
between Verb and iPlatform.239 The Auris team feared that only one robot could
win; the loser would be deprioritized, deemphasized, and cease to exist.240
Auris’s suspicions were well placed. Amid Project Manhattan, Martin wrote
that she did not “see [J&J] running parallel path [V]erb-Auris all the way to 510k”
because “P&L will not support it and it is very inefficient.”241 An internal J&J
retrospective document from the next year recognized that “[Project Manhattan was
[a] financial necessity[]” given the significant expense of “[d]eveloping 2 complex
robots at the same time.”242 The probable end goal was to find ways to “mesh” the
robots, consistent with Gorsky’s earlier aspirations and the budget set by the Ashley
Management Decision.243
Auris leadership thus viewed Project Manhattan as an existential threat to
iPlatform. Because the months-old iPlatform alpha robot would be pitted against a
238
Moll Tr. 76; id. at 47-48; Mintz Tr. 586-87.
239
Moll Tr. 72; DeFonzo 403-06.
240
Moll Tr. 72.
241
JX 1947.
242
JX 2774 at 5.
243
See supra notes 114, 156-57 and accompanying text; JX 2656; Lenard Day 2 Dep.
23-24.
42
Verb post-beta robot that had been through years of iterations, Auris had to quickly
prepare to “survive.”244 Mintz focused on creating “workarounds” for system
“bugs,” which he described as “the engineering and software equivalent of Band-
Aids, duct tape, and baling wire.”245 iPlatform incurred a significant “technical debt”
from going “backwards rather than forwards in development [] to prop up a system”
for an unanticipated head-to-head evaluation.246 In exchange for short term stability
to compete against Verb, iPlatform largely suspended its development plan, MVP
strategy, and beta version progress.247
Project Manhattan consisted of seven procedures performed by eight “key
opinion leader” surgeons (“KOLs”). Most of the KOLs were experienced on the
Verb device but had never used iPlatform.248 Two of the KOLs had worked closely
on Verb’s development.249 The procedures performed were: Roux-en-Y gastric
bypass (RYGB), low anterior resection (LAR), ventral hernia, partial nephrectomy,
244
Mintz Tr. 588-89
245
Id. at 589.
246
Moll Tr. 76; Mintz Tr. 590.
247
See Mintz Tr. 587-88; JX 1793.
248
JX 2125 at 2.
249
These KOLs were Dr. Monika Hagen and Dr. Keith Kim. Hagen Tr. 2282; Hagen Dep.
16-18; Kim Dep. 28, 28-49. Moll asked that Gardiner, who was experienced with
iPlatform, be a KOL. His request was rejected. Mintz Tr. 594-95; Moll Dep. 633-34.
43
hysterectomy, and lobectomy.250 After the procedures, the KOLs rated each
system’s capabilities.251
Both iPlatform and Verb successfully completed all seven procedures.252 The
KOLs gave iPlatform positive feedback and rated the system somewhat or nearly
ready for clinical use, with the exception of lobectomy.253 iPlatform’s performance
in one RYGB lab and the hysterectomy lab were rated equal to that of da Vinci.254
250
JX 2103; JX 2125; JX 2131. RYGB surgery, also called bariatric surgery, reduces the
size of the stomach and reroutes part of the small intestine. LAR surgery treats rectal
cancer by removing part of the rectum and reconnecting the rectum to the colon. Ventral
hernia surgery repairs protrusions of the intestine or other tissue through the abdominal
wall. Partial nephrectomy involves remoting a portion of the kidney to treat disease or
injury. A hysterectomy is a procedure to remove the uterus. A lobectomy is a procedure
to remove a lobe of the lung, including to treat cancer. See Stanford Medicine, General
Surgery – Common Surgical Procedures, Stanford Health Care, https://stanfordhealthcare
.org/medical-treatments/g/general-surgery/procedures.html) (last visited Aug. 31, 2024);
Roux-en-Y Gastric Bypass Weight-Loss Surgery, Johns Hopkins Medicine,
https://www.hopkinsmedicine.org/health/treatment-tests-and-therapies/rouxeny-gastric-
bypass-weightloss-surgery (last visited Aug. 31, 2024); Timothy J. Ridolfi, MD et al, Low
Anterior Resection Syndrome: Current Management and Future Directions, 29 Clinics
in Colon and Rectal Surgery 239, https://www.ncbi.nlm.nih.gov/pmc/articles/PMC49919
69/; Nephrectomy (kidney removal), Mayo Clinic, https://www.mayoclinic.org/tests-
procedures/nephrectomy/about/pac-20385165 (last visited Aug. 31, 2024); Lobectomy,
Johns Hopkins Medicine, https://www.hopkinsmedicine.org/health/treatment-tests-and-
therapies/lobectomy (last visited Aug. 31, 2024).
251
Mintz Tr. 594-95.
252
Id. at 592-98; JX 2125; JX 1878.
253
JX 2131.
254
Id. at 26-28.
44
The hysterectomy lab was a breakthrough for the iPlatform team, since it marked the
first time a surgeon was able to perform a procedure using all six robotic arms.255
Overall, the KOLs “were confident that both systems w[ould] be clinically
capable.”256 Although they raised problems with iPlatform (and Verb), the Auris
team left Project Manhattan feeling encouraged with iPlatform’s performance.257
The first iPlatform milestone (the General Surgery Milestone) was still 2.5 years
away, with subsequent milestones to be completed in 4.5 years.
M. iPlatform “Wins” the Bake-Off
On June 16, 2019, Martin reported to McEvoy and other J&J leaders that
iPlatform “performed well and managed to complete” all KOL procedures.258 By
this point, Martin and Shen had agreed that parallel pathing both robots would be an
unsuccessful strategy.259 They believed that only one system should be brought to
market. After considering KOL feedback, along with the vision and unique features
of iPlatform, Shen and Martin recommended to McEvoy that J&J prioritize
iPlatform.260
255
Mintz Tr. 596-98; see Pl.’s Trial Demonstrative (“Pl.’s Dem.”) 8 (video of the lab being
performed).
256
JX 2131 at 18.
257
Moll Tr. 80; Mintz Tr. 598-600.
258
JX 2103.
259
JX 2144.
260
JX 2164; JX 2236.
45
But “go[ing] with iPlatform” did not mean abandoning Verb.261 Consistent
with J&J’s goals and budget, Shen, Martin, and others discussed combining the
systems instead.262 Shen thought that “[c]ombining 2 programs into 1 ma[de] all the
sense from [a] traditional development standpoint – focus, budget, priority” to
compete with Intuitive.263
The J&J team prepared a recommendation to Gorsky, which projected
iPlatform 2019, 2020, and 2021 launch dates and a Verb launch date sometime after
2021.264 A slide showing the technical synergies between iPlatform and Verb
identified where iPlatform parts could be “plan B option[s]” should Verb’s
development stall.265 Gorsky asked that more elements of Verb be added to
iPlatform.266
In late September, Martin recommended to Gorsky that J&J pursue a
combination system of iPlatform “augmented by incremental [V]erb capabilities
261
JX 2164.
262
JX 2180.
263
Id.
264
JX 2275 at 32.
265
Id. at 45.
266
DeFonzo Tr. 408-09 (“Celine informed me sometime in mid-July that Alex had asked
the team to go back and find more elements of Verb to include in the iPlatform.”). Martin
could not remember this discussion, or most of the other deliberations from this period.
See Martin Tr. 1684-1689. DeFonzo’s testimony was overall credible, supported by
Gorsky’s hope of meshing the robots, and the subsequent events.
46
incl[uding] the Verb surgeon console.”267 Gorsky questioned why the financial
valuations for Verb and iPlatform were higher separately than when the systems
were combined and noted that the combination would “lead[] to some delay.”268
When McEvoy asked for clarification, J&J Chief Financial Officer Flavia Pease
explained that the lower valuation “still assumes all Auris milestones being paid in
full” and offered to “discuss further live.”269 McEvoy subsequently told Gorsky that
the combined Verb/iPlatform valuation improved “when you consider what will also
happen with contingent payment”—meaning the earnout.270 Gorsky gave the team
the “green light” to proceed with next steps.271
N. The FDA’s New Pathway Guidance
Despite the challenges of Project Manhattan, Auris strove to get iPlatform
back on track for regulatory approval. On June 28, Auris sent the FDA a pre-
submission for iPlatform with RYGB and inguinal hernia repair indications.272
267
JX 2594 at 20; Martin Tr. 1683-84.
268
JX 2599.
269
Id.
270
JX 2606; McEvoy Tr. 2637; McEvoy Dep. Day 2 207-08; see also JX 2584 at 26.
271
Martin Tr. 1693.
272
JX 2328 at 43. A laparoscopic inguinal hernia procedure repairs a hernia in the groin
area through small incisions. See Inguinal hernia, Mayo Clinic, https://www.mayoclinic.
org/diseases-conditions/inguinal-hernia/diagnosis-treatment/drc-20351553 (last visited
Aug. 31, 2024).
47
Auris also selected a different da Vinci predicate device than the one it had listed in
its prior submission to address the FDA’s initial feedback.273
In a Verb-related meeting with the FDA on August 5, J&J learned that “going
forward,” the agency believed that the 510(k) pathway would be closed for any new
RASD.274 The FDA reached this decision due to the systems’ “complexity” and
difficulties “mak[ing] a substantial equivalence determination” for a predicate
device.275 The FDA “indicated” that the “De Novo pathway [wa]s still a potential
option” versus the more complex PMA pathway.276 In assessing the effect of this
pathway change on Verb’s launch schedule, J&J’s regulatory team concluded that
De Novo review would yield “[n]o significant timeline differences compared to a
510(k)” review.277
The next month, the FDA notified J&J that the 510(k) pathway was likewise
closed to iPlatform.278 On January 6, 2020, the FDA confirmed that iPlatform could
seek approval through the De Novo pathway instead of PMA.279 This was seen as a
273
JX 2328 at 46; see supra notes 70-72 and accompanying text.
274
JX 2512 at 5.
275
Id.
276
Id.
277
JX 2396 at 12-13.
278
JX 6116 at 4; see also JX 2620; JX 6117.
279
JX 2951 at 6; Shen Tr. 1174; see also JX 2396 at 2; Bryant Tr. 2514-16.
48
positive outcome.280 It was still within the five-month buffer built into iPlatform’s
timeline to achieve its 2021 General Surgery Milestone, not to mention the longer
timelines for the 2023 milestones.281 And once iPlatform obtained De Novo
approval, it could use the 510(k) pathway for future indications by serving as its own
predicate device.282
O. Manhattan
On December 5, 2019, J&J management recommended to the J&J Board that
the company proceed with “a combined platform where Auris’ iPlatform is
augmented by Verb assets including the open surgeon console, intra-procedure data
capabilities and the surgeon portal.”283 The combination robot, called “iPlatform+,”
was described as a “[n]ext generation robotic platform designed with more
flexibility, more control, and more information to elevate [the] surgeon experience
[and] improve patient care.”284
As part of the combination plan, the J&J Board approved a full acquisition of
Verb by buying out residual assets from Verily.285 On December 19, J&J “signed
280
See Shen Tr. 1174.
281
JX 1689 at 13.
282
JX 2396 at 12.
283
JX 2732 at 4; see Martin Tr. 1693.
284
JX 2800 at 4.
285
JX 2732 at 4.
49
the Manhattan (Verb) option agreement.”286 J&J “execute[d] Manhattan” on
February 19, 2020 for a purchase price of approximately $155 million.287
Afterward, J&J worked to integrate Verb’s resources into Auris. The Auris
leadership team was largely sidelined. A “[f]ull [s]peed [m]igration” of more than
“200 [Verb] employees” to the iPlatform team commenced.288 A calamity of excess
and redundancy resulted.289 Hostility abounded between the two factions, which had
just faced off in Project Manhattan for the survival of their respective projects.290
J&J soon announced layoffs on both teams.291
Within a year of the integration, every engineer from legacy Auris’s iPlatform
clinical engineering team left the company—a “devastating” loss for the program.292
Meanwhile, Verb software engineers insisted on re-writing iPlatform’s code.293
Significant attrition of legacy Auris software engineers followed.294
286
JX 2833 (“Manhattan signed!”).
287
JX 3407; JX 2656 at 1.
288
JX 2743 at 11; see Mintz Tr. 609-11.
289
JX 3094.
290
JX 2743 at 11; DeFonzo Tr. 425-427; see also JX 2991 at 4.
291
JX 3272 at 12; JX 3280.
292
Mintz Tr. 616-17.
293
Id. at 613-14; JX 3194.
294
Pl.’s Dem. 7; Mintz Tr. 612-615.
50
P. The Milestone Write-down
In April 2020, J&J internally wrote down the value of the iPlatform and GI
regulatory milestones to zero.295 J&J also wrote down the net sales milestones.296
These write-downs created an on-the-books profit of $983.6 million for J&J.297 An
internal memo stated that the write-down was prompted by the FDA’s shift from the
510(k) to the De Novo pathway for iPlatform.298
J&J publicly announced the write-down on April 14.299 Auris leadership
learned about the write-downs around that time.300 McEvoy and Shen told Moll that
change was a result of the FDA’s pathway change.301 Fortis sent J&J an information
request, and J&J issued a litigation hold on April 24.302
With the milestones written off and litigation looming, J&J instituted a “new
reality” for Auris. 303 Martin and her team rolled out an employee incentive plan that
295
JX 3139; Shen Tr. 1171; Lenard Tr. 1827-28. Internal communications suggest that
J&J finance leaders had been considering the potential effects of writing down the
milestones since October 2019. See JX 2675.
296
JX 3139.
297
Id.; see also JX 5149 at 26.
298
JX 3139. Draft talking points for a first quarter earnings call referred to the milestone-
related profit as a “material” amount of money to the company. JX 3112 at 9.
299
JX 3168; PTO ¶ 161.
300
Moll Tr. 95-96; Mintz Tr. 617. DeFonzo learned about the milestones from Martin a
day before the announcement. DeFonzo Tr. 428.
301
JX 3193; Moll Tr. 95-96, 195, 198; see also JX 3253; Lenard Tr. 1830; JX 3392 at 15.
302
JX 5015; Shen Tr. 1174-75; JX 4490 at 9-10.
303
Moll Tr. 95.
51
had been first discussed in late 2019.304 The revised employee “milestones” included
bonuses upon iPlatform receiving FDA approval for “general surgery,” which was
different from the first iPlatform regulatory milestone in the Merger Agreement.305
The new incentive plan lacked any incentives for umbrella procedures and all GI-
related incentives were removed.306
Two months after the write-down of the iPlatform regulatory and GI
milestones, J&J announced the formation of a “Tiger Team” to simplify iPlatform’s
reporting structure.307 The iPlatform operational team was to report to Steve
Joachim, who effectively replaced Mintz.308 Joachim was a leader of the Ethicon
instrument development group that supported J&J’s robotics program.309 A systems
engineer by training, he lacked prior experience with RASDs.310
J&J also invested significant financial resources into the iPlatform/Verb
program.311 By the end of November, McEvoy had requested $200 million to
304
JX 2675 at 1; Moll Tr. 95-97; Mintz Tr. 617-18.
305
JX 3641 at 3-4; DeFonzo Tr. 430-32; Pl.’s Dem. 6.
306
See Pl.’s Dem. 6.
307
JX 3363 at 5; JX 3391 at 9.
308
JX 3391 at 10.
309
JX 2233 at 2; Joachim Tr. 2156-57.
310
Joachim Tr. 2157, 2241; Mintz Tr. 618-19.
311
JX 3417 at 6, 8-9; JX 3465 at 13; Lenard Tr. 1858-62.
52
develop the combined system.312 J&J’s allocation of resources to iPlatform 16
months post-merger proved too little, too late.
Q. This Litigation
On October 12, 2020, Fortis Advisors LLC filed a Verified Complaint against
J&J, Ethicon, Gorsky, McEvoy, Shen, and Morano.313 Fortis brought the suit in its
capacity as the representative of former Auris stockholders. It advanced 12 causes
of action, including equitable fraud, common law fraud, breach of the Merger
Agreement, reformation, mutual mistake, civil conspiracy, breach of the implied
covenant of good faith and fair dealing, and specific performance.
R. J&J’s New Narrative
The iPlatform beta prototype—the second iteration of the full system—came
online at the end of 2020.314 Auris had planned to go to clinical trials with, obtain
FDA clearance for, and launch the beta version of iPlatform.315 The system
experienced technical complications, including thermal, stability, and workspace
issues.316 These were issues Auris had been aware of during the alpha iteration and
viewed as “imminently solvable” until progress was derailed by Project
312
JX 5231 at 20.
313
Dkt. 1.
314
JX 4181.
315
Mintz Tr. 662-63.
316
Id. at 619-20; Khan Tr. 3021; JX 3764 at 10-11, 21, 66, 83.
53
Manhattan.317 The integration of the Verb system created an added layer of stability
complications for iPlatform.318
A new account of the Auris acquisition began to emerge at J&J. In March
2021, Shen sent Joachim an email titled “Very important thinking” that attached a
“narrative document” outlining Shen’s own “reflection” on iPlatform.319 Shen wrote
that the “original plan was to launch the Verb system first, giving [iPlatform] [a] 3-
year time[line] to fully prove concept feasibility.”320 Shen noted that J&J’s “current
challenge” with iPlatform was due to “design problems,” including “Work Space
(Reach, Access and Collision Prevention, etc.).”321
In early May, Joachim circulated a deck to J&J leadership citing technical
issues as the reason for iPlatform program delays.322 Joaquin Duato, who replaced
Gorsky as CEO in early 2022, asked why Shen had been unaware of iPlatform
workspace issues sooner.323 Joachim began searching old due diligence files,
317
Mintz Tr. 619-22.
318
Id. at 686.
JX 3814 at 1. The presentation referred to iPlatform as “Ottava,” which was the robot’s
319
name at this point.
320
Id. at 5.
321
JX 3814 at 5.
322
JX 5036.
323
JX 5247 at 1.
54
focusing on reports about arm design.324 The pre-merger design choice Auris
engineers made between so-called “Silverton” and “Superton” style robotic arms
was cast as evidence of Auris’s deceit during due diligence.325
By the end of 2021, iPlatform was shelved.326 J&J pivoted to a system
utilizing Verb’s bed-based architecture combined with certain iPlatform components
and accessories.327
S. Litigation Continues
While iPlatform sat idle, Fortis’s litigation proceeded apace.
On December 13, 2021, Fortis’s equitable fraud, reformation, and civil
conspiracy claims were dismissed.328 Individual defendants Gorsky, McEvoy, Shen,
and Morano were also dismissed for lack of personal jurisdiction.329
324
JX 3960.
325
JX 6149; Shen Tr. 1289-90; McEwen Dep. 161-62; Joachim Tr. 2218-19; Mintz Tr. 718.
326
JX 4322 at 2.
327
Id.
328
Dkt. 102.
329
Id.
55
A ten-day trial began on January 16, 2024.330 Just before trial began, Fortis
voluntarily dismissed its mutual mistake and unjust enrichment claims.331 Post-trial
briefing and argument were completed on May 22, 2024.332
II. ANALYSIS
Fortis advances both contract and fraud claims against J&J. Its contract-based
contentions include that J&J repudiated and breached the Merger Agreement and
breached the implied covenant of good faith and fair dealing. As to fraud, Fortis
argues that J&J deceived Auris into merging and accepting a contingent payment for
the Monarch Soft Tissue Ablation Milestone.
I begin with the contract theories. Fortis proved that J&J breached its efforts
obligation and the implied covenant regarding the iPlatform regulatory milestones
but not the Monarch-related or net sales milestones. It did not prove that J&J
repudiated the Merger Agreement.
