Fortis Advisors LLC v. Johnson & Johnson, et al., C.A. No. 2020-0881-LWW (Del. Ch. Dec. 13, 2021) (Will, V.C.)
In this memorandum opinion, the Court of Chancery granted, in part, the entity defendants’ motion to dismiss several claims related to defendants’ alleged breach of a merger agreement with robotic medical company Auris Health, Inc. (“Auris”). In so ruling, the Court held that an exclusive remedy provision in a merger agreement, in the absence of clear anti-reliance language, does not foreclose a party from alleging fraud based on extra-contractual representations. The Court also granted the individual defendants’ motion to dismiss, declining to exercise personal jurisdiction under Delaware’s long-arm statute or the conspiracy theory of jurisdiction.
In late 2018, Johnson & Johnson (“J&J”), through its subsidiary Ethicon, Inc. (“Ethicon”), sought to acquire Auris to develop Robotically Assisted Surgical Devices (“RASDs”). Ethicon, led in negotiations by the individual defendants, entered into a merger agreement with Auris in February 2019, which called for Ethicon to pay Auris’s former stockholders $3.4 billion at closing and $2.35 billion in additional earnout payments, contingent on Auris’s two RASDs in development, Monarch and iPlatform, reaching certain regulatory and sales milestones. Ethicon represented during negotiations that Auris would retain its independence within J&J, would have its “space expansion and hiring needs” met, and would not have to compete with Verb Surgical Inc. (“Verb”), a J&J joint venture that was also developing an RASD.
In August 2019, the FDA informed the parties that the regulatory pathway tied to several milestones for iPlatform under the merger agreement was no longer considered appropriate for first-generation RASDs like iPlatform. Auris thus began its application for a different FDA pathway called “De Novo” in early 2020. However, during this time, J&J allegedly pitted Auris against Verb to determine which company had developed a superior RASD and declined to augment Auris’s space and hiring needs. In April 2020, after declaring Auris’s iPlatform RASD superior to Verb’s and integrating Verb into Auris, J&J announced that it had released most of the funds it held in reserve for potential earnout payments to Auris’s former stockholders. Plaintiff, Fortis Advisors LLC, subsequently asserted twelve claims against J&J, Ethicon, and the individual defendants on behalf of Auris’s former stockholders.
The entity defendants moved to dismiss plaintiff’s claims for civil conspiracy, fraud, breach of the implied covenant of good faith and fair dealing, mutual mistake, unjust enrichment, and specific performance.
As to plaintiff’s fraud claims, the Court held that, in the absence of an express non-reliance provision, the exclusive remedy provision in the merger agreement did not bar the plaintiff from pursuing fraud claims based on allegedly false extra-contractual representations and material omissions made during merger negotiations. Specifically, the Court recognized that the merger agreement did not contain language disclaiming Auris’s reliance on representations made during merger negotiations and the exclusive remedy provision did not carve out an exception for fraud claims based on extra-contractual representations. The Court acknowledged that “[n]o Delaware court has found that an exclusive remedy provision bars a plaintiff from bringing a fraud claim based on extra-contractual representations in the absence of express anti-reliance language.” Having concluded that the exclusive remedy provision did not bar plaintiff’s fraud claims, the Court held that the plaintiff had adequately pleaded a claim for common law fraud because the plaintiff sufficiently showed justifiable reliance on the alleged misrepresentations by the defendants regarding Verb, and the question of whether the defendants acted with intent to defraud the plaintiff could not be resolved at the pleadings stage. Conversely, the Court dismissed plaintiff’s claim for equitable fraud because plaintiff had not pleaded any special relationship between the parties or a justification that an equitable remedy was required to make plaintiff whole.
The Court declined to dismiss plaintiff’s claim that Ethicon violated the implied covenant of good faith and fair dealing because plaintiff adequately alleged that the merger agreement did not address how to deal with the FDA’s unexpected policy change regarding the regulatory pathway for iPlatform.
The Court also declined to dismiss plaintiff’s claims for rescission based on mutual mistake, holding that additional evidence was needed to determine whether the parties were mistaken at the time the merger agreement was signed, and rejecting defendants’ argument that plaintiff had assumed the risk of a change in the FDA’s regulatory regime.
The Court dismissed plaintiff’s claim for reformation based on mutual mistake because the plaintiff failed to allege the existence of any antecedent agreement that the merger agreement attempted to express.
The Court upheld plaintiff’s unjust enrichment claim because plaintiff had pleaded viable claims for common law fraud and rescission based on mutual mistake.
The Court also declined to dismiss plaintiff’s specific performance claim involving a provision of the merger agreement that required the parties to address terms that had become incapable of being enforced. Under these circumstances, the Court held it was unable to conclude that there was no reasonably conceivable set of circumstances under which the plaintiff could recover on its specific performance claim.
Finally, the Court dismissed plaintiff’s claims against the individual defendants for lack of personal jurisdiction. The Court declined to exercise personal jurisdiction under Delaware’s long-arm statute because the merger negotiations occurred outside of Delaware, none of the allegedly harmed former stockholders of Auris had a physical presence in Delaware, and the creation of a merger subsidiary in Delaware was not alone enough to create a basis for personal jurisdiction. Similarly, the Court held that the plaintiff failed to allege that the individual defendants engaged in a conspiracy between distinct actors, and therefore refused to exercise jurisdiction under a civil conspiracy theory.