Johnson & Johnson was hit with more than $1 billion in damages Wednesday for breaching its pledge to prioritize two surgical robots it acquired when it bought Auris Health Inc. for $3.4 billion.
A Delaware judge ruled against the pharmaceutical giant eight months after a trial of claims that it engaged in wide-ranging breaches of its agreement with former Auris shareholders by failing to pursue regulatory approvals for two projects with blockbuster potential, the iPlatform and the Monarch.
More than $2 billion in additional payments hinged on the approvals. The allegations echoed a recurring theme in Delaware’s Chancery Court, the leading US forum for M&A fights, where it’s common for lawsuits to assert that corporate acquirers are trying to wriggle out of post-deal payments.
“J&J’s promise to Auris was broken almost immediately,” Vice Chancellor Lori W. Will said in a 145-page opinion. Although the damages will compensate the Auris ex-investors, “what remains irretrievably lost is the transformative potential of Auris’ robots,” Will said.
The company criticized the ruling through a spokesperson Wednesday, stressing in a statement that it had “no bearing on our current robotics program or our Ottava system that we plan to bring to market.”
“We respectfully disagree with the court’s decision regarding our development of the iPlatform and communications with Auris regarding soft tissue ablation,” the statement said. “Fundamentally, the court viewed our commercially reasonable contract as imposing a commercially unreasonable obligation. We are reviewing the decision and assessing our options for appeal.”
The lawsuit, filed in 2020, said J&J misled Auris before the 2019 transaction about how it would allocate resources between the iPlatform and the “Verb,” a rival robot already being developed in partnership with a Google affiliate. J&J held a “faceoff” competition between the two systems called “Project Manhattan” to determine which would move forward, according to Wednesday’s ruling.
Because the Verb had a significant head start, J&J knew the approach “would hinder, rather than promote, iPlatform’s achievement of regulatory milestones” by forcing its developers to devote all their resources to playing catchup, Will said. Although the iPlatform prevailed in the competition, it won a Pyrrhic victory, she found.
“For iPlatform, winning Project Manhattan was losing,” as it “effectively became a parts shop for Verb,” the judge said. “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.”
Will did rule for J&J on certain issues, largely rejecting contract claims involving the other device, the Monarch, and fraud allegations centering on the idea that J&J deliberately duped Auris into accepting deferred payments it never had any intention of making. But she handed the former shareholders a win on one fraud count involving the Monarch.
The Auris ex-investors include the company’s founder, a pioneer in the field who previously started Intuitive Surgical Inc., manufacturer of the industry-leading Da Vinci surgical robot.
Ross Aronstam & Moritz LLP and Selendy Gay PLLC are counsel for the former Auris investors, who sued through a litigation representative. J&J is represented by Morris, Nichols, Arsht & Tunnell LLP and Patterson Belknap Webb & Tyler LLP.
The case is Fortis & Fortis Advisors LLC v. Johnson & Johnson, Del. Ch., No. 2020-0881, 9/4/24.