As to its fraud theories, Fortis met its burden regarding J&J’s statements about
the Monarch Soft Tissue Ablation Milestone. It did not prove that J&J’s more
general statements about future intentions for Auris amount to fraud.
330
Dkt. 539.
331
Dkts. 527-28.
332
Fortis Advisors LLC’s Opening Post-trial Br. (Dkt. 561) (“Pl.’s Opening Post-trial
Br.”); Defs.’ Answering Post-trial Br. (Dkt. 562); Fortis Advisors LLC’s Reply Post-trial
Br. (Dkt. 566); see also Dkts. 571-72.
56
Fortis is entitled to damages for the breach of contract, implied covenant, and
fraud claims on which it prevails. Damages total $1,011,271,21.009, inclusive of
pre-judgment interest for milestones that expired before trial and exclusive of pre-
judgment interest owed since then.
A. Breach of Contract
“Under Delaware law, the elements of a breach of contract claim are: 1) a
contractual obligation; 2) a breach of that obligation by the defendant; and
3) resulting damage to the plaintiff.”333 Fortis has the burden to prove each element
by a preponderance of the evidence.334 “Proof by a preponderance of the evidence
means proof that something is more likely than not.”335
“A contract’s express terms provide the starting point in approaching a
contract dispute.”336 “Delaware law adheres to the objective theory of contracts,”
meaning that “a contract’s construction should be that which would be understood
by an objective, reasonable third party.”337 “When interpreting a contract, [the]
333
H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 140 (Del. Ch. 2003).
334
Narayanan v. Sutherland Global Hldgs. Inc., 2016 WL 3682617, at *8 (Del. Ch. July
5, 2016) (citing Agilent Techs., Inc. v. Kirkland, 2010 WL 610725, at *13 (Del. Ch. Feb.
18, 2010)).
335
inTEAM Assoc., LLC v. Heartland Payment Sys., Inc., 2016 WL 5660282, at *13 (Del.
Ch. Sept. 30, 2016) ), aff’d in part, rev’d in part on other grounds sub nom. Heartland
Payment Sys., LLC v. Inteam Assocs., LLC, 171 A.3d 544 (Del. 2017).
336
Ostroff v. Quality Servs. Labs., Inc., 2007 WL 121404, at *11 (Del. Ch. Jan. 5, 2007).
337
Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010) (citation omitted).
57
Court ‘will give priority to the parties’ intentions as reflected in the four corners of
the agreement.’”338 “Absent some ambiguity, Delaware courts will not distort or
twist contract language under the guise of construing it.”339 These principles guide
my review of the Merger Agreement.
1. The Earnout Structure
Fortis, on behalf of Auris’s former stockholders, seeks recovery of the
contingent consideration memorialized in the Merger Agreement. Auris received
$3.4 billion in cash at closing.340 Its stockholders stood to gain another $2.35 billion
in earnout payments, $1.15 billion of which was conditioned on iPlatform obtaining
regulatory approval for increasingly complex procedures by staged deadlines.341
“An earn-out is a provision in an acquisition agreement that makes a portion
of the purchase price payable to the seller if/when certain post-closing performance
targets are achieved.”342 It is a popular means to bridge price gaps between buyers
338
Salamone v. Gorman, 106 A.3d 354, 368 (Del. 2014) (quoting GMG Cap. Inv., LLC v.
Athenian Venture P’rs I, L.P., 36 A.3d 776, 779 (Del. 2012)).
339
Allied Cap. Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1030 (Del. Ch. 2006).
Neither party argues that the relevant provisions of the Merger Agreement are ambiguous,
and I find no ambiguity.
340
Merger Agreement §§ 2.03(a)(ii), 10.03(l), 10.03(w).
341
Id. § 2.07(a).
342
Richard De Rose, The Ins and Outs of Earn-Outs: A Delaware Perspective, ABA
Business Law Today (Mar. 2022), https://www.americanbar.org/groups/business_law/res
ources/business-law-today/2022-march/the-ins-and-outs-of-earn-outs-a-delaware-
perspective/.
58
and sellers, with different considerations for each.343 Buyers can mitigate valuation
risk since the contingent payment is based on the seller’s actual future performance
rather than its projections. Sellers give up guaranteed cash but stand to gain a greater
payment overall than they might otherwise receive upfront if defined milestones are
met.
A key point of tension in negotiating an earnout structure is allocating post-
closing operational control.344 The buyer prefers to freely manage the post-closing
activities of the business and to minimize earnout payments. For the buyer, a
favorable approach grants it the right to operate the business in its sole discretion,
limited only by good faith.345 The seller, by contrast, would rather retain a say in the
acquired business and to maximize earnout payments. It may bargain for a
contractual assurance that the buyer will devote certain “efforts” toward meeting the
milestones.346
343
JX 3955 at 4 (Leonidas G. Barbopoulos & Jo Danbolt, The Real Effects of Earnout
Contracts in M&As, 44 J. Fin. Rsch., 607, 610 (2010) (citation omitted)).
344
See JX 4046 at 3-4 (Richard Harroch, Understanding Earnouts in Mergers and
Acquisitions, Forbes (June 26, 2021), https://forbes.com/sites/allbusiness/2021/06/26/und
erstandingearnoutsin-mergers-and-acquisitions/).
345
See, e.g., LaPoint v. AmerisourceBergen Corp., 2007 WL 2565709, at *10 (Del. Ch.
Sept. 4, 2007) (considering a provision requiring that the buyer “act in good faith during
the Earnout Period” and not “undertake any actions during the Earnout Period any purpose
of which is to impede the ability of the [seller’s] [s]tockholders to earn the Earnout
Payments”).
346
See Himawan v. Cephalon, Inc., 2024 WL 1885560, at *7 (Del. Ch. Apr. 30, 2024)
(discussing a buyer-friendly efforts standard where the buyer was given “complete
discretion with respect to all decisions” related to purchased asset, limited only by an
59
“Variations on the ‘efforts’ concept include commitments to make: ‘good
faith efforts,’ ‘commercially reasonable efforts,’ ‘reasonable efforts,’ ‘reasonable
best efforts’ and ‘best efforts.’”347 From a transactional standpoint, these variations
reflect “a hierarchy from lowest (good faith efforts) to highest (best efforts) level of
commitment.”348 This is logical as a matter of plain English since the words used
have different meanings.349 But there is no agreement in case law over whether they
create different standards. Delaware courts have viewed variations of efforts
obligation to use commercially reasonable efforts to earnout milestones); see also
Neurvana Medical, LLC v. Balt USA, LLC, 2020 WL 949917, at *15-16 (Del. Ch. Feb. 27,
2020) (interpreting an asset purchase agreement that gave the buyer “sole discretion and
authority post-closing” to make decisions about a product, which discretion was limited by
an “outward facing” commercially reasonable efforts requirement).
347
Peter Atkins & Edward Micheletti, “‘Reasonable Efforts’ Clauses in Delaware: One
Size Fits All, Unless . . . ,” Harvard Law School Forum on Corporate Governance (Nov.
22, 2018), https://corpgov.law.harvard.edu/2018/11/22/reasonable-efforts-clauses-in-
delaware-one-size-fits-all-unless/ (last visited Aug. 30, 2024).
348
Id.; see also 1 ABA Mergers and Acquisitions Committee, Model Stock Purchase
Agreement with Commentary 212 (2d ed. 2010) (describing a “general sense of hierarchy
of various types of efforts clauses”); 2 Lou R. Kling et al., Negotiated Acquisitions of
Companies, Subsidiaries and Divisions § 13.06 (2024) (“[M]ost practitioners treat
‘reasonable efforts,’ ‘commercially reasonable efforts’ and ‘reasonable best efforts’ as all
different from, and as imposing less of an obligation than, ‘best’ efforts. There is no
universal agreement, however, as to whether these three standards are, as a practical matter,
any different from each other; notwithstanding the fact that ‘reasonable best efforts’ sounds
as if it imposes more of an obligation than ‘commercially reasonable efforts.’”).
349
E.g., Best, Merriam-Webster, https://www.merriam-webster.com/dictionary/best (last
visited Aug. 31, 2024) (defining “best” as “excelling all others” or “most productive of
good; offering or producing the greatest advantage, utility, or satisfaction”); Reasonable,
Merriam-Webster, https://www.merriam-webster.com/dictionary/reasonable (last visited
Aug. 31, 2024) (defining “reasonable” as “being in accord with reason” or “moderate,
fair”).
60
clauses—particularly those using the term “reasonable”—as largely
interchangeable.350
More important, then, is carefully drafting language that delineates the efforts
expected of the buyer relative to the achievement of the milestones. The parties can
set an outward facing efforts definition that looks to an industry standard or other
industry participants as a yardstick.351 This is generally seller friendly because the
seller can cite external standards by which to measure the buyer’s efforts.
Alternatively, the parties can set an inward facing definition, which applies the
350
See Williams Cos., Inc. v. Energy Transfer Equity, L.P., 159 A.3d 264, 272 (Del. 2017)
(holding that “commercially reasonable efforts” and “reasonable best efforts” both “impose
obligations to take all reasonable steps to solve problems and consummate the
transaction”); Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347, at *87 (Del. Ch. Oct.
1, 2018) (observing the lack of support in case law “for the distinctions that transactional
lawyers draw” between the various efforts clauses), aff’d, 198 A.3d 724 (Del. 2018)
(TABLE); Channel MedSystems, Inc. v. Boston Sci. Corp., 2019 WL 6896462, at *37 n.410
(Del. Ch. Dec. 18, 2019) (noting that a “commercially reasonable efforts” provision is
functionally the same under Delaware law as a “reasonable best efforts provision” (citing
Akorn, 2018 WL 4719347, at *87 & n.796)); 1 ABA Mergers and Acquisitions Committee,
Model Stock Purchase Agreement with Commentary 213 (“[C]ase law offers little support
for the position that ‘reasonable best efforts,’ ‘reasonable efforts,’ or ‘commercially
reasonable efforts’ will be interpreted as separate standards less demanding than ‘best
efforts.’”).
351
See Kristian A. Werling & Richard B. Smith, “Commercially Reasonable Efforts”
Diligence Obligations in Life Science M&A, 18 The M&A Lawyer (June 2014); e.g.,
Himawan, 2024 WL 1885560, at *11 (evaluating a merger agreement defining
“commercially reasonable efforts” as “the exercise of such efforts and commitment of such
resources by a company with substantially the same resources and expertise as [the buyer],
with due regard to the nature of efforts and cost required for the undertaking at stake”);
Neurvana, 2020 WL 949917, at *16-17 (dismissing a claim for breaching a commercially
reasonable efforts provision that imposed an “outward facing definition” that applied “an
industry-standard requirement . . . to define the diligence obligations of the buyer” where
the complaint failed to identify comparators).
61
buyer’s own diligence standards.352 This is often more buyer friendly since the buyer
can compare its past practices in similar situations to its present efforts.
As the Merger Agreement here demonstrates, however, these generalizations
are subject to exception given the highly customized nature of earnout structures.
J&J and Auris agreed to an inward facing provision to measure J&J’s “commercially
reasonable efforts” in advancing Auris’s products. But Auris bargained for three
crucial protections. First, J&J’s efforts were to be in furtherance of “achiev[ing]
each of the Regulatory Milestones”—not J&J’s other corporate goals.353 Second,
J&J was required to devote efforts consistent with its “usual practice” for a “priority
medical device.”354 This was doubly advantageous to Auris. Efforts to achieve the
regulatory milestones must be at the high level J&J—a top company in the
industry—set for itself, and for “priority” devices within J&J.355 Third, J&J was
352
See Werling, supra note 351; e.g., FMLS Holding Co. v. Integris BioServices, LLC,
2023 WL 7297238, at *7 (Del. Ch. Oct. 30, 2023) (considering a claim based on an inward-
looking definition of commercially reasonable efforts, which looked to how the business
was operating pre-merger); Banas v. Volcano Corp., 47 F. Supp. 3d 941, 946 (N.D. Cal.
2014) (reviewing an inward facing “commercially reasonable efforts” clause requiring the
buyer to use “efforts, sales terms, expertise and resources normally used by [Volcano] for
other products, which, as compared with [products developed from the plaintiffs’ assets];
are of similar market potential at a similar stage in its development or product life, taking
into account all reasonable relevant factors affecting the cost, risk and timing of
development and the total potential of the applicable [developed products], all as measured
by the facts and circumstances at the time such efforts are due”).
353
Merger Agreement § 2.07(e)(i).
354
Id. § 2.07(e)(ii).
355
See DeFonzo Tr. 381-82 (recalling that Morano encouraged Auris to accept an inward
facing standard by assuring it that J&J’s standard exceeded industry standards); id. at 382-
62
prohibited from acting “based on taking into account the cost of making any Earnout
Payment(s).”356 This limitation is more restrictive than the typical requirement that
a buyer not affirmatively act (or fail to act) for the purpose of thwarting an earnout
payment.357 The Merger Agreement also lacks language granting J&J complete
discretion over decisions relating to Auris’s business.358
With these assurances, Auris agreed to a deal with an earnout component.359
That is, it forewent guaranteed cash in exchange for assurances that J&J would
promote—not impair—its ability to reach the regulatory milestones. For J&J, this
83 (discussing the choice of “priority medical device” language as a “residual assurance”
that iPlatform would be prioritized within J&J). J&J put forth the expert opinion of Peter
Hinchliffe on whether J&J’s conduct was commercially reasonable. The Fortis expert he
was rebutting—Dr. Paul Gompers—did not opine on this matter. To the extent that
Hinchliffe offered any proper rebuttal testimony, much of it verged on legal opinions that
I decline to accept. But even Hinchliffe acknowledged that the inward facing efforts
standard in the Merger Agreement favored Auris. Hinchliffe Tr. 3145-46 (agreeing that
the “inward-facing standard in the contract” favored Auris due to J&J’s “high standards
relative to the rest of the industry”).
356
Merger Agreement § 2.07(e)(iii).
357
See S’holder Rep. Servs. LLC v. Albertsons Cos., 2021 WL 2311455, at *1 (Del. Ch.
June 7, 2021) (discussing a “typical” provision in which the buyer “bargained for the right
to operate [the seller] post-closing in its discretion limited only by its express commitment
not to operate [the seller] in a manner intended to avoid the obligation to pay the earnout”);
see also infra note 391 (citing precedent).
358
See supra note 346 and accompanying text (discussing precedent).
359
See JX 278 at 6-7 (Luca Viarengo et al., Enforcement Quality and the Use of Earnouts
in M&A Transactions: International Evidence, 45 J. Bus. Fin. & Acct., 437, 442-43 (2018)
(observing that a seller may agree to an earnout clause if the contractual protections are
“strong,” making the seller “more confident that it will obtain what it is due”).
63
meant that it paid less upfront but lost the ability to exercise unchecked discretion
over the Auris products.
As discussed below, Auris’s expectations went unmet. J&J did not devote
commercially reasonable efforts to achieve the milestones consistent with those
given to a priority device. Instead, it repeatedly impeded and impaired the
development of Auris’s products. J&J’s efforts might have been beneficial to its
broader robotics program, its profit margins, or its commercialization strategy. But
they were wholly inconsistent with J&J’s promises to Auris.
2. Whether J&J Breached the Efforts Provision
The Merger Agreement includes a bespoke “[e]fforts” clause.360 Section
2.07(e)(i) imposes on J&J an affirmative obligation to use “commercially reasonable
efforts” to advance the achievement of the iPlatform and Monarch regulatory
milestones.
From and after the Closing Date until the earlier to occur of the
latest Earnout Period End Date with respect to the Regulatory
Milestones or the date on which each of the Regulatory
Milestones have been achieved in accordance with this
Agreement, Parent shall, and shall cause its Affiliates (including
the Surviving Corporation) to, use commercially reasonable
efforts to achieve each of the Regulatory Milestones (excluding,
once achieved, any such Regulatory Milestones that may have
been achieved).361
360
Merger Agreement § 2.07(e) (“Efforts; Certain Transfers”).
361
Id. § 2.07(e)(i).
64
The express requirement that J&J’s objective be “to achieve each of the Regulatory
Milestones” stands in stark contrast to J&J’s understanding that it could “make
whatever decisions needed to be made” about the Auris products “in the context of
the rest of [J&J’s] business.”362
Delaware courts have interpreted “commercially reasonable efforts” clauses
as requiring a party “to take all reasonable steps” toward an end.363 Here, the parties
bargained for a meaning. Section 2.07(e)(ii) of the Merger Agreement defines
“commercially reasonable efforts” as:
the expenditure of efforts and resources in connection with
research and development and obtaining and furnishing of
information to and communications with applicable
Governmental Entities in connection with obtaining the
applicable 510(k) premarket notification with respect to the
applicable Robotics Products consistent with the usual practice
of Parent and its Affiliates with respect to priority medical device
products of similar commercial potential at a similar stage in
product lifecycle to the applicable Robotics Products[.]364
362
Morano Tr. 1532-34 (“[I]f we were spending $3.4 billion on [Auris], we were going to
own the company, and we wanted and needed the right to be able to make whatever
decisions needed to be made appropriately moving forward in the context of the rest of our
business.”); e.g., JX 2339 (Martin to DeFonzo: “As a general note, we will manage the
milestones to do what is the right for the business. They are meant to be collective
incentives to drive the business in the right direction in service of maximizing value.”);
Martin Day 2 Dep. 564-65 (testifying that the goal was to “develop a system to delight the
customers” because the “marketplace [] was waiting for a system from Johnson &
Johnson”); see also JX 1663; JX 6206.
363
Williams Cos., 159 A.3d at 273; see also Akorn, 2018 WL 4719347, at *86-88;
Himawan v. Cephalon, Inc., 2018 WL 6822708, at *7 (Del. Ch. Dec. 28, 2018) (citation
omitted).
364
Merger Agreement § 2.07(e)(ii); see also id. § 10.03(eee) (defining “Robotics
Products”).
65
The definition goes on to list ten factors J&J may “take into account” in setting its
level of efforts for a “priority medical device”:
(A) issues of efficacy and safety, (B) the risks inherent in the
development and commercialization of such products, (C) the
expected and actual competitiveness of alternative products sold
or licensed by third parties in the marketplace, (D) the expected
and actual patent and other proprietary position of the product,
(E) the likelihood and difficulty of obtaining FDA and other
regulatory approval given the nature of the product and the
regulatory structure involved, (F) the regulatory status of the
product and scope of any marketing approval, (G) pending or
actual legal proceedings with respect to the applicable Robotics
Product, (H) whether the product is subject to a clinical hold,
recall or market withdrawal, (I) input from regulatory experts and
any guidance or developments from the FDA or similar
Governmental Entity, including as it may affect the data required
to obtain premarket approval from the FDA or any similar
approval from another Governmental Entity and (J) the expected
and actual profitability and return on investment of the product,
taking into consideration, among other factors, the expected and
actual (1) third party costs and expenses, (2) royalty and other
payments and (3) pricing and reimbursement relating to the
product(s).365
Section 2.07(e)(iii) prohibits J&J from making decisions to avoid, or based on, the
milestones:
Parent shall not, and shall cause its Affiliates (including the
Surviving Corporation) not to, take any actions, or refrain from
taking any actions, concerning the business or operations of
Parent or any of its Affiliates (including the Surviving
Corporation) (A) with the intention of avoiding any of Parent’s
obligations to pay any Earnout Payment or (B) based on taking
into account the cost of making any Earnout Payment(s) made,
365
Id. § 2.07(e)(ii).
66
or actually or potentially to be made, pursuant to this
Agreement.366
Together, these provisions provide several layers of protection for Auris.
Although the ten factors J&J could consider in expending efforts and
resources gave it some measure of discretion, the mandate that J&J follow its “usual
practice” for “priority medical device[s]” cabined it.367 The phrase “priority medical
device” is undefined in the Merger Agreement. Based on its usual meaning, a
“priority” device is one given “superiority in rank, position, or privilege.” 368 J&J
identified a single comparator “priority medical device at a similar stage in product
lifecycle” to iPlatform and Monarch: an orthopedic RASD called Velys.369
Velys was developed through an MVP strategy starting with simple, buildable
functionality and a single indication.370 It lacked perfect performance statistics
before receiving its first FDA clearance in January 2021 and was not superior (or
366
Id. § 2.07(e)(iii).
367
Id. § 2.07(e)(ii).
368
Priority, Merriam-Webster, https://www.merriam-webster.com/dictionary/priority (last
visited Aug. 30, 2024); Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 738
(Del. 2006) (“Under well-settled case law, Delaware courts look to dictionaries for
assistance in determining the plain meaning of terms which are not defined in a contract.”).
369
See Heda 30(b)(6) Dep. 29-32; PTO ¶ 164; cf. Banas, 47 F. Supp. 3d at 947 (applying
Delaware law; discussing the importance of considering a relevant comparator device by
which to measure commercially reasonable efforts where no adequate comparator was
identified).
370
See PTO ¶ 164; JX 4246 at 3; Waterson Dep. 98-99; Shen Tr. 1227-28.
67
even equivalent) to its market-leading rival upon launch in August 2021.371 Velys
employees were given cash incentives to achieve rapid FDA clearance.372
iPlatform received starkly different treatment than Velys. Instead of being
prioritized, J&J subjected iPlatform to efforts that impaired its development and
ability to secure planned clearances. J&J’s efforts benefitted another device—
Verb—at iPlatform’s expense. It is obvious from the record that J&J’s efforts
toward the iPlatform regulatory milestones were not commercially reasonable, as
defined in the Merger Agreement. J&J’s breaches are, instead, reasonably certain
to have caused iPlatform to miss its regulatory milestones.
I reach a different conclusion regarding Monarch. J&J diminished aspects of
the Monarch program while prioritizing others. Fortis did not prove that these
actions reflect a breach of J&J’s efforts obligation.
a. Efforts Towards the iPlatform and GI Milestones
The Merger Agreement required J&J to use “commercially reasonable
efforts,” as defined in Section 2.07(e)(ii), to achieve the regulatory milestones.373
Six regulatory milestones are tied to FDA clearance of iPlatform for increasingly
371
See Waterson Dep. 180-81; JX 3717; JX 3963; JX 4481 at 19-20; see also PTO ¶¶ 165-
66.
372
Waterson Dep. 103-106.
373
Merger Agreement § 2.07(e)(ii); see Shen Tr. 1150-51 (confirming his understanding
that J&J had an obligation to “exercise priority efforts to achieve the regulatory milestones
in the merger agreement”).
68
complex laparoscopic procedures.374 A seventh—the GI Milestone—concerned
clearance for an endoluminal procedure and could be satisfied with either iPlatform
or Monarch.375 J&J did not bestow on iPlatform the efforts and resources to achieve
these milestones that would befit a “priority” device.376
Instead, J&J thrust iPlatform into a showdown with Verb. The fallout from
Project Manhattan grew when the iPlatform robot and team were forced to merge
with Verb. Compounding iPlatform’s challenges, the iPlatform and GI regulatory
milestones were deprioritized when they were written off and different incentives
were imposed. This is the antithesis of the commercially reasonable efforts expected
for a “priority” device.
i. Project Manhattan
Within weeks of closing, iPlatform was pitted against the Verb robot for the
Project Manhattan competitive assessment.377 To prevail, Auris had to prepare for
a series of in-house surgical challenges rather than progress iPlatform’s
development. Auris’s engineering team scrambled to gain functional system
stability so that the fledgling iPlatform alpha robot could face the post-beta Verb—
374
Merger Agreement § 2.07(a)(iii)-(vii).
375
Id. § 2.07(a)(viii).
376
Id. § 2.07(e)(ii).
377
See supra Section I.L; see also JX 1702 (“Plan to Technically Assess Verb Platform
and iPlatform”).
69
taking on extensive “technical debt” in the process.378 The legacy Auris team saw
no alternative, since both iPlatform and Verb were “fighting for their lives.”379 Over
80 Auris personnel were diverted to “support a 25-day lab period.”380 Many of the
Project Manhattan procedures assigned to iPlatform were more advanced than those
Auris intended to use to satisfy Regulatory Milestones.
J&J insists that imposing Project Manhattan on iPlatform did not breach its
efforts obligation because the exercise was meant to “identify synergies in order to
accelerate the development of the robots.”381 But Project Manhattan had no upside
for Auris. It did not advance iPlatform’s development, provide it with resources, or
bring it closer to regulatory approval. Quite the opposite.
For iPlatform, Project Manhattan caused needless setbacks and resource
drains. To make matters worse, J&J delayed making resource decisions for Auris
378
See Mintz Tr. 589-91 (describing how the workarounds to prepare for Project Manhattan
eliminated any “firm foundation” to fix problems in a “measured, controlled way”
necessary for a complex robot and created problems to solve later); Moll Tr. 254
(explaining that Shen did not understand “all of the work that needed to be done just to get
ready for any sort of technical assessment” and the “technical debt” Auris incurred “just to
show up for this evaluation”); see also JX 4207.
379
DeFonzo Tr. 406 (“[W]e were in a fight for our lives. . . . Verb us, and us Verb.”); see
also Moll Tr. 72 (“So we quickly characterized this as a bakeoff because the pitting of two
systems against each other was – couldn’t have been more different than the description of
a technology audit that had nothing to do with Verb, that had everything to do with
iPlatform and Monarch and how it could be – progress could be accelerated by resources
from J&J.”).
380
JX 2389 at 9; see also JX 2444 at 8; JX 2330.
381
Defs.’ Answering Post-trial Br. 6 (emphasis removed).
70
until the assessment was complete.382 For Verb, though, it was a boon. Through the
assessment, J&J identified synergies between the robots so that iPlatform could
optimize Verb.383 Doing so gave J&J something to show the market and its Board
for years of substantial investments in Verb while staying within the Ashley
Management Decision budget. This result might be appropriate if I were considering
whether J&J had used commercially reasonable efforts to develop Verb as a priority
device. But J&J agreed to devote such efforts to iPlatform in pursuing the regulatory
milestones. The iPlatform milestones were sacrificed to aid the Verb program.384
382
See JX 2103 (“July is a critical month with Manhattan project concluding. Auris’s
future needs to be assessed against the outcome of these strategic decisions.”); Moll Tr. 86;
see also JX 2403; JX 2019.
383
E.g., JX 6206 (Shen: “My original thought is to get Verb to market asap, and then
iPlatform. Leverage as much as possible behind the scene. The overall consolidation of
both platforms will take 5-10 years. The Tech Assessment will take us to the final
decision.”); Lenard Day 2 Dep. 23-24 (“If there are ways for us to take those two–and
combine them to optimize what would eventually be our value–I never heard about [Project
Manhattan] as a comparison between the two.”). Lenard was J&J’s Vice President of
Finance for J&J’s Robotics and Digital Solutions Group from 2019 until October 2022.
Lenard Tr. 1785-1786.
384
JX 1630 (Shen to McEvoy: “[i]Platform is exciting, but there is so much we do not
know. Verb has challenges, but we already have a working prototype which can perform
preclinical surgeries. Instrument is also developed. We need to be all in for Verb. Verb
+ iPlatform is our bullet proof strategy to compete.”); see also JX 1820 (Shen: “The Tech
Assessment is the No. 1 priority at this point for all of us.”); JX 1703.
71
Project Manhattan alone is sufficient to find that J&J breached its efforts
obligation in Section 2.07(e) of the Merger Agreement. A “priority” device would
not have to endure a costly battle merely to remain operative.385 But there is more.
ii. The Verb Combination and Integration
iPlatform’s success in Project Manhattan came at a crippling cost. It led to
the iPlatform system being meshed with Verb components, including certain
hardware.386 The complete integration of Verb into Auris followed.
Combining the RASDs hampered iPlatform’s launch and milestone
achievement.387 Contemporaneous documents reflect that J&J knew pursuing the
“[s]ingle, [o]ptimizied [p]latform” would negatively affect iPlatform’s development
schedule.388 Worse, J&J anticipated that the delay would frustrate the iPlatform
385
Nothing of the sort was required of Velys. See supra notes 370-72 and accompanying
text.
386
JX 2594 at 20 (recommending “[g]o to market with Combination platform defined as
‘iPlatform’+ (6-arm robotic architecture) augmented by incremental Verb capabilities incl.
Open Console, Verily scope, Digital Assets at launch, followed by further iterations
including UID integration”).
387
See Mintz Tr. 686 (discussing the difficulties faced by iPlatform’s beta version due to
“integration challenges”); see also Gardiner Tr. 822 (recounting that beta’s software
“crashed” when it was brought online).
388
See JX 2566 at 10 (Sept. 2019 Manhattan Financials Update: “Single, Optimized
Platform launching in 2024 (+1 Year Delay to Combine)”); McEvoy Tr. 2635
(acknowledging that combining the systems would mean a longer time to market for
Auris); Lenard Tr. 1802-04; JX 2584 at 26 (draft investor presentation discussing “[l]onger
time to market for Auris impacting retention” and “[m]ilestone [r]evisions for Auris
employees” as considerations for combining Verb and iPlatform); see also JX 2554 at 23
(J&J Sept. 2019 deck suggesting two year delay for combination); JX 5122 at 19-20 (J&J
employee texts expressing concern that a deck indicating delay from the combination could
72
regulatory milestones.389 Gorsky endorsed the combined system after understanding
that J&J had a “good overall value case” from a fair market value perspective
considering “what [w]ould also happen with the contingent payment.”390 This was
not only inconsistent with J&J’s obligation to use commercially reasonable efforts
to achieve the milestones. It was also contrary to J&J’s promise not to act “based
on taking into account the cost of making any Earnout Payment(s).”391
be “used against us in litigation”); compare Dougherty Dep. 400-02, 404-05 (testifying that
he was concerned Auris would learn about “scenario planning” to form a single platform),
with Dougherty Tr. 3170-72 (attempting to walk back his deposition testimony).
389
Unfortunately, Gorsky declined to attend trial and shed light on this exchange. Other
potentially relevant evidence was lost because Gorsky failed to turn off auto-delete on his
cell phone after receiving a litigation hold notice (in this and other litigation). Fortis moved
for sanctions in October 2022. See Pl.’s Mot. to Compel Discovery and for Sanctions (Dkt.
214). I reserved judgment on the motion until trial. With the benefit of a full record, I
conclude that Gorsky’s failure to retain text messages is far from ideal, but it was neither
reckless nor intentional. See Seibold v. Camulos P’rs LP, 2012 WL 4076182, at * (Del.
Ch. Sept. 17, 2012) (explaining that “dispositive sanctions are “only appropriate where a
party acts to intentionally or recklessly destroy evidence” (citation omitted)). Upon
receiving the hold memo, Gorsky asked his assistant to ensure that he complied. Aff. of
Alex Gorsky in Supp. of Defs.’ Opp’n to Pl.’s Mot. to Compel Discovery and for Sanctions
(Dkt. 226) Ex. A. This instruction shows an intention to comply. He also testified during
his deposition that he had enabled auto-delete on his phone years ago and simply forgot.
Gorsky Dep. 323-24. Gorsky was negligent. He did not, however, spoliate evidence.
390
JX 2606 at 1-2 (Oct. 1, 2019 email from McEvoy to Gorsky, in response to his inquiry
about why the combined system had a lower valuation); see also JX 2599 at 2 (CFO Pease
explaining, before McEvoy emailed Gorsky, that the lower valuation was based on
assuming that the iPlatform milestones were paid); McEvoy Tr. 2636-37 “Q: [T]he
contingent payment you wrote about there included the milestones that you were
contemplating writing down; correct? A: I presume so.”).
391
Merger Agreement § 2.07(e)(iii). This provision lacks an intent requirement. Cf.
Lazard Tech. P’rs, LLC v. Qinetiq N. Am. Operations LLC, 114 A.3d 193, 194 (Del. 2015)
(discussing a provision in a merger agreement prohibiting a buyer from “taking any action
to divert or defer [revenue] with the intent of reducing or limiting the Earn-Out Payment”);
id. at 195 (explaining that the Court of Chancery “properly held that [a] buyer’s action had
73
The detrimental effects of the combination on iPlatform intensified when the
entire Verb group was thrust upon Auris, which was trying to regain its footing after
Project Manhattan.392 In J&J’s view, the integration is indicative of commercially
reasonable efforts because Verb’s resources were being devoted to iPlatform. 393 In
reality, it was “highly disruptive,” as J&J had predicted.394 The Verb team, which
had just learned it lost Project Manhattan, suddenly had to support a competitor
robot. The iPlatform team went from nimble and focused to redundant and
divided.395 The “devastating” departure of the entire legacy iPlatform clinical
to be motivated at least in part by [an] intention” to avoid an earnout and was not required
to find that avoidance was the buyer’s sole purpose).
392
I do not necessarily view the integration as a separate breach. It was a continuation of
the injury from Project Manhattan and the robot combination. iPlatform could no longer
pursue its development and commercialization strategy. It, instead, had to battle, merge,
and integrate with a competitor device.
393
See Defs.’ Answering Post-trial Br. 98-99.
394
JX 2743 at 11 (J&J presentation describing the integration strategy as a “[o]ne time,
highly-disruptive change”); see DeFonzo Tr. 425-27 (describing the integration as a
“horrible experience” for both Auris and Verb since they had been “pitted against one
another,” which created a “toxic culture where, essentially, one program wins and the other
program loses . . . [a]nd now, all of a sudden, it’s, like, let’s integrate these things”); JX
2921 at 1 (DeFonzo expressing his concern to J&J that the directive to “integrate as quickly
as possible” is “unreasonable if we expect it not to disrupt development activities and core
business unit objectives”).
395
See JX 3094 (J&J’s Lenard: “After the Verb acquisition, I REALLY need to initiate
layoffs – not just for my budget . . . but also for the good of the business. We have so many
people now that we don’t know what do to with everyone and it’s slowing down our
progress.”); Mintz Tr. 613 (“Verb’s software team at this point was almost twice the size.
So now we have a situation where the team that sort of lost their baby was brought in to
join this team, and they outnumbered them two to one. There’s a dynamic there, even in
the best of times.”); see also JX 4495 (“Gompers Rep.”) ¶ 69 (describing the importance
of “firm-specific” human capital for entrepreneurial endeavors).
74
engineering team, and a number of Auris software engineers, resulted.396 With Verb
tethered to iPlatform, the swift pace Auris had once achieved was disrupted.397
J&J also argues that the combination and integration of Verb with iPlatform
was a “commercially reasonable business decision[]” falling “well within J&J’s
discretion under the contract.”398 This reflects a fundamental misreading of the
Merger Agreement. J&J could consider various factors in assessing the level of
efforts to devote. But the end goal of those efforts was to achieve the iPlatform
regulatory milestones—not to further J&J’s robotics program.399 A “priority” device
would not have its system, technology, and team diluted to fix another device’s
problems.400
iii. Thwarting of iPlatform’s MVP Strategy
The milestone structure that J&J and Auris agreed upon reflected an MVP
strategy, albeit not explicitly. The first iPlatform regulatory milestone—the General
Surgery Milestone—could be satisfied by any upper and any lower abdominal
396
See Mintz Tr. 612, 614-15 (explaining the “step back” to engineering and system
stability caused by the integration and “significant” attrition that resulted); JX 3194.
397
See JX 2991 at 4 (Feb. 2020 internal J&J presentation stating “[w]e can’t underestimate
the impact the ‘non bake-off bake-off’ has had on both companies”); Gompers Rep. ¶ 112
(opining that by “impos[ing] integration burdens on Auris management,” J&J “impeded
Auris’ ability to achieve the Acquisition milestones”).
398
Defs.’ Answering Post-trial Br. 103.
399
Merger Agreement § 2.07(e)(i).
400
Velys was never forcibly combined with another program. See Thomson Dep. 85-87;
Waterson Dep. 328-39.
75
procedures.401 From there, iPlatform would build towards more specialized
procedures to achieve the 2023 umbrella and GI regulatory milestones J&J had
allowed iPlatform to select.402 The milestones proceeded iteratively from relatively
simple to complex, without regard to architecture (e.g., number of arms used).403
At first, Auris considered pursuing either five-arm Nissen fundoplication or
RYGB for the upper abdominal procedure and inguinal hernia repair for the lower
abdominal procedure to satisfy the General Surgery Milestone.404 Choosing RYGB
for the upper indication was ambitious yet ideal, since Auris would have met two
milestones at once (the General Surgery and Upper Abdominal Milestones).405 But
after Project Manhattan caused delay, Auris worried that RYGB was out of reach
for 2021. It sought to simplify iPlatform’s initial indications and features for
regulatory approval purposes.406
401
Merger Agreement § 2.07(a)(iii).
402
Id. § 2.07(a)(iv)-(viii); see supra note 186 and accompanying text; supra note 194.
403
See Khan Tr. 3039-40.
404
JX 1729 at 21-22; Mintz Tr. 691-93 (explaining that Moll initially preferred to work
towards five-arm procedures); JX 824 at 29; see supra notes 74, 250, 270.
405
Sheehy Dep. 110-11 (Auris clinical engineer testifying: “If we could get two milestones
at the same time with the same set of activities, that would have been more efficient than
sequentially going from milestone 1 to milestone 2.”). Auris was confident at the time,
based on its lab results, that iPlatform could perform RYGBs. See infra notes 541-43 and
accompanying text.
406
JX 2199 (Moll suggesting to Shen and Martin that iPlatform “go with [the] smallest and
most efficient clinical effort to achieve desired regulatory clearances –> ie work to and
only to FDA defined clinical activities” to “accelerate [its] momentum”); Moll Tr. 86-90;
see also JX 6206.
76
Moll’s requests to pursue an MVP version of iPlatform for its initial regulatory
clearance, using simplified procedures that iPlatform was “very capable” of
performing, were rebuffed by J&J.407 J&J continued to insist that iPlatform focus
on RYGB—a procedure that would promote Ethicon instrument sales and broad
commercialization while putting achievement of the General Surgery Milestone in
peril.408 When Shen learned in May 2019 that Mintz planned to make “instrument
trade-offs” to pursue 510(k) with a simplified indication, he asked a colleague to
“intervene.”409
J&J believes that the ten factors listed in the Merger Agreement’s definition
of commercially reasonable efforts allowed it to drive iPlatform towards the more
complex procedure.410 For example, “expected and actual profitability” would be
furthered by an RYGB indication using high margin Ethicon instruments.411
407
Moll Tr. 88 (“RYGB is a more complex procedure. There are more questions with
regard to port placement. There was more questions with regard to arm movement. We
had lots of success in the lab with the single-quadrant procedures of gallbladders and
Nissens and hernias and hysterectomies. We knew that we were very capable in those
procedures.”); id. at 89-91.
408
Id. at 89-90.
409
JX 6206 at 1 (Shen: “We cannot do the wrong things for the sake of [the] timeline.”);
see also JX 2172 at 1 (June 2019 email from Shen to Martin: “Another thing that bothers
me is our milestone incentives. That may not drive the right behaviors.”); Shen Tr. 1164-
65.
410
E.g., Shen Tr. 1170-71 (stating that he believed the Auris team was too focused on the
milestones as “opposed to a great product” with commercial viability); see also Defs.’
Answering Post-trial Br. 44 (“Pursuing RYGB made commercial sense.”).
411
Merger Agreement § 2.07(e)(ii)(J); see Moll Tr. 89-91.
77
iPlatform’s “expected and actual competitiveness” versus da Vinci could also
improve using a five or six-arm architecture.412 Still, J&J’s insistence that
iPlatform’s foray into regulatory approval involve a complex five-arm procedure
impeded the achievement of the 2021 milestone. It did not provide “efforts and
resources . . . in connection with obtaining the applicable 510(k) premarket
notification . . . consistent with the usual practice of [J&J] with respect to [a] priority
medical device.”413
Although J&J was entitled to consider certain factors in devoting efforts and
resources to iPlatform, its discretion was not free floating. J&J was not, for example,
permitted to prioritize commercialization, product differentiation, or short-term
profitability at the expense of achieving the milestones.
Even if it could, those considerations were promoted through an MVP
approach for regulatory approval. Auris proved that:
• “[I]ssues of efficacy and safety” counsel in favor of starting with
a basic device and simple procedures before adding complexity
in later iterations.414
412
Merger Agreement § 2.07(e)(ii)(C).
413
Id. § 2.07(e)(ii).
414
Id. § 2.07(e)(ii)(A); see Shen Tr. 1168-69; Moll Tr. 16.
78
• “[T]he risks inherent in [] development” are lower with an MVP
strategy. It simplifies the system to ensure speed, flexibility, and
reliability, which reduces development risk.415
• “[T]he likelihood and difficulty of obtaining FDA and other
regulatory approval” favors starting with a narrow indication
before seeking to expand the device’s approval.416
• Commercial considerations—including “profitability and return
on investment,” the “competitiveness of alternative products,”
and the “risks inherent in . . . commercialization”—support an
MVP strategy.417 An MVP approach would have allowed J&J to
assess the valuable aspects of iPlatform before investing in the
development of a fully featured product.418 Even a minimally
viable version of iPlatform using fewer arms would have “plenty
of differentiation” from da Vinci to drive adoption.419
Numerous witnesses at trial confirmed that it is industry standard to follow an
MVP strategy for the development and regulatory approval of complex medical
415
Merger Agreement § 2.07(e)(ii)(B); see Khan Tr. 3042 (J&J’s technical expert
confirming that an MVP strategy promotes system speed, flexibility, and reliability); see
also Khan Day 1 Dep. 214 (“The simpler the system at the initial stages, the easier it is to
ensure system stability and solve other problems.”); Grennan Dep. 112-14 (J&J’s rebuttal
economics expert testifying about MVP); Gompers Rep. ¶ 62 (“[T]he MVP approach
accelerates time to market relative to the product-development model used by established
companies to enter known markets.”).
416
Merger Agreement § 2.07(e)(ii)(E); see Tillman Tr. 2825-27 (J&J’s regulatory expert
acknowledging that it is a common regulatory practice to seek clearance of an early device
with limited functionality, which can be a predicate for future iterations); accord Wittwer
Tr. 1959; see also Shen Tr. 1166-67; Moll Tr. 293-94; Khan Day 1 Dep. 209.
417
Merger Agreement § 2.07(e)(ii)(B), (C), (J); see Gompers Tr. 1935-36; Grennan Dep.
112-14.
418
E.g., Shen Tr. 1169; Grennan Tr. 2545; Gompers Tr. 1916-18, 1935-36; Khan Tr. 3041-
42; Lopes Tr. 2444.
419
Moll Tr. 90; id. at 294-95; see also Shen Tr. 1167; Grennan Dep. 58.
79
devices.420 For RASDs in particular, the approach is highly efficient.421 In terms of
priority devices, J&J’s own practice for Velys was to follow an MVP strategy.422
Gorsky also had asked that an MVP approach be used for Verb.423 Thus, J&J’s
insistence that iPlatform focus on a complex umbrella procedure to satisfy the
General Surgery Milestone was not commercially reasonable in view of J&J’s
obligation to devote efforts befitting a priority medical device.
iv. The New Incentives
In April 2020, J&J wrote down the iPlatform and GI regulatory milestones to
$0.424 This was an accounting measure; it did not eliminate J&J’s contractual
obligation to fund earnout payments if Auris timely met milestones.425 But the write-
420
See Shen Tr. 1164, 1169; Khan Tr. 3041-42; Khan Day 1 Dep. 207, 209; Moll Tr. 15-
16.
421
See supra notes 19-22 and accompanying text.
422
See JX 4246 at 3 (“As part of the deal model, it was agreed that we would do a true
MVP with the objective to enter the US market as quickly as possible.”); Waterson Dep.
98-99; Shen Tr. 1227-28.
423
See JX 255 at 1 (“Alex has asked us to . . . make sure we hit the goals and deliver the
first general ‘minimally viable product’”); JX 711 at 3 (targeting “1 indication” for a
“[r]educed program scope” to accelerate launch); Shen Tr. 1167.
424
JX 3139 at 2; PTO ¶ 161.
425
Defs.’ Answering Post-trial Br. 111-12.
80
down was accompanied by an employee incentive program with targets different
from the milestones in the Merger Agreement.426
In contrast to the General Surgery Milestone that Auris had bargained for, the
new regulatory approval incentive was based on FDA approval of iPlatform for a
“general surgery” indication (like RYGB).427 The program set a target date for
iPlatform’s initial FDA approval at the end of 2023—two years later than the
deadline in the Merger Agreement.428 All other regulatory milestones for iPlatform
and GI-related incentives were absent from the program.429
These different inducements, coupled with J&J’s communications to Auris
that the milestones were “canceled,”430 negatively affected employees’ motivation
to work towards the iPlatform and GI regulatory milestones in the Merger
Agreement.431 J&J was not using “commercially reasonable efforts” toward meeting
426
JX 2675 at 1 (discussing, in October 2021, the potential need to “construct an employee
specific plan to ‘restore’ milestone achievability through creating a new separate retention
program”); Moll Tr. 95-97; Mintz Tr. 617-18.
427
Compare JX 3641 at 5, with Merger Agreement § 2.07(a)(iii); see also supra note 193
and accompanying text.
428
Compare JX 3641 at 5, with Merger Agreement § 2.07(a)(iii).
429
Compare JX 3641 at 5, with Merger Agreement § 2.07(a)(iv)-(viii). It also replaced
gross revenue-based sales milestones with incentives based on profitability and overseas
expansion. Compare JX 3641 at 5, with Merger Agreement §§ 2.07(a)(ix)-(x).
430
See Moll Tr. 95-96, 195, 198; see also JX 3193.
431
See Gompers Rep. ¶ 117.
81
the regulatory milestones “consistent with [J&J]’s usual practice” for a “priority”
device.432 It was redirecting efforts toward different goals.
This is not to say that J&J had to pursue the milestones without any regard to
commercial reasonableness. But though J&J could reasonably calibrate its efforts,
it could not try to re-write or deprioritize the milestones themselves. Velys never
received similar treatment.433
* * *
J&J was required to utilize commercially reasonable efforts to meet the
iPlatform and GI regulatory milestones, consistent with those given to a priority
medical device. Its actions beginning with Project Manhattan were anything but. A
priority device benefitting from such efforts by J&J would not be embattled,
derailed, and enmeshed with another. Velys was not.
Regardless, J&J insists that the efforts devoted to iPlatform were
commercially reasonable because iPlatform’s funding vastly exceed that of Velys
(or any other medical device program at J&J).434 J&J invested over $2.25 billion in
the Auris program (broadly speaking) from 2019 to 2022.435 It also purchased a
432
Merger Agreement § 2.07(e)(ii).
433
See supra notes 370-72 and accompanying text.
434
Defs.’ Answering Post-trial Br. 102. J&J makes similar arguments about staffing, which
fail for the same reasons as its financing arguments and those discussed above regarding
the post-integration debacle.
435
See JX 4516 (“Malackowski Rep.”) 283-84; Defs.’ Answering Post-trial Br. 102.
82
company called Vytronus for $20 million to buttress Auris’s capabilities, at Moll’s
request.436
It is an oversimplification to view these funds as furthering the achievement
of the iPlatform regulatory milestones. For example, $112 million of the funds J&J
claims were for iPlatform were spent on the Verb robot and instrument R&D, $89
million was spent on Ethicon legal fees (including this litigation), and $90 million
was spent to acquire the remaining interest in Verb.437 Much of the investment came
post-write-down, and one-third of the cited total was spent after J&J abandoned
iPlatform in 2022.438 An obligation to use commercially reasonable efforts in pursuit
of the iPlatform regulatory milestones is not equivalent to spending large sums on
J&J’s robotics program. J&J fell short of the promise it made in Section 2.07(e) of
the Merger Agreement.
b. J&J Efforts Towards the Monarch Milestones
The Merger Agreement includes two regulatory milestones for Monarch: one
focused on soft tissue ablation and the other on endourology. J&J’s contractual
436
JX 2825 at 1; Martin Tr. 1767-68; Leparmentier Dep. 210-12.
437
See Malackowski Rep. 283-84; see also Defs.’ Trial Demonstrative (“Defs.’ Dem.”) 10.
Other expenditures included $214 million for additional instruments R&D, $60 million for
marketing products other than iPlatform and Monarch, and $75 million for standalone
“Digital Solutions” software products. See Malackowski Rep. 283-84; Kilroy Dep. 263-
64; see also Defs.’ Dem. 10.
438
See Malackowski Rep. 283-84; see also Defs.’ Dem. 10.
83
obligations extended to these milestones.439 Fortis contends that J&J failed to use
commercially reasonable efforts to achieve them.
Monarch’s story is distinct from iPlatform’s. Monarch was not subjected to
Project Manhattan. Its system was not joined with another robot. It was largely
permitted to follow an MVP strategy. And its regulatory milestones were not written
down until September 2020.440
Fortis’s arguments regarding the Monarch milestones are, at bottom,
disagreements with how J&J engaged with the FDA and prioritized aspects of the
Monarch program. Funding was allocated towards some Monarch indications
instead of others, there were hiring gaps, and J&J’s actions towards solving the
NeuWave FLEX problem were bungled. These actions, or lack thereof, were flawed
and may prompted unintended delays, but they are not commercially unreasonable
under Section 2.07(e).
i. Soft Tissue Ablation
The Monarch Soft Tissue Ablation Milestone contemplated 510(k) approval
for a “specific indication for robotically driven (or controlled) soft tissue ablation,”
439
Merger Agreement § 2.07(e)(i); id. § 10.03(zz) (defining “Regulatory Milestones” to
include “the Monarch Endourology Milestone” and the “Monarch Soft Tissue Ablation
Milestone”).
440
JX 3504 at 3. The new employee incentive plan did, however, prioritize reusable
bronchoscopes rather than the Soft Tissue Ablation Milestone and lacked any endourology
incentives. See JX 3641 at 5.
84
including “instruments and accessories required to perform such ablation” by the
end of 2022.441 To meet the milestone, Monarch would need to use the NeuWave
FLEX catheter.442 But FLEX was in regulatory limbo after the patient death during
its lung tissue study.443 A “microwave pole” being developed by another company,
which could have replaced FLEX to perform the ablation procedure, became
unavailable after its developer was acquired.444
Fortis argues that J&J’s efforts obligation required it to promptly conduct a
new clinical study on FLEX.445 It disagrees with J&J’s initial strategy of advocating
to the FDA that an IDE was unnecessary.446 Fortis—with the benefit of hindsight—
may be correct that J&J’s strategy flopped. That does not mean, however, that J&J’s
attempts were commercially unreasonable in real time.
J&J engaged in multiple discussions with the FDA to find the shortest path to
regulatory clearance for FLEX, consistent with the Soft Tissue Ablation
Milestone.447 That the FDA continued to insist J&J conduct clinical trials and seek
441
Merger Agreement § 2.07(a)(ii).
442
Moll Tr. 51.
443
See supra notes 172-74 and accompanying text.
444
Leparmentier Tr. 995.
445
Pl.’s Opening Post-trial Br. 122 (citing Wittwer Tr. 1968-69).
Id. at 80 (arguing that “J&J squandered a meeting with the FDA”); see JX 2313 at 8-10;
446
JX 2648 at 35-36.
447
See Bryant Tr. 2500-01.
85
an IDE for FLEX related to lung tissue ablation is no fault of J&J. In 2020, at the
FDA’s encouragement, J&J obtained a Breakthrough Device Designation for
FLEX.448 The Breakthrough Device Program is a priority FDA program for devices
offering a public health benefit with “significant regulatory advantages.”449 By the
end of 2020, the FLEX team made several regulatory submissions, held multiple
meetings with the FDA, and completed pre-clinical animal studies.450 As a result of
those efforts, in November 2021, the FDA conditionally approved an IDE for FLEX
in lung treatment.451 Despite that, the remaining clinical data and regulatory
submissions for final approval meant that Monarch could not meet the 2022
milestone.
Setting aside whether J&J should have told Auris about the patient death
sooner,452 J&J’s efforts were commercially reasonable. The delay caused by the
patient death and the resulting requirements imposed by the FDA were not in J&J’s
control. Although Velys never faced a similar regulatory hurdle, J&J’s iterative and
consistent engagement with the FDA for Monarch reflects the sort of efforts one
448
JX 3294; see also JX 2313 at 10.
449
Tillman Rep. ¶ 29.
450
See JX 3657 at 11.
451
See Tillman Rep. ¶ 288.
452
As discussed below, Auris is entitled to recover for this milestone due to fraud. See
infra Section II.B.4.
86
would expect it to undertake for a priority device. In setting the level of its efforts,
J&J was entitled to consider “the regulatory status of the product and scope of any
marketing approval, . . . whether the product is subject to a clinical hold, recall or
market withdrawal, [and] input from regulatory experts and any guidance or
developments from the FDA.”453 Had J&J succeeded in persuading the FDA that an
IDE was not needed for FLEX, it would have saved time for Monarch to meet the
Soft Tissue Ablation Milestone.
ii. Endourology
The Endourology Milestone required Monarch to obtain 510(k) approval “for
endourology procedure(s)” by the end of 2020.454 Auris had solved major scientific
problems with the procedure and planned to satisfy the milestone with an MVP
approach.455 Fortis argues that J&J failed to provide adequate resources to do so.456
Instead, to address a “known budget gap” in 2020, J&J decided that the “[p]rimary
Monarch focus” would be bronchoscopy rather than endourology.457
453
Merger Agreement § 2.07(e)(ii)(F), (H)-(I).
454
Id. § 2.07(a)(i).
455
Leparmentier Tr. 983-84, 1017-18.
456
Pl.’s Opening Post-trial Br. 81.
457
JX 3091 at 3.
87
Velys received requested funding, space, and personnel.458 By comparison,
endourology was 15% understaffed and partially underfunded.459 But even if
Monarch’s endourology team had proportionately less resources than Velys, it is not
apparent that J&J’s efforts deviated from its usual practice in supporting research,
development, and regulatory interactions for a priority device. J&J logically
prioritized a staged approach to Monarch’s development.
Monarch Uro’s planned 510(k) submission depended upon the to-be-
approved Monarch Bronch 2.0 three-arm cart first receiving 510(k) clearance.460
Monarch could not seek approval for Uro until after Bronch 2.0 obtained it in April
2020.461 J&J’s efforts and resources in furtherance of bronchoscopy necessarily
advanced Monarch’s chance of achieving the Endourology Milestone. The Merger
Agreement permitted J&J to consider “the likelihood and difficulty of obtaining
FDA and other regulatory approval” in setting the level of its efforts, which would
reasonably include focusing on an indication necessary for a subsequent
clearance.462
458
See JX 356; Thomson Dep. 55; Waterson Dep. 130-31, 341.
459
See Leparmentier Tr. 1019-21; JX 3195; JX 3091 at 3.
460
See JX 975 at 4 (communicating this plan to the FDA); see also JX 637 at 9-12; JX 673
at 5. Bronch 1.0, which already had 510(k) clearance, only had two arms. Monarch Uro
required the Bronch 2.0 three-arm version to be cleared.
461
Tillman Rep. ¶¶ 223-25.
462
Merger Agreement § 2.07(e)(ii)(E).
88
3. Whether Fortis Was Damaged
Fortis must next prove with “reasonable certainty” that J&J’s breaches of the
Merger Agreement caused it injury.463 Fortis contends that J&J’s failure to use
commercially reasonable efforts prevented Auris from achieving the iPlatform
regulatory, GI, and net sales milestones.464 J&J, for its part, asserts that Fortis cannot
prove that its injury “flowed from [J&J’s] violation of the contract” rather than
“other intervening causes.”465 I consider these arguments for iPlatform milestone by
milestone.466
a. iPlatform Regulatory Milestones
The Merger Agreement outlines six regulatory milestones for iPlatform: the
General Surgery Milestone, four umbrella procedure milestones (the Upper
Abdominal Milestone, the Lower Abdominal Milestone, the Urologic Milestone,
463
Siga Techs., Inc. v. PharmAthene, Inc. (“Siga II”), 132 A.3d 1108, 1111 (Del. 2015)
(“[W]hen a contract is breached, expectation damages can be established as long as the
plaintiff can prove the fact of damages with reasonable certainty.” (emphasis removed));
see also Cura Fin. Servs. N.V. v. Elec. Payment Exch., Inc., 2001 WL 1334188, at *19-20
(Del. Ch. Oct. 22, 2001) (“[R]easonable certainty is not equivalent to absolute certainty;
rather, the requirement that plaintiff show defendant’s breach to be the cause of his injury
with ‘reasonable certainty’ merely means that the fact of damages must be taken out of the
realm of speculation.” (quoting Tanner v. Exxon Corp., 1981 WL 191389 (Del. Super. July
23, 1981))).
464
See Pl.’s Opening Post-trial Br. 121-26.
465
Defs.’ Answering Post-trial Br. 112 (quoting LaPoint, 2007 WL 2565709, at *9).
466
Because Fortis did not prove a breach of contract as to J&J’s Monarch-focused efforts,
I do not consider whether Fortis suffered damages related to Monarch.
89
and the Gynecologic Milestone), and the GI Milestone.467 Pre-merger, J&J
estimated an 85% probability of meeting the General Surgery Milestone and an 75%
probability of meeting the umbrella and GI milestones.468 J&J insists that its
predictions were misguided for two overarching reasons: technical issues and
regulatory challenges.469
On the technical front, J&J points to evidence of “problems with workspace,
thermal issues, system stability, emergency patient access, and instrument
performance.”470 To be sure, these were challenges that the iPlatform team would
need to solve. J&J obstructed Auris’s ability to do so by imposing Project Manhattan
shortly after closing, and then combining iPlatform with Verb.
Beyond that, I view J&J’s insistence that technical deficiencies led to the
failed milestones with skepticism. J&J engaged in multiple rounds of due diligence,
involving experienced Verb engineers and outside robotics experts at Sagentia. 471
J&J gained direct insight through its Auris board observer seat.472 J&J knew about
iPlatform’s strengths and weaknesses before projecting that the milestones would
467
Merger Agreement § 2.07(a)(iii)-(viii).
468
JX 3139.
469
Defs.’ Answering Post-trial Br. 112-13.
470
Id.
471
E.g., JX 447; JX 1076; Mintz Tr. 575-78; see also DeFonzo Tr. 354-57.
472
See PTO ¶ 107; Morano Tr. 1445-47; Mintz Tr. 575-78; McEwen Dep. 71; supra note
103 and accompanying text.
90
likely be achieved and acquiring Auris.473 When J&J wrote down the milestones in
April 2020, it cited the FDA pathway change to De Novo—not technical issues—as
the basis.474
It was only after Fortis sued in October 2020 that J&J began searching for
diligence files suggesting technical flaws in iPlatform’s system.475 This appears to
be tactical backfilling.476 One frequently cited example is Auris’s selection of the
Silverton-style arm for iPlatform rather than the redesigned Superton arm, which
J&J calls a hasty choice detrimental to iPlatform’s success that was hidden from
J&J.477 As Mintz explained, though, iPlatform’s choice was neither rash nor
473
E.g., JX 1284.
474
JX 3139 at 2; see Lenard Tr. 1830.
475
JX 3814 (Shen telling Joachim to be “THE leader to own the [Auris acquisition]
narrative”); see supra notes 319-21 and accompanying text.
476
For instance, J&J argues that “DeFonzo provided J&J with a version of the iPlatform
team’s January 2019 quarterly program review that had been doctored to remove references
to significant problems with workspace, thermal issues, and instrument performance” and
that “Auris similarly altered other technical materials shared with J&J.” Defs.’ Answering
Post-trial Br. 41. The internal version and external version are of the quarterly update are
different. Compare JX 1130, with JX 1113 at 8, 29-34, 35, 37. But there is no credible
evidence suggesting that Auris set out to hoodwink J&J or “doctor” documents. Instead,
Auris’s internal documents were simply cleaned up and revised before being sent to a
potential outside investor/acquiror. See DeFonzo Tr. 510-14.
477
Defs.’ Post-trial Answering Br. 62; see Defs.’ Dem. 22 at 53-60. J&J relied on the
expert opinion of Dr. Moiz Khan to support its argument that iPlatform’s design and system
suffered from fatal flaws. Khan’s critiques of iPlatform were based on his review of a
subset of documents and videos. He never operated the robot and saw the robot just once
in passing. Khan Tr. 2971-73. Because of his limited exposure to the robot, I give his
testimony about specific challenges facing iPlatform little weight.
91
nefarious; it was strategic and evident.478 Nevertheless, I weigh specific arguments
in the context of each milestone despite my overarching cynicism that technical
problems are to blame for the missed milestones.
On the regulatory front, the primary matter raised by J&J is the FDA’s pivot
from the 510(k) to the De Novo pathway for RASDs. This change, in J&J’s
estimation, “doomed any hope of meeting the milestones.”479 The milestone most
directly affected by the pathway change is the General Surgery Milestone. If
iPlatform had timely obtained De Novo approval for one upper and one lower
abdominal surgical procedure, it could follow the 510(k) pathway for the subsequent
regulatory milestones.480 As such, I mainly consider the effects of the FDA’s
478
Mintz Tr. 718 (“So this balance of reach, access, stiffness, bandwidth, you have to get
all of those right. And having gotten the stiffness and bandwidth we did in a long, skinny
arm was not something to give up lightly. And we were completing procedures.”); id. at
711 (“None of these risks were hidden.”). Mintz was a compelling witness. He had
extensive experience developing successful RASDs, including at Intuitive. He was vital
to iPlatform’s development and has unmatched knowledge of the design and development
process from its infancy in 2016 through the selection of the beta design in early 2021. Id.
at 711-12. Mintz testified candidly about iPlatform’s technical challenges and what it took
to solve them. See, e.g., id. at 619-22. Despite Mintz’s passion for the iPlatform system
and his financial incentives, his testimony was highly credible relative to that of Khan. .
479
Defs.’ Answering Post-trial Br. 111.
480
See Wittwer Rep. ¶ 22 (“If iPlatform had obtained De Novo approval for its general
surgery application, J&J could have used iPlatform itself as a predicate device allowing
use of the 510(k) pathway for pre-market clearance of further indications contemplated
under subsequent ‘umbrella’ regulatory milestones for iPlatform. This would have reduced
the regulatory approval timelines for these later applications.”); see also Wittwer Tr. 1959.
92
position change in the context of the General Surgery Milestone. It is with that
milestone that I begin.
i. General Surgery Milestone
The General Surgery Milestone required iPlatform to receive 510(k) clearance
“for one upper abdominal surgical procedure” and “one lower abdominal surgical
procedure” by the end of 2021.481 iPlatform was on track to meet this milestone at
the time of the merger. Before closing, iPlatform’s pre-alpha prototype had
completed procedures that would have satisfied it.482
iPlatform’s program timeline gave it five months to secure an initial 510(k)
approval.483 This was “ambitious.”484 To reduce risk, Auris built in a “healthy”
buffer of five additional months, ending on the last day of 2021. 485 Based on
iPlatform’s progress and optionality over which upper and lower clinical indications
to pursue, the Auris team believed that the iPlatform General Surgery Milestone
would likely be met.486
481
Merger Agreement § 2.07(a)(iii).
482
See JX 5012 at 1; JX 699 at 9; JX 2610; Mintz Tr. 579-80; Gardiner Tr. 743-51.
483
JX 1689 at 13-14; Mintz Tr. 579-80.
484
DeFonzo Tr. 505-06.
485
Id.; see also Mintz Tr. 659-60 (explaining that the timelines reflected “when we could
reasonably, aggressively expect things to go” plus a buffer).
486
JX 1413 at 2 (estimating a 65% probability of success for the first milestone); Mintz
Tr. 580.
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The record supports Auris’s assessment. After the merger, iPlatform
continued to receive high marks from surgeons.487 It performed well in Project
Manhattan.488 It went on to successfully complete 40 cadaver labs from mid-2019
to early 2020 in which all milestone procedures were performed—including the most
complex LAR and RYGB procedures.489 The labs were, at times, imperfect and
some physicians disliked the iPlatform system.490 But regulatory approval is
measured by clinical safety and effectiveness—not commercial readiness.491 It is
487
See generally Pl.’s Dem. 13 (lab results).
488
See supra notes 252-56 and accompanying text; see Wittwer Tr. 1957 (testifying that,
in her opinion as a regulatory expert, iPlatform’s results in Project Manhattan would be
“sufficient to . . . proceed to the next stages of product development for certain
procedures”).
489
Pl.’s Dem. 13, lines 12-51 (showing that iPlatform completed cadaver lab procedures
including 14 LARS, 10 RYGBs, 6 ventral hernias, 1 inguinal hernia, 2 partial
nephrectomies, and 1 hysterectomy); Gardiner Tr. 752-53, 772, 800-03. Gardiner
completed over 30,000 surgeries in his decades-spanning career, with about 30% being
performed with a RASD. Id. at 722-23. He also instructed other surgeons on how to
perform robotic surgeries and worked with Moll at Intuitive in developing the da Vinci
robot. Id. at 724. Despite his financial incentives as an Auris stockholder, his testimony
was highly credible.
490
E.g., JX 699 at 37; JX 3047; JX 3550. iPlatform was not for everyone. Hagen, one of
the Project Manhattan KOPs involved with developing Verb, strongly disliked the
architecture of iPlatform. She preferred a live assistant rather than the fifth robotic arm.
Gardiner Tr. 768-71; Hagen Tr. 2344-45.
491
See Wittwer Rep. ¶ 179 (“Medical devices do not need to be fully ready to enter large-
scale commercial distribution before a company seeks regulatory clearance for them.”);
Wittwer Tr. 1954; Grennan Tr. 2547 (acknowledging the difference between regulatory
maturity and commercial readiness for a complex medical device); see also Gardiner Tr.
726-28.
94
often desirable to obtain regulatory clearance for a prototype without the full
functionality of a planned commercial device.492
In September 2021, J&J acknowledged that iPlatform would be capable of the
Nissen fundoplication procedure that would satisfy an upper abdominal surgery
indication.493 For the lower abdominal indication, inguinal hernia labs from 2019
through 2020 show iPlatform’s capacity to successfully perform the procedure.494
Surgeons performing those labs rated iPlatform’s performance as “superior to” or
“competitive with” da Vinci.”495 In September of 2021, J&J again acknowledged
that iPlatform would be capable of inguinal hernia and appendectomy—both lower
abdominal procedures that would satisfy the first milestone.496 If the results were
replicated through the verification and validation phases, there would be sufficient
492
See Wittwer Tr. 1955-56 (“[I]t’s actually desirable to submit your first application with
fewer features and focusing on a select procedure or two to obtain that first De Novo
clearance.”); Wittwer Rep. ¶¶ 179-81. Auris’s ARES robot is one such example. See
Leparmentier Tr. 977 (explaining that ARES received FDA clearance using an MVP
strategy and was never intended to be commercially launched); Moll Tr. 293-94.
493
JX 4129 at 27 (“Based on experience with primary procedures, system should [] be
capable of: . . . Nissen Fundoplication”). As discussed above, Auris initially considered
pursuing either Nissen fundoplication or RYGB for its first upper abdominal procedure.
See supra note 404 and accompanying text; JX 1729 at 21-22.
494
See Pl.’s Dem. 13; JX 1541.
495
JX 2622 at 15 (four 2019 iPlatform inguinal hernia labs completed with “high
confidence” with ratings of “[b]est in class” and “superior to Da Vinci”); JX 3610 at 2
(Gardiner in 2020 reporting to Joachim that iPlatform’s inguinal hernia procedure was
“largely cooked” and “already competitive to the predicate”).
496
JX 4129 at 16 (“Beta will be capable in Inguinal Hernia[.]”); id. at 17 (“Beta system
should be capable based on experience with primary procedure(s): Appendectomy[.]”).
95
data for the FDA to assess iPlatform’s safety and effectiveness for the proposed
indication.497 iPlatform could obtain approval for a single successful procedure.498
Overall, the record supports a finding that iPlatform would likely have met
the General Surgery Milestone had J&J fulfilled its promises to Auris. iPlatform
was on track to achieve the milestone before Project Manhattan and the Verb
integration. J&J’s insistence that iPlatform pursue a five-arm RYGB, instead of
simpler procedures using a minimally viable device, made matters worse. J&J’s
adoption of new employee incentives in 2020 that conditioned the first payment on
achieving a complex general surgery indication further re-directed resources away
from the General Surgery Milestone. It is reasonably certain that J&J’s breach of its
efforts obligation (and, as discussed below, an implied term regarding the De Novo
pathway) damaged Auris by preventing it from timely securing regulatory approval.
Technical Problems. J&J contends that, regardless of its conduct, iPlatform
could never have met the General Surgery Milestone because of “fundamental
technical challenges” with the system’s workspace.499 Workspace relates to the
architecture of the robot, such as whether the arms experience collisions during
procedures.500 The record provides little support for J&J’s assertion. Although
497
Wittwer Tr. 1958.
498
Id. at 1959.
499
Defs.’ Post-trial Answering Br. 59.
500
Moll Tr. 270-71.
96
workspace issues arose, numerous lab reports show that iPlatform had the capability
to safely and effectively complete procedures to satisfy the milestone.501
The other technical issues J&J cites were “surmountable.”502 They were
similar to ones Auris leadership had tackled at Intuitive 20 years earlier.503 Thermal
issues made the robot hot to the touch.504 iPlatform’s system was sometimes
unstable.505 And a worst-case scenario persisted since the robot’s arm setup meant
that a very large patient could not be transported from the operating table to a gurney
if a hospital lost power mid-procedure.506 Such engineering challenges are expected
while developing a highly complex medical device.507
501
E.g., Pl.’s Dem. 13; JX 3685 at 7 (reporting “[a]dequate approach and workspace for 4-
arm RYGB to move forward with US IDE” as of November 2020); JX 4129 at 15-19
(stating that iPlatform would be “capable” in Nissen fundoplication, inguinal hernia, small
ventral hernia, appendectomy, prostatectomy, and hysterectomy, among other procedures);
see also Khan Tr. 3004 (testifying that “capable” means safe, effective, and able to
complete the procedure).
502
Kilroy Tr. 2136-37 (“Other engineering challenges, I saw them as more
surmountable . . . [T]he real showstoppers for the system were workspace and
collisions.”); Khan Day 1 Dep. 543 (“I didn’t state many issues being fundamental and
existential. I only said that to the workspace . . . .”).
503
Mintz Tr. 561.
504
This was known to J&J during diligence. See JX 1284 at 12; Mintz Tr. 716 (Mintz
recalling J&J’s engineer touching an iPlatform arm during diligence and commenting on
the temperature).
505
Mintz Tr. 572-73.
506
Joachim Tr. 2233, 2236-38. J&J cites iPlatform’s poor instrument performance as
another flaw. As Joachim admitted, however, instrument performance would not prevent
iPlatform from meeting regulatory milestones. Id. at 2173-77.
507
Mintz Tr. 572-73.
97
Many of these issues would not inhibit straightforward procedures that could
satisfy the General Surgery Milestone, such as Nissen fundoplication and inguinal
hernia, which the pre-alpha robot had successfully performed. Advanced
capabilities, like using five or six arms, were not necessary to perform these
procedures safety and effectively for regulatory purposes.508 Despite that, the
iPlatform team had been working to address various technical problems.509 It was
derailed when iPlatform was forced to participate in Project Manhattan and then
combine with a separate system. These complications—all imposed by J&J—not
only delayed iPlatform’s progress but also imposed months of technical debt and
unanticipated roadblocks.
Regulatory Problems. J&J also argues that the iPlatform General Surgery
Milestone was unmet due to the FDA’s pathway change. The General Surgery
Milestone (like all iPlatform regulatory milestones) required iPlatform to obtain
“510(k) clearance.”510 But in August 2019, the FDA said that the 510(k) pathway
was unavailable to RASDs.511 iPlatform unexpectedly had to follow the De Novo
pathway.
508
Id. at 580-81.
509
Moll Tr. 80-82; Mintz Tr. 550, 582, 620-22.
510
Merger Agreement § 2.07(a)(iii).
511
JX 2512 at 4-5.
98
J&J suggests that this position change meant it was off the hook for the
General Surgery Milestone. Not so. The obvious goal of the General Surgery
Milestone was for iPlatform to obtain FDA approval. In contrast to other provisions
of the Merger Agreement, there is no evidence that 510(k) (versus another pathway)
was specifically negotiated.512 That is because at the time of the Merger Agreement,
a “510(k) process” was the “only logical pathway for a robotic device.”513 When
that understanding changed four month after the merger, J&J viewed the availability
of De Novo (rather than PMA) as a victory.514
Yet, the iPlatform General Surgery Milestone expressly contemplates “510(k)
premarket notification[],” which was no longer an option for iPlatform post-pathway
shift.515 To address this wrinkle in its breach of contract claim, Fortis presents an
implied covenant theory.516 It asserts that after the FDA’s pathway change, the
512
DeFonzo Tr. 363-64 (testifying that the parties “never even discussed” a non-510(k)
pathway); Moll Tr. 58-59. J&J originally argued that this term was “highly negotiated.”
Defs.’ Pre-trial Br. (Dkt. 504) 2. It did not press that argument after trial.
513
Moll Tr. 58-59.
514
Shen Tr. 1174; Wittwer Tr. 1953.
515
Merger Agreement § 2.07(a)(iii). As noted above, the subsequent umbrella milestones
could be obtained through 510(k) if iPlatform received De Novo clearance. See supra note
282 and accompanying text; Wittwer Tr. 1949.
516
PTO ¶ 5. Fortis also advanced a mutual mistake claim that was also premised on the
change in FDA policy regarding the availability of the 510(k) pathway for iPlatform. Id.
Because documents Fortis sought through a FOIA request were not produced in time for
trial, Fortis withdrew its mutual mistake claim. See Dkts. 525, 527.
99
implied covenant of good faith and fair dealing required J&J to pursue De Novo
approval instead.517 I agree.518
Implied Covenant. “The implied covenant [of good faith and fair dealing] is
inherent in all contracts.”519 It “embodies the law’s expectation that ‘each party to a
contract will act with good faith toward the other with respect to the subject matter
of the contract.’”520 The implied covenant “ensures that parties do not ‘frustrat[e]
the fruits of the bargain’ by acting ‘arbitrarily or unreasonably.’”521 “The reasonable
expectations of the contracting parties are assessed at the time of contracting.”522
At the time the Merger Agreement was signed, all parties assumed that 510(k)
would be an available pathway for iPlatform.523 The FDA had indicated in October
2018 that iPlatform could receive 510(k) clearance with the appropriate clinical data
517
Pl.’s Opening Post-trial Br. 130-31.
518
In my decision denying J&J’s motion to dismiss the implied covenant claim, I noted
that this is precisely the sort of situation where the “implied covenant comes into play.”
Mem. Op. Regarding the Defs.’ Mot. to Dismiss (Dkt. 44) (“MTD Mem. Op.”) 38. That
observation remains true after trial.
519
Baldwin v. New Wood Res. LLC, 283 A.3d 1099, 1116 (Del. 2022) (citation omitted).
520
Sheehan v. Assured P’rs, Inc., 2020 WL 2838575, at *11 (Del. Ch. May 2020) (quoting
Allied Cap., 910 A.2d at 1032).
521
Baldwin, 283 A.2d at 1116 (quoting Dieckman v. Regency GP LP, 155 A.3d 358, 367
(Del. 2017)).
522
Dieckman, 155 A.3d at 367.
523
See JX 3253 at 1 (contemporaneous notes of meeting about regulatory affairs from a
May 14, 2020 call where Kozak says: “During acquisition [we] had assumed 510k was
appropriate.”).
100
and predicate device.524 It warned only that 510(k) might be unavailable because
the proposed predicate device (a da Vinci robot) lacked a bronchoscope and Auris
had listed a bronchoscopy indication for iPlatform.525 Auris resolved this mismatch
in its subsequent submission by withdrawing bronchoscopy from iPlatform’s
planned indication and selecting a more apt da Vinci predicate.526 Neither Auris nor
J&J had reason to believe that a more onerous pathway would be required. 527 In
524
JX 743 at 3 (“While our review of your pre-submission does not imply that your future
submission will necessarily be approved or cleared, FDA intends that this feedback will
not change, provided that the information submitted in a future IDE or marketing
application is consistent with that provided in this pre-submission and that the data in the
future submission do not raise any important new issues materially affecting safety or
effectiveness.”); id. at 5-6.
525
Id. at 4 (“You propose the da Vinci Xi K131861 as the predicate device. While the
Indications for Use IFU statements of your subject device and your predicate appear to be
similar the intended use of your subject device does not appear to be the same as your
proposed predicate device[.] For example your proposed predicate is not intended to
provide bronchoscopic visualization of and access to patient airways for diagnostic and
therapeutic procedures and does not contain a bronchoscope.”); id. at 1; see supra notes
70-71 and accompanying text.
526
JX 2468 at 5 (“[G]iven FDA’s concern of using a predicate not indicated for
bronchoscopic procedures, Auris has decided to remove the use of a bronchoscope from
the initial submission.”); Mintz Tr. 604-06 (“Question: ‘Was [] the FDA telling Auris it
would not approve iPlatform under the 510(k) pathway?’ Mintz: ‘It was not . . . They’re
pointing out that the da Vinci Xi does not have bronchoscopic capability . . . so we removed
that from our indications for use. . . . . There’s another da Vinci 510(k) that uses a robotic
bed in conjunction with the system, and that was a more appropriate predicate. So we
adjusted our submission to use that more appropriate predicate.’”).
527
See In re El Paso Pipeline P’rs, L.P. Deriv. Litig., 2014 WL 2768782, at *18 (Del. Ch.
June 12, 2014) (observing that the implied covenant of good faith and fair dealing is
properly invoked where “the parties simply failed to foresee the need for the term and,
therefore, never considered to include it”); see also Nemec v. Shrader, 991 A.2d 1120,
1128 (Del. 2010).
101
fact, J&J was surprised in August 2019 when it learned that Verb had to follow the
De Novo pathway instead of 510(k).528
J&J argues that requiring 510(k) approval was a material term to the Merger
Agreement because the specific pathway affects the time to market, the resources
required, and the deal value.529 But there is no evidence that the parties bargained
for 510(k) instead of De Novo.530 J&J knew pre-merger that the FDA required
extensive clinical testing for iPlatform to secure 510(k) approval.531 Though De
Novo approval is generally more onerous, the primary difference for iPlatform was
FDA review time, which J&J predicted would only add two months of delay.532 The
FDA required iPlatform to submit clinical testing data under either the 510(k) or De
Novo pathway.533
528
See JX 2512 at 4-5.
529
Defs.’ Answering Post-trial Br. 51-53.
530
See supra note 512; cf. Aspen Advisors LLC v. United Artists Theatre Co., 843 A.2d
697, 707 (Del. Ch. 2004) (explaining that the implied covenant will not fill a gap if the
parties discussed and rejected it), aff’d, 861 A.2d 1251 (Del. 2004).
531
See JX 1284 at 4, 12; JX 1504 at 5.
532
JX 2396 at 15 (predicting a De Novo review would change Verb’s launch from April
2022 to June 2022); see also Wittwer Tr. 1949-50 (“Per FDA regulation, a 510(k) is a 90-
day review clock. And a De Novo application is a 150-day review time.”); Wittwer Rep.
¶¶ 158-60 (opining that the shift to De Novo review caused an approximately 60 day delay).
Wittwer’s opinion was reliable. In addition to her educational and professional
background, she has submitted and received FDA clearance on over fifty 510(k)
applications and three De Novo applications. Wittwer Rep. ¶ 10.
See JX 2396 at 12 (J&J concluding there was “[n]o significant timeline differences” for
533
Verb to achieve De Novo “as compared to a 510(k)”); Tillman Tr. 2823-24 (acknowledging
102
Had the parties known that 510(k) would become unavailable for RASDs,
they logically would not have listed 510(k) as the method of obtaining regulatory
approval in the Merger Agreement.534 The Merger Agreement lacked a term to
address what would occur if the 510(k) pathway were closed to iPlatform. When
this change arose, however, J&J had an implied obligation—at least for the iPlatform
General Surgery Milestone—to use commercially reasonable efforts to achieve De
Novo clearance. Doing so would facilitate 510(k) approval for the subsequent
milestones, which I address next.535 But J&J failed to utilize such diligence.536 It
cannot avoid liability by scapegoating an unforeseen policy change that had an
immaterial effect on the time and cost for iPlatform to gain FDA clearance.537
that iPlatform’s 510(k) process would be in the “minority of 510(k) submissions that
require clinical data”).
534
See Oxbow Carbon & Mins. Hldgs., Inc. v. Crestview-Oxbow Acq., LLC, 202 A.3d 482,
506-07 (Del. 2019) (explaining that the implied covenant exists to address “unanticipated
developments”); Blaustein v. Lord Balt. Cap. Corp., 84 A.3d 954, 959 (Del. 2014) (“[T]he
implied covenant is used in limited circumstances to include what the parties would have
agreed to themselves had they considered the issue in their original bargaining positions at
the time of contracting.” (citation omitted)).
535
JX 2396 at 12 (“Once De Novo classification is granted, the device can be used as
predicate for future 510(k) submissions.”); Wittwer Tr. 1946, 1959.
536
See supra Section II.A.2.a.
537
Because I find that Fortis has prevailed on its implied covenant claim, I need not address
its alternate theory that J&J should be ordered to “negotiate in good faith” to modify the
Merger Agreement from 510(k) to De Novo to “effect the original intent of the parties.”
Merger Agreement § 10.11; see also id. § 8.04(b); Pl.’s Opening Post-trial Br. 132-33.
103
ii. Umbrella Milestones
Auris also proved that J&J’s breaches of the Merger Agreement were
reasonably certain to have led Auris to miss four 2023 iPlatform regulatory
milestones: the Upper Abdominal Milestone, the Lower Abdominal Milestone, the
Urologic Milestone, and the Gynecologic Milestone. Had J&J used commercially
reasonable efforts in furtherance of the iPlatform General Surgery Milestone, the
510(k) pathway would have been open. The delays caused by Project Manhattan
and dysfunction from the Verb combination/integration, among other breaches, led
to compounding delays that put the milestones in peril. The evidence demonstrates
that each of these umbrella milestones were likely to be met had J&J provided
commercially reasonable efforts and resources to iPlatform as a priority device.538
Upper Abdominal Milestone. The Upper Abdominal Milestone required
iPlatform to receive 510(k) approval for an “upper abdominal Umbrella
Procedure[]” by the end of 2023.539 The RYGB procedure would have satisfied this
milestone.540 iPlatform was on track to achieve it.
538
See JX 2683 at 3, 26-27 (Accelerando and Cambridge November 2019 projection that
iPlatform could achieve the 2023 milestones).
539
Merger Agreement § 2.07(a)(iv); see id. § 10.03(uuu) (defining “Umbrella Procedure”
as “any procedure or procedure category within a specialty, which represents higher
complexity or risk and when cleared by the FDA includes covered procedures of less
complexity or lower risk within that specialty”).
540
See JX 1729.
104
Surgeons using iPlatform successfully completed RYGBs in 12 labs between
June 2019 and the first quarter of 2020—both during and after Project Manhattan.541
Surgeons performed 21 four-arm RYGB cadaver labs from August to November
2020 with iPlatform. Four different surgeons gave iPlatform all A and B grades
during the final six “repeatability” labs performed in November, which were
designed to test surgical techniques refined during earlier “procedure development”
labs.542 iPlatform continued to demonstrate capability in RYGB with at least 11
cadaver labs completed in 2021. Although two surgeons gave iPlatform lower (but
still adequate) ratings in these labs, three others rated iPlatform A+, A, and B in all
categories.543
To the extent J&J argues that technical issues caused iPlatform to miss the
milestone, the trial record suggests otherwise. For example, after successful cadaver
labs in November 2020, Joachim (who led the iPlatform team at the time) determined
there was “[a]dequate approach workspace for 4-arm [RYGB] to move forward” to
clinical trials.544 Put differently, workspace issues did not prevent iPlatform from
541
See e.g., JX 2131 at 26-27 (June 2019 five-arm RYGB rated by physician as “nearly
ready for clinical use”); JX 3047 at 57 (Nov. 2019 five-arm RYGB rated by same physician
as on par with da Vinci); see also Pl.’s Dem. 13.
542
JX 3603 at 7.
543
See e.g., JX 3948 at 1 (May 2021 five-arm RYGB by surgeon performing his first lab
on iPlatform, rating iPlatform’s performance either A or A+ across the board); see also
Pl.’s Dem. 13.
544
JX 3685 at 7.
105
proceeding to clinical trials for the four-arm procedure. This assessment was three
years before the milestone deadline.545
Lower Abdominal Milestone. The Lower Abdominal Milestone required
iPlatform to obtain 510(k) approval for a “colorectal/lower abdominal Umbrella
Procedure[]” by the end of 2023.546
The LAR procedure could satisfy the milestone. During Project Manhattan,
a KOL successfully completed it using iPlatform.547 Between July 2019 and January
2020, surgeons performed 14 additional LAR cadaver labs using the iPlatform.548
J&J only produced written reports for five of these labs, but all show successful
results.549 From April to June 2021, surgeons performed 15 more LAR cadaver labs
545
J&J’s insistence on a full-featured iPlatform beta that could perform RYGB for the first
regulatory approval effectively forced iPlatform to meet the Upper Abdominal Milestone
two years early. See supra Section II.A.2.a.iii.
546
Merger Agreement § 2.07(a)(v).
547
JX 2125 at 21-22; see also JX 1541 (March 2019 report of iPlatform “[s]uccessful
access of relevant workspaces for LAR”).
548
See Pl.’s Dem. 13.
549
See id. Records for hundreds of iPlatform labs were not produced by J&J. Fortis asks
me to conclude that this amounts to spoliation, and that I should infer that the withheld or
destroyed lab materials confirm iPlatform’s capabilities. See Pl.’s Opening Post-trial Br.
119-120; see also Pl.’s Mot. in Limine for an Adverse Inference Due to Spoliation and/or
Withholding of Evidence of iPlatform Lab Procedures (Dkt. 465). Though there are gaps
in the record where information has been lost, J&J also produced a substantial amount of
materials from a design history file and other records. I lack grounds to find that J&J’s
non-production rises to the level of reckless or intentional spoliation of evidence and
decline to draw an adverse inference. See Sears, Roebuck & Co. v. Midcap, 893 A.2d 542,
552 (Del. 2006). At the same time, it would be inequitable to infer that iPlatform did not
successfully perform these labs based upon J&J’s failure to produce the underlying data. I
106
on iPlatform. Based on the 11 procedures for which J&J produced lab data,
iPlatform performed well. For all but one of these 11 labs, iPlatform was rated
above, equivalent to, or near da Vinci on all metrics.550 In February 2022, a five-
arm LAR was performed that overall met or exceeded da Vinci’s performance.551
Urologic Milestone. The Urologic Milestone required iPlatform to obtain
510(k) approval for a “urological Umbrella Procedure[]” by the end of 2023.552 Lab
records show that iPlatform could perform prostatectomy and partial nephrectomy—
two procedures that Auris could have used to satisfy the milestone.553
iPlatform demonstrated its capability to perform a prostatectomy as early as
2018.554 Post-merger, surgeons completed 19 prostatectomy cadaver labs on
iPlatform, rating iPlatform’s performance as above or equivalent to da Vinci on most
view the missing information as neutral. Even without it, Fortis proved by a preponderance
of the evidence that iPlatform was on track to meet the milestones before J&J’s breaches.
550
See e.g., JX 3992 at 2 (rating iPlatform A+ or A across all metrics, with “[n]o
workspace/collision issues” and instrument trajectories superior to da Vinci); see also Pl.’s
Dem. 13; Pl.’s Dem. 20 (five-arm LAR lab on iPlatform in June 2021; surgeon reporting
“high[] satis[faction”).
551
Gardiner Tr. 825-27. J&J produced no records for labs after June 2021. See Pl.’s Dem.
13 at rows 204-35. Gardiner, however, credibly testified to his personal experience with
the iPlatform system performing this procedure.
552
Merger Agreement § 2.07(a)(vi).
553
See, e.g., JX 2610 at 3, 10 (partial nephrectomy performed with “high confidence”); JX
4013 at 3, 10 (reporting 17 prostatectomy labs “with almost all A ratings, and a good range
of patients”); see supra notes 73, 255 (explaining these procedures).
554
Moll Tr. 87-88; Mintz. Tr. 552-53; Gardiner Tr. 746-49 (“It worked perfectly.”).
107
metrics.555 In 2021, J&J concluded that iPlatform would be capable in
prostatectomy.556
iPlatform was also successfully performing partial nephrectomies. During
Project Manhattan, a KOP completed a partial nephrectomy on iPlatform and rated
it “nearly ready for clinical use.”557 Two more partial nephrectomy cadaver labs
were completed in 2019 with strong results.558 From July to December 2021,
surgeons completed 12 more partial nephrectomy cadaver labs on iPlatform. Based
on the subset of lab results J&J produced, these procedures were also successful and
the iPlatform system was rated equivalent to da Vinci on most metrics.559
Gynecologic Milestone. The Gynecologic Milestone required iPlatform to
obtain 510(k) clearance for a “gynecological Umbrella Procedure[]” by the end of
2023.560 Auris intended to satisfy the milestone with a hysterectomy indication.
555
See JX 4013 at 10 (17 surgeons giving almost all A ratings and a few Bs); Gardiner Tr.
812-13; see also Pl.’s Dem. 13; Pl.’s Dem. 20 at 4 (two surgeons rating iPlatform with A+s,
As, and a few Bs across relevant metrics during five prostatectomies each on iPlatform,
with three other surgeons giving similar ratings during one prostatectomy each).
556
JX 4129 at 18 (“Beta system will be capable in Prostatectomy[.]”).
557
JX 2131 at 21-22.
558
See JX 2610 at 10 (surgeon writing: “Everything feels like you could go to market today,
the motion of tools feels good and the workspace is great.”); Gardiner Tr. 797-98 (recalling
watching this procedure); see also Pl.’s Dem. 13.
559
Pl.’s Dem. 13; see also Gardiner Tr. 821-22 (describing his performance of these
procedures).
560
Merger Agreement § 2.07(a)(vii).
108
During Project Manhattan, a KOP successfully completed a hysterectomy with
iPlatform’s alpha version.561 This procedure was especially notable because it was
the first using iPlatform’s sixth arm.562
In total, iPlatform completed at least five successful hysterectomy cadaver
labs.563 If replicated, these procedures would show that iPlatform was safe and
effective in hysterectomy from a regulatory standpoint.564 J&J concluded in
September 2021 that iPlatform was expected to be capable in hysterectomy.565
iii. GI Milestone
The GI Milestone required either iPlatform or Monarch to secure 510(k)
clearance for “Endoscopic Submucosal Dissection (ESD)” by the end of 2023.566 At
the time of the merger, it was expected that the milestone could be met by the
deadline with iPlatform.567
561
JX 2131 at 27-28.
562
Id. at 8-9, 27-28; see also Mintz Tr. 596-98; Pl.’s Dem. 8 (video of the procedure).
563
JX 2131 at 27-28; JX 2610 at 11 (surgeon: “This is so much easier than what I currently
do.”); Pl.’s Dem. 13.
564
Wittwer Tr. 1958.
565
JX 4129 at 19 (“Beta system expected to be capable in Hyster[e]ctomy[.]”).
566
Merger Agreement § 2.07(a)(viii). ESD is a procedure using an endoscope to remove
precancerous and cancerous areas in the GI tract. See Endoscopic Submucosal Dissection,
Johns Hopkins Medicine, https://www.hopkinsmedicine.org/health/treatment-tests-and-
therapies/endoscopic-submucosal-dissection (last visited August 31, 2024).
567
JX 1729 at 16 (projecting Q2 2023 for iPlatform GI indication clearance and adding in
a buffer time period); JX 3139 at 1 (J&J predicting a 75% chance of achieving the eighth
regulatory milestone (GI) with iPlatform).
109
In the year after the merger, a small research team reporting to Leparmentier
demonstrated the feasibility of performing ESD on either system.568 In December—
four years before the milestone deadline—the Monarch team completed a “very
successful” ESD on a live pig with Auris-designed instruments that could be used
on iPlatform.569 Lepartmentier was confident at that point that the GI milestone
would be met, provided that the GI team was given resources to move toward
product development.570 But J&J deprioritized GI.571
In a presentation to J&J leadership on April 6, 2020, the GI team
recommended that ESD clearance be pursued on iPlatform first and Monarch
later.572 Lepartmentier supported this strategy, understanding that J&J intended to
launch iPlatform in the near term.573 The plan never came to fruition because of
Project Manhattan and the Verb integration.
568
Leparmentier Tr. 1003-04.
569
JX 2867 at 12 (report of “completed” colon ESD procedure “in a live porcine model”
on Dec. 18, 2019); Leparmentier Tr. 1004-06.
570
Leparmentier Tr. 1006.
571
See JX 3091 at 3; Leparmentier Tr. 1008; see also JX 3451 (Shen directing the GI team
to limit its efforts to “skunk R&D work”—exploratory research with minimal resources).
572
JX 3148 at 38-40; Leparmentier Tr. 1010, 1085-86 (describing how pursuing the GI
indication on iPlatform made commercial sense for customers and insurers); Lopes
Tr. 2441-42 (discussing that GI capability was a “better fit” for iPlatform).
573
Leparmentier Tr. 1010.
110
The ESD indication is perhaps the one for which iPlatform was least prepared
to seek clearance. But J&J’s failure to use commercially reasonable efforts derailed
iPlatform’s plan to build towards endoluminal capability. As iPlatform’s MVP
approach was lost, so too was its readiness to perform GI procedures.
Having failed iPlatform, one would expect that J&J would redirect its GI
Milestone-related efforts to Monarch. Monarch had made strides in ESD during
2019 and 2020.574 There is no evidence, though, that J&J tried to use Monarch for
the achievement of the GI Milestone.
At trial, J&J spent little time defending its approach to the GI Milestone except
to highlight iPlatform’s purported technical defects. This is not compelling.575 The
record supports a finding that J&J’s breach of the Merger Agreement is reasonably
certain to have harmed to Fortis. Failed efforts and resulting delays snowballed,
leaving iPlatform unable to timely meet the GI Milestone.
b. Net Sales Milestone
The Merger Agreement includes two net sales milestones. The first would
have been met if J&J’s “Robotics Net Sales” reached “$575 million in the aggregate”
574
See JX 2867 at 12: Leparmentier Tr. 1004-06; JX 3075 at 17 (physician in February
2020 praising Monarch GI as an “[i]mmense improvement over traditional ESD” after
completing a lab on a porcine colon).
575
See supra notes 475-78 and accompanying text.
111
during 2022 or sooner.576 The second could be met if “Robotics Net Sales” reached
“$1,650 million in the aggregate” during 2024 or sooner.577
By its terms, the efforts provision in Section 2.07(e) does not apply to the net
sales milestones.578 The sole constraint for J&J with respect to the net sales
milestones is in Section 2.07(e)(iii), which bars J&J from taking, or refraining from
taking, actions “with the intention of avoiding . . . any Earnout Payment” or “based
on taking into account the cost of making any Earnout Payment(s).”579 Fortis proved
that J&J breached this provision when J&J considered the loss of the contingent
payments as a factor when directing that iPlatform combine with Verb.580
Fortis did not, however, prove that this breach was a reasonably certain cause
of the missed net sales milestones. J&J’s prioritization of Verb over iPlatform would
have supported the net sales milestones since Verb sales are included. As Fortis
concedes, “it often takes years for an innovative device to become profitable.”581
576
Merger Agreement § 2.07(a)(ix); see id. § 10.03(ddd) (defining “Robotics Net Sales”).
577
Id. § 2.07(a)(x).
578
Id. § 2.07(e)(i) (requiring J&J to use “commercially reasonable efforts to achieve each
of the Regulatory Milestones”).
579
Id. § 2.07(e)(iii)(A)-(B).
580
See supra notes 389-91 and accompanying text.
581
Pl.’s Opening Post-trial Br. 110 (citing Grennan Tr. 2552-53; Shen Tr. 1169; JX 4495
¶¶ 61, 65).
112
The fact that iPlatform was on the cusp of regulatory approval is not equivalent to it
becoming commercially viable, much less profitable for J&J.582
4. Whether J&J Repudiated the Merger Agreement
Fortis also avers that J&J is liable for repudiating the Merger Agreement.583
“Under Delaware law, repudiation is an outright refusal by a party to perform a
contract or its conditions entitling ‘the other contracting party to treat the contract as
rescinded.’”584 “Repudiation must be ‘positive and unconditional.’”585
The purported “repudiation” Fortis complains of does not meet this standard.
According to Fortis, J&J’s cancelation of the iPlatform and GI regulatory milestones
and the net sales milestones in April 2020 amounts to repudiation. But the write-
down was not an “outright refusal” to perform.586
The write-down was an accounting exercise by which J&J released reserves;
it was not a cancelation of the milestones. If iPlatform (or Monarch) reached any
milestone in the Merger Agreement, J&J retained a contractual obligation to make a
corresponding earnout payment. In addition, J&J continued to perform in the sense
582
See supra note 491 and accompanying text.
583
See Pl.’s Opening Post-trial Br. 102-04.
584
CitiSteel USA, Inc. v. Connell Ltd. P’ship, 758 A.2d 928, 931 (Del. 2000) (quoting
Sheehan v. Hepburn, 138 A.2d 810, 812 (Del. Ch. 1958)).
585
W. Willow-Bay Court, LLC v. Robino-Bay Court Plaza, LLC, 2009 WL 458779, at *5
(Del. Ch. Feb. 23, 2009) (quoting Carteret Bancorp., Inc. v. Home Grp, Inc., 1998 WL
3010, at *6 (Del. Ch. Jan. 13, 1988)).
586
CitiSteel USA, 758 A.2d at 931.
113
that it provided some resources to the Auris robots post-write-down. J&J may have
fallen short of its efforts promise, but that is different from an outright refusal to
perform.587
B. Fraud
Fortis contends that J&J fraudulently induced Auris to merge.588 The
elements of common law fraud are:
(1) a false representation, usually one of fact, made by the
defendant; (2) the defendant’s knowledge or belief that the
representation was false, or was made with reckless indifference
to the truth; (3) an intent to induce the plaintiff to act or to refrain
from acting; (4) the plaintiff’s action or inaction taken in
justifiable reliance upon the representation; and (5) damage to
the plaintiff as a result of such reliance.589
587
Fortis also claims that J&J failed to provide Fortis with quarterly disclosures, in breach
of Section 2.07(d)(i) of the Merger Agreement. Section 2.07(d)(i) provides that J&J must,
each quarter, provide “to the Stockholder Representative . . . a reasonable written update
on the status of achieving each of the Milestones, including with respect to the Regulatory
Milestones, a reasonable update on the actions undertaken by [J&J] . . . pursuant to Section
2.07(e).” Fortis relegated its argument on this claim to a footnote in its opening post-trial
brief. Pl.’s Opening Post-trial Br. 133 n.43. To the extent it continues to press the claim,
Fortis did not prove a breach of Section 2.07(d)(i). The record reflects that Fortis was
given reasonable quarterly disclosures. See JX 2528; JX 2530; JX 2665; JX 2978; JX 3218.
Even if J&J had breached the provision, Fortis did not prove resulting damage. Moll and
DeFonzo also provided information to Fortis’s Advisory Board directly. See Salehizadeh
Dep. 78-79, 86-90; see also Royan Tr. 428-29.
588
PTO ¶ 3.
589
Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1074 (Del. 1983); see Maverick
Therapeutics, Inc. v. Harpoon Therapeutics, Inc., 2020 WL 1655948, at *26 (Del. Ch.
2020) (“The elements of fraud and fraudulent inducement are the same.”).
114
The fraud must be “material” and “concern an essential part of the transaction.”590
Fraud may arise through misrepresentations, concealment of material facts, or
silence under a duty to speak.591
Fortis advances three fraud theories. First, it claims that J&J’s statements
about developing iPlatform and Verb in parallel were false.592 Second, it claims that
J&J misled Auris by promising a “light touch” integration into J&J.593 And third, it
claims that the Soft Tissue Ablation Milestone was not “highly certain” to be met,
as J&J assured Auris.594
Before addressing the merits, I first resolve J&J’s argument that the Merger
Agreement’s integration clause is a barrier to the first and second fraud theories.
1. The Integration Clause
J&J argues that Fortis’s fraud claims based on parallel development and “light
touch” integration are barred by the Merger Agreement’s integration clause.595 The
Merger Agreement’s integration clause is standard.596 The Merger Agreement
590
Maverick, 2020 WL 1655948, at *31 (quoting Great Hill Equity Partners IV, LP v. SIG
Growth Equity Fund I, LLLP, 2018 WL 6311829, at *33 (Del. Ch. Dec. 3, 2018)).
591
Stephenson, 462 A.2d at 1074.
592
Pl.’s Opening Post-trial Br. 88-89.
593
Id. at 89-90 (quoting JX 2755).
594
Id. at 90-91.
595
Defs.’ Answering Post-trial Br. 130-32.
596
Merger Agreement § 10.07 (“This Agreement, the Escrow Agreement and the
Confidentiality Agreement [] constitute the entire agreement, and supersede all prior
115
contains only an asymmetric anti-reliance provision in which J&J disclaimed
reliance on extra-contractual representations.597 Auris did not make a similar
disclaimer.
In resolving J&J’s motion to dismiss, I explained that “a standard integration
clause, without anti-reliance language, cannot disclaim reliance of representations
outside of the written contract.”598 I also observed that the one-way anti-reliance
clause in the Merger Agreement means “Auris was permitted to rely on the
defendants’ assurances.”599 J&J avers that I left open the effect of the integration
clause on “alleged extra-contractual promises of future intent.”600 I see no basis to
deviate from my prior ruling.601 To the extent that J&J is not bound by it or has
presented different considerations, J&J’s argument fails on the merits.
agreements and understandings, both written and oral, among the parties with respect to
the subject matter hereof or thereof . . . .”).
597
Id. § 4.08 (“Except for the representations and warranties contained in Article III [of the
Merger Agreement], [J&J] and Merger Sub acknowledge that none of [Auris] or any person
on behalf of [Auris] makes, and neither [J&J] nor Merger Sub have relied upon, any other
express or implied representation or warranty with respect to [Auris] or any of its
Subsidiaries or with respect to any other information provided or made available to [J&J]
or Merger Sub in connection with the transactions contemplated by this Agreement . . . .
Each of [J&J] and Merger Sub disclaims any representations and warranties other than
those that are expressly set forth in Article III.”).
598
MTD Mem. Op. 22.
599
Id. at 29.
600
Defs.’ Answering Post-trial Br. 130; see also Defs.’ Pre-trial Br. 78.
601
See Advanced Litig., LLC v. Herzka, 2006 WL 2338044, at *5 (Del. Ch. Aug. 10, 2006).
116
J&J asserts that “an integration clause alone is sufficient to bar a fraud claim
based on expressions of future intent or future promises.”602 It cites two decisions
in support: Shareholder Representative Services LLC v. Albertsons Companies, Inc.
and Black Horse Capital, LP v. Xstelos Holdings, Inc.603 Nevertheless, the general
rule in Delaware is that “integration clauses do not operate to bar fraud claims based
on factual statements not made in the written agreement.”604 “If parties fail to
include unambiguous anti-reliance language, they will not be able to escape
responsibility for their own fraudulent representations made outside of the
agreement’s four corners.”605 There is neither a recognized exception to these
principles nor a reason to deviate from them here.606
602
Defs.’ Answering Post-trial Br. 130 (quoting Albertsons, 2021 WL 2311455, at *12).
603
Albertsons, 2021 WL 2311455, at *2; see also Black Horse Cap. L.P. v. Xstelos Hldgs.,
Inc., 2014 WL 5025926, at *24-25 (Del. Ch. Sept. 30, 2014) (holding that an integration
clause barred a fraud claim because the statements allegedly relied upon “were not
misrepresentations of material fact . . . but rather prior parole evidence that would vary the
extant terms in the subsequent integrated writings”).
604
Kronenberg v. Katz, 872 A.2d 568, 592 (Del. Ch. 2004); see also 11 Williston on
Contracts § 33:24 (4th ed.), Westlaw (May 2024 update).
605
Abry P’rs V, L.P. v. F & W Acq. LLC, 891 A.2d 1032, 1059 (Del. Ch. 2006).
606
See Trifecta Multimedia Hldgs., Inc. v. WCG Clinical Servs. LLC, 318 A.3d 450, 466-67
(Del. Ch. 2024) (rejecting a similar argument).
117
On top of that, Albertsons and Xstelos are inapposite. Neither case involved
a contract with a one-sided anti-reliance clause. And unlike here, the purported oral
misrepresentations in those cases conflicted with the terms of the contracts.607
2. Parallel Pathing and Prioritization
Fortis avers that J&J’s senior leadership made various false statements
promising to prioritize iPlatform and develop it in parallel with Verb.608 Most are
the sort of “classically vague statements that a commercial party routinely makes
during deal-making courtship.”609 They include:
• that iPlatform and Verb were “complementary”;610
• that Auris had J&J’s “resources at [its] sails” to develop
iPlatform;611
• that J&J would spend “multiples” of what Auris alone could
devote to its technology;612
• that iPlatform was a “priority”;613 and
607
Albertsons, 2021 WL 2311455, at *2; Xstelos, 2014 WL 5025926, at *22.
608
Pl.’s Opening Post-trial Br. 88.
609
Airborne Health, Inc. v. Squid Soap, LP, 2010 WL 2836391, at *8 (Del. Ch. July 20,
2010).
610
Pl.’s Opening Post-trial Br. 25 (quoting JX 838).
611
Id. at 24 (quoting DeFonzo Tr. 330-31).
612
Id. (quoting JX 1004).
613
Id. (quoting McEvoy Tr. 2598). This is, of course, different from whether J&J treated
iPlatform as a priority device in fulfilling its efforts obligation.
118
• that Auris could access J&J’s “global candy store” of
resources.614
Statements like these, praising one’s “skills, experience, and resources,” are “mere
puffery and cannot form the basis for a fraud claim.”615
Further, it is not apparent that these statements are false or were made with
scienter.616 The evidence suggests that J&J intended to provide the Auris robots with
more resources than Auris had as a standalone company.617 Auris’s products were
given, among other things, substantial funding, access to J&J’s “global candy store,”
614
Id. (quoting JX 920).
615
Solow v. Aspect Res., LLC, 2004 WL 2694916, at *3 (Del. Ch. Oct. 19, 2004) (citing
Kronenberg, 872 A.2d at 580-81); see also Trenwick Am. Litig. Trust v. Ernst & Young,
L.L.P., 906 A.2d 168, 209 (Del. Ch. 2006) (explaining that “statements of expectation or
opinion about the future of the company and the hoped for results of business strategies”
are “generally not actionable” for fraud claims under Delaware law); Winner Acceptance
Corp. v. Return on Cap. Corp., 2008 WL 5352063, at *8 (Del. Ch. Dec. 23, 2008)
(describing statements that one’s expertise would help expand the business as “mere pun
and puffery”); Trifecta, 318 A.3d at 463-64 (holding that statements about a party being
“the best partner to accelerate growth” or that the counter-party would benefit from
“collaboration, coordination and shared relationship” across thousands of clients were
“non-actionable puffery”); Earth Pride Organics, LLC v. Corona-Orange Foods
Intermediate Hldgs., LLC, 2024 WL 1905384, at *9 (Del. Ch. Apr. 17, 2024) (concluding
that statements about resources to “support growth,” company capabilities, and expertise
“to execute against new opportunities” were the sort of pre-transaction puffery that could
not support a fraud claim).
616
See Metro Commc’n Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121,
143 (Del. Ch. 2004); see also Arwood v. AW Site Servs., LLC, 2022 WL 705841, at *20
(Del. Ch. Mar. 9, 2022) (explaining that a plaintiff must show that false statements were
made “knowingly, intentionally, or with reckless indifference to the truth” and that the
speaker “intended to induce [the plaintiff’s] reliance” on the alleged misrepresentation
(citation omitted)).
617
E.g., JX 1150; JX 2873; McEvoy Tr. 2664-65; McEvoy Dep. 281-82; see also Shen Tr.
1462-63.
119
a dedicated “Tiger Team,” and many of Verb’s assets. These resources mostly came
too late to support iPlatform’s achievement of the regulatory milestones, or even
impaired iPlatform’s success. That does not, however, mean that J&J’s statements
were untrue.
J&J’s statements about parallel pathing Verb and iPlatform are relatively less
vague. They include:
• that iPlatform and Verb would be developed in “parallel”;618 and
• that J&J planned to launch both iPlatform and Verb, meaning
that it had the funds to develop both.619
Fortis contends that J&J “never intended” to develop the two systems in parallel, as
evidenced by Project Manhattan and the Ashley Management Decision. 620
These are statements of future intent rather than present fact.621 The record
demonstrates that pre-merger, J&J was considering different options for the
618
Pl.’s Opening Post-trial Br. 24 (quoting Moll Tr. 40).
619
Id. (citing Morano Tr. 1474).
620
Id. at 25.
621
See Great Lakes Chem. Corp. v. Pharmacia Corp., 788 A.2d 544, 554 (Del. Ch. 2001)
(“Predictions about the future cannot give rise to actionable common law fraud. Nor can
expression of opinion.” (citation omitted)); MicroStrategy Inc. v. Acacia Rsch. Corp., 2010
WL 5550455, at *15 (Del. Ch. Dec. 30, 2010) (“Generally, prior oral promises or
statements of future intent do not constitute ‘false representation[s] of fact’ that would
satisfy the first element of fraudulent misrepresentation.”); Winner Acceptance, 2008 WL
5352063, at *10 (“This Court looks with particular disfavor at allegations of fraud when
the underlying utterances take the form of unfulfilled promises of future performance.”);
Carrow v. Arnold, 2006 WL 3289582, at *9 (Del. Ch. Oct. 31, 2006) (“Generally, prior
oral promises or statements of future intent do not constitute ‘false representation[s] of
120
respective programs. J&J viewed iPlatform as a potential a backup for Verb—
Shen’s so-called “bullet proof strategy.”622 Before closing, J&J evaluated
developing both systems and launching them as complementary offerings focused
on different indications or markets.623 I cannot conclude that J&J’s statements about
parallel pathing were made without any intention of performing.624
Project Manhattan was contrary to J&J’s promise to devote commercially
reasonable efforts to iPlatform. But the contours of Project Manhattan as a direct
comparison between iPlatform and Verb were set after closing. J&J had the funds
to develop and launch both robots, even if the Ashley Management Decision made
fact’ that would satisfy the first element of fraudulent misrepresentation.”), aff’d, 933 A.2d
1249 (Del. 2007).
622
JX 1630; see supra note 218 and accompanying text.
623
E.g., JX 1363 at 9 (J&J in February 2019 projecting launches for iPlatform and Verb);
JX 664 at 4 (Shen in September 2018 describing “a potential segmentation play” of Verb
and iPlatform, stating that the programs “can be complementary,” and that having both
would be a “‘Fail Safe’ plan for [J&J’s] robotic[s] strategy”); see also JX 1557 at 2 (J&J
telling the FTC post-closing that the systems were “complementary” because “Verb will
pursue laparoscopic procedures with a focus on those that benefit from advanced
instrumentation, and iPlatform will pursue complex procedures that benefit from
concomitant endoscopic and laparoscopic techniques”).
624
See Grunstein v. Silva, 2009 WL 4698541, at *13 (Del. Ch. Dec. 8, 2009) (“Courts . . .
will convert an unfulfilled promise of future performance into a fraud claim if
particularized facts are alleged that collectively allow the inference that, at the time the
promise was made, the speaker had no intention of performing.”); see also Stevanov v.
O’Connor, 2009 WL 1059640, at *12 (Del. Ch. Apr. 21, 2009).
121
this a less likely outcome.625 Parallel pathing was one of the three outcomes of
Project Manhattan contemplated by Shen.626
J&J ultimately chose to use iPlatform to prop up Verb. Some J&J officers,
like Gorsky, may have viewed “meshing” the robots as an upside of the merger. As
of closing, though, it was just a scenario under consideration. The final decision to
merge iPlatform with Verb was made only after Project Manhattan when the J&J
Board approved it. Although J&J’s conduct regarding iPlatform fell short of its
contractual efforts obligations, Fortis did not prove that J&J’s pre-closing statements
about parallel pathing constitute fraud.
3. “Light Touch” Integration
Fortis also avers that J&J defrauded it by making representations about
Auris’s anticipated place within the overall J&J organization. These statements
include:
• that J&J would “[p]reserve [Auris’s] entrepreneurial innovation
culture”;627
625
See Shen Tr. 1247-48 (explaining that despite the budget challenge by McEvoy, J&J
was financially able to develop both systems in parallel if the business decision was made
to do so).
626
JX 1702 at 3 (“Develop both systems in parallel and the[n] make the final
commercialization decision.”).
627
Pl.’s Opening Post-trial Br. 31 (quoting JX 838 at 6); see also id. (quoting Moll. Tr. 38).
122
• that J&J would “retain [Auris’s] leadership / team by creating a
semi-autonomous model”;628
• that J&J would be “deferential” to Moll;629 and
• that, unlike in prior mergers, it was going to “do[] Silicon Valley
well . . . this time.”630
Fortis did not prove that these statements were fraudulent. Several are the sort
of fluffy platitudes made during negotiations that “no rational prospective investor .
. . would find material.”631 J&J’s integration of Auris might not have had the “light
touch” Auris anticipated, but it seems that Auris had a different subjective view of
lightness than J&J.632
Other statements are not false. Auris personnel were kept in some key
leadership positions and maintained a measure of control over certain functions, as
J&J intended.633 In many other ways, Auris’s autonomy was understandably lost.
628
Id. (quoting JX 838 at 6).
629
Id. (quoting DeFonzo Tr. 328).
630
Id.631
Lazard Debt Recovery GP, LLC. v. Weinstock, 864 A.2d 955, 971 (Del. Ch. 2004)
(finding that statements touting an “ideal work environment” and “unique resources” were
“at best enthusiastic puffery”); Squid Soap, 2010 WL 2836391, at *8 (explaining that
statements of “corporate optimism” cannot support a fraud claim); see supra note 615 and
accompanying text.
632
E.g., JX 1299 at 8 (J&J talking points explaining to Auris “some aspects that will need
to be integrated into J&J post-close such as financial reporting, and HR”).
633
E.g., McEvoy Tr. 2597; Pl.’s Dem. 7; cf. Trifecta, 318 A.3d at 458, 464-65 (holding that
it was reasonably conceivable an explicit promise that a target could “operate
independently (including all local corporate functions)” was fraud where the acquirer
123
Auris could not justifiably expect that it would retain the same culture and
independence it enjoyed as a startup after being acquired by a multi-billion-dollar
global company like J&J. Nor did J&J represent as much.
4. Certainty of the Soft Tissue Ablation Milestone
Fortis’s third fraud theory is markedly different than the others. On January
24, 2019, while working to convince Auris to sell, Gorsky (with the guidance of
Morano and Kozak) offered the $100 million Soft Tissue Ablation Milestone to
Moll. Gorsky told Moll that there was such a “high certainty” of achieving the
milestone that J&J viewed it as an “‘effective’ up front” payment.634 This
representation was false because the milestone was not remotely certain to be met.635
prevented the target’s personnel from speaking with potential customers immediately after
closing).
634
JX 1228 at 5 (Gorsky talking points delivered to Moll on January 24, 2019, referencing
the milestone as part of the total up front consideration); id. at 6 (explaining that J&J had
included the milestone “to be responsive to [Auris’s] request” and that J&J thought Auris
would “view [it] as relatively certain and near-term”); see also Kozak Tr. 1572-73; Moll
Tr. 51 (testifying that Gorsky described “a highly likely target for achievement by the team
because it was a very simple integration” between Monarch and the FLEX device).
635
Kozak testified that J&J viewed the milestone as “achievable.” Kozak Tr. 1618; see also
JX 1239 at 3 (discussing the achievability of the milestone by end of July 2022). That is
very different from being “‘effective’ up-front consideration.” JX 1228 at 5.
124
Whether Gorsky’s statement is an “overt misrepresentation” is borderline.636
But it is undoubtedly “active concealment of material facts.”637 When J&J’s
representation about the milestone’s certainty was made, J&J knew that a patient in
its NeuWave clinical study had recently died.638 A for-cause, on-site investigation
had been launched by the FDA.639 On January 24—two weeks before Gorsky and
Moll spoke—J&J’s point of contact for the study “briefed” J&J’s Auris deal team
(including Kozak) on the “patient death that [wa]s currently under investigation.”640
The investigation risked substantial delay.641 Yet J&J waited until after closing to
tell Auris.
Gorsky’s statement was intended to induce Auris to agree to a contingent
payment and Auris justifiably relied on it.642 Auris was damaged as a result of its
636
In re Am. Int’l Grp., Inc., Consol. Deriv. Litig., 965 A.2d 763, 804 (Del. Ch. 2009), aff’d
sub nom. Teachers.’ Ret. Sys. Of La. v. PricewaterhouseCoopers LLP, 11 A.3d 228 (Del.
2011) (TABLE).
637
Id.638
See JX 1901 at 30.
639
See JX 1673; Bryant Tr. 2519-20; supra note 172 and accompanying text.
640
JX 1182 (Kozak updating Morano in January 2019, discussing that “a sensitivity
[analysis] will be run to understand impact to valuation” from the patient death under
investigation); see also JX 1171; JX 1673.
641
See Wittwer Rep. ¶¶ 95-101; Wittwer Tr. 1966-68; see also JX 1213.
642
See Hebert Tr. 1400-01; Kerrey Tr. 1428-29; Royan Tr. 1378-79; see also JX 1249 at 3
(Moll on Jan. 24, 2019 calling the Monarch milestone a “chip shot”). J&J argues that
“[t]here is no document that corroborates” the Auris directors’ testimony that they relied
on J&J’s representations. Defs.’ Answering Post-trial Br. 121 n.9. It is unclear why J&J
feels that the directors’ credible testimony is insufficient. The parties’ negotiating history
125
reliance.643 Destroying the value of the milestone was a direct and proximate result
of J&J’s fraud.644 Auris never would have agreed to this milestone had it known
about the patient death, since uncertainty persisted over the safety of FLEX and the
timeline to clear regulatory hurdles.645 It would have demanded a higher upfront
payment instead.646
III. REMEDY
Fortis is entitled to damages for J&J’s breaches of the efforts provision in the
Merger Agreement as they relate to the iPlatform regulatory milestones and GI
Milestone. It is also entitled to damages for J&J’s fraud as it relates to the Soft
further supports that the $100 million milestone as “up front” consideration was important
in Auris’s decision to merge. See Moll Tr. 51-52; DeFonzo Tr. 390-392.
J&J has asked for adverse inferences on the Auris board’s reliance since two
members (Salehizadeh and Hebert) failed to preserve text messages. Defs.’ Mot. for
Spoliation Sanctions (Dkt. 328). On June 5, 2023, I ordered the directors’ remaining
responsive texts to be produced and reserved decision on whether they recklessly spoliated
evidence. After reviewing the trial record, I decline to issue sanctions. I see no basis to
conclude that either individual recklessly (much less intentionally) spoliated evidence.
643
At some point, the fact of the patient death became public. See JX 976. A report dated
December 3, 2018 is on the FDA’s website. Id. at 3. This does not excuse J&J’s fraud. It
is unknown when the report was posted. Even if it were made public pre-merger, Auris
would have had no reason to search the FDA’s website for information about problems
with the NeuWave study.
644
See Maverick, 2021 WL 1592473, at *9.
645
See DeFonzo Tr. 391-92 (“[I]f we were aware of that, I don’t think we would have
accepted that milestone.”); Moll Tr. 177 (testifying the FLEX complications put in doubt
whether the “milestone was even relevant”); see also JX 2339; Leparmentier Tr. 996-97.
646
See Moll Tr. 51-52; DeFonzo Tr. 391-92; see also supra note 642.
126
Tissue Ablation Milestone. Once liability is established, “this court has broad
discretion to tailor a remedy to suit the situation as it exists.”647
Under Delaware law, the standard remedy for breach of contract “is based
upon the reasonable expectations of the parties ex ante.”648 Damages for fraud are
similar. “[T]he recipient of a fraudulent misrepresentation is entitled to recover as
damages . . . the pecuniary loss to [it] of which the misrepresentation is a legal
cause.”649 “Such expectation—or benefit-of-the-bargain—damages are measured
by the amount of money that would put the plaintiff in the position it would have
held if the defendant’s representations were true” or if the defendant had performed
as promised.650
A. Contract Damages
J&J must indemnify Fortis for losses “arising from or relating to” any “breach
of or failure to perform” under the Merger Agreement.651 Fortis proved that J&J
647
Gilliland v. Motorola, Inc., 873 A.2d 305, 312 (Del. Ch. 2005) (citation omitted).
648
Siga II, 132 A.3d at 1111 (quoting Duncan v. Theratx, Inc., 775 A.2d 1019, 1022 (Del.
2001)).
649
NetApp, Inc. v. Cinelli, 2023 WL 4925910, at *17 (Del. Ch. Aug. 2, 2023) (quoting
Restatement (Second) of Torts § 549(1)).
650
Id. at *17 (citing Siga II, 132 A.3d at 1130); see also Comrie v. Enterasys Networks,
Inc., 837 A.2d 1, 17 (Del. Ch. 2003) (“Th[e] principle of expectation damages is measured
by the amount of money that would put the promisee in the same position as if the promisor
had performed the contract.” (citing Duncan, 775 A.2d at 1022)).
651
Merger Agreement § 8.02. Although Section 8.02(c) caps damages at $170,000,000
except for intra-contractual fraud, Section 8.05(b) carves out the “right to Earnout
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what Auris expected to gain using the probability-weighted milestone values
assigned by the parties.654 Auris’s estimated probabilities of success are from a
February 2019 valuation prepared by its financial advisor Centerview Partners,
which reflects input from Auris management.655 J&J’s estimates are from a January
2019 valuation model prepared by J&J and presented to its Board.656 Manning also
calculated a blended approach by averaging the parties’ probability assignments.657
Manning’s alternative approach is warranted here. Contract damages should
“put the promisee in the same position as if the promisor had performed the
contract.”658 At the time of the merger, neither party anticipated that the milestone
payments were a certainty. They separately assigned each iPlatform regulatory
milestone a probability of achievement. The risk-adjusted probabilities assessed by
the parties and their advisors reasonably reflect the likelihood that the milestones
would have been achieved if J&J complied with its efforts obligation.
valuation, competition economics and antitrust, intellectual property, business strategy,
and public policy. See JX 4493 (“Manning Rep.”) 11.
654
Manning Tr. 2051-52; Manning Rep. ¶ 115; see Pl.’s Dem. 15 at 14.
655
Manning Rep. ¶¶ 115(a), 177; JX 1413 (Centerview Feb. 12, 2019 presentation).
Manning Rep. ¶¶ 115(b), 173-74; JX 2873 (J&J Jan. 2019 “BoD model” with native
656
Excel attachment).
657
Manning Rep. ¶ 115(c); see Pl.’s Dem. 15 at 14.
658
Comrie, 837 A.2d at 17 (citation omitted).
129
criticized Manning’s approach.663 Malackowski opined that Manning’s analysis
used an outdated pre-diligence model created by J&J, which relied on inaccurate
projections from Auris and did not account for “undisclosed risks” negatively
affecting Auris’s value.664
None of these points are persuasive. J&J’s own communications state that the
differences between the pre-diligence model presented to its Board (that Manning
relied on) and a updated post-diligence updated model (that Malackowski addressed)
are “slight.”665 The changes have no meaningful effect on Fortis’s damages.666 The
probabilities of success J&J assigned to the relevant milestones remained the
same.667 J&J’s projections were based on extensive due diligence and reliance on
an outside advisor. These estimates supported an essential part of the deal.668 And
663
Malackowski is the co-founder and senior managing director of Ocean Tomo, LLC,
which provides financial expert, management consulting, and advisory services. He is an
experienced testifying expert on subjects including valuation, lost profits, and venture
financing including expected risk / return. He has a bachelor’s degree in accounting from
the University of Notre Dame and is a registered Certified Public Accountant.
Malackowski Rep. 5-6.
664
Id. at 37-58.
665
JX 2873 (“The overall EBIT differences are slight – only about $200MM cumulative.”).
666
Compare Malackowski Rep. Figure 12, with id. at Figure 13.
667
Compare id. at Figure 13, with Pl.’s Dem. 15 at 14.
668
See Manning Tr. 2061-62 (opining that it was reasonable to conclude that the parties’
estimates of success were reliable since they were “an essential part of the transaction they
were engaged in”).
131
B. Fraud Damages
Fortis proved that J&J committed fraud with respect to the Soft Tissue
Ablation Milestone.671 Fortis has the burden to present a reasonable method to
calculate fraud damages.672
Fortis offers two measures of damages for its fraud claim: (1) rescissory
damages or (2) benefit of the bargain (i.e., expectation) damages.673 Rescissory
damages are “the monetary equivalent of rescission” and intended to restore parties
to the economic positions they would have held had the challenged transaction not
occurred.674 Benefit of the bargain damages “are equal to ‘the difference between
the actual and the represented values of the object of the transaction.’”675 Since
J&J’s fraud concerns a single milestone, I believe that the benefit of the bargain
approach is more suitable to compensate Fortis than the “exceptional” remedy of
rescissory damages.676
671
See JX 1215 at 5; supra Section II.B.4.
672
See, e.g., Maverick, 2021 WL 1592473, at *9.
673
Pl.’s Opening Post-trial Br. 97.
674
Lynch v. Vickers Energy Corp., 429 A.2d 497, 501 (Del. 1981), overruled in part on
other grounds, Weinberger v. UOP, Inc., 457 A.2d 701, 714 (Del. 1983).
675
LCT Cap., LLC v. NGL Energy P’rs LP, 249 A.3d 77, 91 (Del. 2021) (quoting
Stephenson, 462 A.2d at 1076).
676
See Universal Enters. Grp., L.P. v. Duncan Petroleum Corp., 2013 WL 3353743, at
*15-16 (Del. Ch. July 1, 2013) (explaining that Delaware courts are reluctant to award
rescissory damages, particularly for transactions occurring years prior where intervening
events have occurred) (citations omitted).
133
The purpose of expectation damages is to put Fortis “in the position it would
have held if [J&J’s representations] were true.”677 Unlike rescissory damages, which
are based on undoing a fraudulent transaction, expectation damages remit to Fortis
the value of the object it was fraudulently promised.678 Damages are equal to the
difference between the actual and represented values of the object of the fraudulent
transaction—here, the Soft Tissue Ablation Milestone.
The actual value of the milestone is the reduced probability of reaching it due
to the material information J&J kept from Fortis. Manning treated the actual value
as $0, on the assumption that J&J’s misrepresentation made the earnout payment
associated with the milestone unattainable. I adopt this value. Fortis has proven that
the milestone became unattainable due to the cumulative effect of J&J’s fraud.
The represented value of the milestone is based on Auris’s reasonable
expectation of its value at the time of the breach—i.e., the risk-adjusted probability
of reaching the milestone. Manning calculated this figure using the expected net
present value (eNPV) of the milestone at the time of the merger. 679 He considered
677
NetApp, 2023 WL 4925910, at *17 (citing Siga II, 132 A.3d at 1130); Strassburger v.
Earley, 752 A.2d 557, 579 (Del. Ch. 2000) (explaining that expectations are measured at
the time of the transaction).
678
See Maverick, 2021 WL 1592473, at *9 (“Benefit of the bargain damages are equal to
the difference between the actual and represented values of the object of the fraudulent
transaction. This method should put the plaintiff in the same position that the plaintiff
would have been in if the defendant’s representations had been true.” (citation omitted)).
679
Manning Rep. ¶¶ 181-85.
134
three valuation scenarios representing Auris’s reasonable expectation of the
contingent payment. First, he assessed an eNPV for the milestone using
Centerview’s February 2019 valuation.680 Second, he assessed an eNPV for the
milestone using J&J’s January 2019 model as presented to its Board.681 Finally, he
calculated an eNPV for the milestone using a blended average of Centerview and
J&J’s risk-adjusted values.682
Centerview derived a present value of the contingent payments based on an
estimated probability of success for each milestone.683 The estimated probability of
successful results multiplied by the contingent payment amount results in an
expected payment for each milestone. To calculate the present value of each
milestone, Centerview discounted each expected payment back to March 31, 2019
using a 10.5% discount rate.684 Centerview’s risk-adjusted eNPV for the Soft Tissue
Ablation Milestone is $58,000,000 using an 85% probability of achievement.685
680
Id. ¶ 183; see id. ¶¶ 161, 177; JX 1413.
681
Manning Rep. ¶ 184; see id. ¶¶ 173-74; JX 2873.
682
Manning Rep. ¶ 182.
683
JX 1413; see Manning Rep. ¶¶ 177-79.
684
JX 1413 (“Valuation as of 3/31/19 based on 10.5% discount rate using mid-year
convention.”); Manning Rep. ¶ 177.
685
Manning Rep. Attachment D-2; see JX 1413.
135
Like Centerview, J&J assessed the present value of the contingent payments
using an estimated probability of success for each milestone.686 The expected
payment amount was calculated by multiplying the estimated probability of success
by the contingent payment amount. J&J discounted each expected payment back to
April 1, 2019 using a 9.5% discount rate.687 The risk-adjusted eNPV for the Soft
Tissue Ablation Milestone using J&J’s model is $63,731,495 based on an 85%
probability of achievement.688
Manning’s blended average of the Centerview and J&J risk-adjusted eNPVs
is $60,865,748.689 The difference between the represented value of the Monarch
Soft Tissue Ablation Milestone and the actual value ($0) is $60,865,748. I adopt
this figure as the most responsible estimate of Auris’s reasonable expectation of the
Monarch Soft Tissue Ablation Milestone’s value at the time of the merger.
Consistent with my approach to contract damages, the blended value strikes a
responsible balance.
686
JX 2873 (Tab: “Contingent Consideration”); Manning Rep. ¶¶ 174-75.
687
Manning Rep. ¶ 174; JX 2873 (Tab: “Corporate Model (Stock)”).
Manning Rep. ¶ 192; id. at Attachment D-3; JX 2873 (Tabs: “Input,” “Contingent
688
Consideration”).
689
Manning Rep. ¶ 190; id. at Attachment D-1.
136
C. Pre-judgment Interest
“In Delaware, pre-judgment interest is awarded as a matter of right.”690
“Prejudgment interest serves two purposes: first, it compensates the plaintiff for the
loss of the use of [its] money; and second, it forces the defendant to relinquish any
benefit that it has received by retaining the plaintiff’s money in the interim.”691
1. Contract Damages
The Merger Agreement states that, for any earnout payment not paid within
10 days of J&J delivering notice of a milestone’s achievement:
interest shall accrue on such unpaid amount at a rate per annum equal to the
prime rate of interest reported from time to time in The Wall Street Journal,
calculated on the basis of the actual number of days elapsed over three
hundred sixty (360), from the date such amount should have been paid
pursuant to the terms of this Agreement . . . to the date of actual payment in
full of such amount.692
The Merger Agreement also states that J&J will “notify the Stockholders’
Representative in writing within fifteen (15) days after the achievement” of any
regulatory milestone.693 J&J “shall, or shall cause the Surviving Corporation or the
Paying Agent to, pay the applicable Earnout Payment . . . within ten (10) days after
such notice is delivered.”694
690
Citadel Hldg. Corp. v. Roven, 603 A.2d 818, 826 (Del. 1992).
691
Brandywine Smyrna, Inc. v. Millennium Builders, LLC, 34 A.3d 482, 486 (Del. 2011).
692
Merger Agreement § 2.07(d)(vii).
693
Id. § 2.07(c).
694
Id. § 2.07(c).
137
Guided by these provisions, Manning calculated pre-judgment interest on
Fortis’s breach of contract damages using per-quarter averages of daily prime rates
as reported in The Wall Street Journal, adjusted to reflect one quarter of a 360-day
year.695 He conservatively assumed that the milestone payments would have been
received 25 business days after the last day of the milestone period.696 He calculated
pre-judgment interest through May 18, 2023 (the date through which he was asked
to calculate damages), applying a floating interest rate that compounds quarterly.697
I adopt Manning’s approach as both fair and consistent with the Merger
Agreement. The prime rate was not only agreed upon by the parties, but also
considered the best measure of the commercial lending rate used by banks for loans
to creditworthy customers.698 Using a variable rate accounts for the economic
realities during the relevant period, which saw significant swings in interest rates.699
Whether to award compound or simple interest is a discretionary matter for this
695
Manning Rep. ¶ 87.
696
Id.
697
Id.
698
Id. ¶ 87 n. 202 (citing Federal Reserve Website, FAQs, “What is the Prime Rate, and
Does the Federal Reserve Set the Prime Rate?” https://www.federalreserve.gov/
faqs/credit_12846.htm).
699
See Gentile v. Rossette, 2010 WL 3582453, at *2 (Del. Ch. Sept. 10, 2010) (“In
departing from a legal rate of interest fixed at the time of the wrongdoing, our courts have
considered concepts such as ‘the realities of the relationship’ between the parties, whether
a particular party was the primary cause for a delay in the litigation, as well as general
‘fundamental economic realit[ies].’” (citation omitted)).
138
court.700 J&J’s sophistication, plus the years that it benefitted from non-payment of
the earnout, support compound rather than simple interest.701
The only applicable milestones that expired before May 18, 2023 are the
General Surgery Milestone and the Soft Tissue Ablation Milestone. A further
interest calculation from May 19, 2023 through the date of judgment will be needed
for these milestones, as well as the four iPlatform umbrella milestones for which
Fortis proved its entitlement to damages.
For the General Surgery Milestone, Manning computed pre-judgment interest
from (1) the milestone end date plus 25 business days through (2) May 18, 2023.
For the first quarter of this period, for each milestone, he multiplied the damages by
the quarterly average prime rate and by the number of days in the quarter divided by
360 to determine interest. For each of the remaining quarters, for each milestone,
he multiplied the sum of the expected payment and cumulative interest by the
number of days in the quarter divided by 360 and by the quarter’s average prime
rate.702 The resulting calculation is:703
NGL Energy P’rs LP v. LCT Cap., LLC, --- A.3d ---, 2024 WL 2716005, at *4 (Del.
700
May 28, 2024).
701
See Valeant Pharms. Int’l v. Jerney, 2007 WL 2813789, at *8 (Del. Ch. Mar, 1, 2007).
702
Manning Rep. ¶ 93.
703
Id. at Attachment B-20 (calculating interest for the General Surgery Milestone by
quarter beginning in Q1 2022 based upon the average prime rate assuming a cumulative
payment of $300,000,000).
139
states that J&J will indemnify Auris for “any and all Losses suffered or incurred by
any such Seller Indemnified Party arising from or relating to . . . any breach of or
failure to perform any covenant, agreement or obligation . . . contained in this
Agreement.”709 “Losses” are defined as:
any and all debts, obligations, losses, liabilities, damages, [t]axes, costs
of investigation and other third party costs and expenses, in each case,
whether known or unknown, absolute or contingent, liquidated or
unliquidated, direct or indirect, due or to become due, accrued or not
accrued, asserted or unasserted, related or not related to a Third Party
Claim or otherwise (in each case excluding (x) incidental consequential
and lost profits (in each case to the extent not reasonably foreseeable)
and (y) punitive damages or damages based upon a financial metric
multiple (except, in each case, to the extent awarded in a final non-
appealable judgment and actually paid to a third party as part of a Third
Party Claim)).710
There is no language in this provision, or elsewhere in the Merger Agreement,
contemplating an award of attorneys’ fees for litigation. Granting Fortis’s request
would force me to “interpret the provision in an expansive way that would be
inconsistent with the American Rule,” which requires each party to bear its own
attorneys’ fees.711 I decline Fortis’s invitation to do so.
709
Merger Agreement § 8.02(ii).
710
Id. § 8.01.
711
Senior Housing Cap., LLC v. SHP Senior Housing Fund, LLC, 2013 WL 1955012, at
*45 (Del. Ch. May 13, 2012).
142
General Surgery, Upper Abdominal, Lower Abdominal, Urologic, Gynecologic, and
GI Milestones. J&J also committed fraud relating to the Soft Tissue Ablation
Milestone. Fortis is entitled to damages, plus pre- and post-judgment interest, as
outlined above.
Within 14 days, Fortis is asked to file an updated interest calculation
consistent with the methodology adopted above. The parties are asked to confer on
and file a proposed final order within 10 days of Fortis’s interest submission.
144