The Earnout That Never Paid: What an Earnout Clause Did and Didn’t Protect

An earnout clause is a promise to pay part of the price later, if the business hits agreed milestones. When Johnson & Johnson bought Auris Health in 2019, it paid $3.4 billion at closing and agreed to as much as $2.35 billion more in milestone payments. None of it was paid. A Delaware court later found that J&J broke its written promise to push the products toward those milestones.

On this page: What the earnout clause promised · How the earnout clause was broken · What the courts decided · What it cost · Good faith in Illinois · Three things to check · A sample earnout clause · Earnout clause FAQ

What the earnout clause promised

Auris Health was founded in 2012 by Dr. Frederic Moll, one of the co-founders of Intuitive, the company behind the da Vinci surgical robot. By 2016 it was building two robots: Monarch, aimed at diagnosing and treating lung cancer, and iPlatform, an operating-room robot meant to compete with da Vinci.

Johnson & Johnson had its own robot in the works, called Verb. The court found Verb “was falling increasingly behind the schedule J&J had announced to the market,” and J&J “looked to Auris as a solution.” Auris, for its part, “was wary of an acquisition, especially by J&J since Verb was a potential competitor of iPlatform.”

The deal signed on February 12, 2019. Auris received $3.4 billion in cash at closing. Its stockholders could earn another $2.35 billion across ten milestones, eight regulatory and two sales, with $1.15 billion riding on iPlatform alone.

The sellers got two promises in writing, and this is the part of the earnout clause that mattered. J&J would use efforts “consistent with the usual practice” it used for “priority medical device products.” And J&J would not act, or hold back, “with the intention of avoiding” an earnout payment or “based on taking into account the cost” of paying one.

That is more than most sellers get. For how an earnout sits alongside the other ways buyers defer the price, see our explainer on earnouts and seller notes.

How the earnout clause was broken

The court found “J&J’s promise to Auris was broken almost immediately after closing.” iPlatform was put into a head-to-head contest against Verb called “Project Manhattan,” and progress toward the FDA milestones stopped.

iPlatform won. J&J then had Verb’s hardware and team added to it, and the court said iPlatform “effectively became a parts shop for Verb.” In April 2020, J&J wrote the milestones down to zero.

The iPlatform robot effectively became a parts shop for Verb.

What the trial court and the Delaware Supreme Court decided

The stockholders’ representative, Fortis Advisors, sued. After a 10-day trial, Vice Chancellor Lori Will ruled in September 2024 that J&J breached its efforts and anti-avoidance promises. She rejected J&J’s technical-problems defense as “dubious.” She also found fraud on one Monarch milestone: J&J told Auris the milestone was nearly certain and didn’t mention a regulatory investigation that followed a patient’s death in a study. Most of the other fraud claims failed. Damages with interest exceeded $1 billion.

In January 2026, the Delaware Supreme Court affirmed almost all of it. It reversed one piece. The FDA had changed the approval route for the first iPlatform milestone, and the trial court had used the implied covenant of good faith to treat the new route as good enough. The Supreme Court said there was “no genuine contractual gap.” The contract had already put the risk of FDA changes on the sellers. That milestone came out of the award, and the case went back to recalculate.

There is no genuine contractual gap for the covenant to fill.

That is the lesson in one line: an earnout clause is protected by the words in it, not by the words a court might wish were in it. This was Delaware law. Illinois has its own rules, below. The earlier stage of this dispute is covered separately on this site.

What it cost

On paper the earnout clause was worth up to $2.35 billion. Here is what it actually produced.

• None of the ten milestones was paid.
• At trial: damages with interest over $1 billion, including $60,865,748 for the fraud on one Monarch milestone. Interest ran at the contract’s prime rate, compounded.
• The trial court refused to shift the sellers’ legal fees to J&J. The contract didn’t provide for it.
• The Supreme Court sent the award back to be recalculated without the first milestone. We didn’t find the final number in the record, so we won’t guess.
• Time: signed 2019, sued 2020, trial decision 2024, appeal decided 2026.

How Illinois courts read good faith into an earnout clause

Illinois reads good faith into contracts as a limit on discretion. In Dayan v. McDonald’s Corp. (1984), the First District said a party with contractual discretion “must exercise that discretion reasonably and with proper motive,” and not “arbitrarily, capriciously, or in a manner inconsistent with the reasonable expectations of the parties.” The court gave an example that fits an earnout closely: acting out of “a desire to extricate himself from a contractual obligation by refusing to bring about a condition precedent.”

There’s a limit. In Voyles v. Sandia Mortgage Corp. (2001), the Illinois Supreme Court repeated that the duty “is not generally recognized as an independent source of duties giving rise to a cause of action in tort.” It works inside the contract you signed.

That matches the Delaware reversal. Good faith protects the deal you made. It won’t write the terms you left out.

Three things to check in your earnout clause

If you’re selling, or sold with an earnout still running, pull the agreement and work through your earnout clause line by line:

• ☐ Find the efforts clause. Does it stop at “commercially reasonable efforts,” or does it tie the buyer’s efforts to something measurable, like how the buyer treats its own comparable products?
• ☐ Look for a promise that the buyer won’t make decisions to avoid paying you.
• ☐ Check what reports you’re entitled to on milestone progress, and how often.

These are terms to settle early, while you still have leverage — which is why they belong in the letter of intent, not the final markup. For the wider pattern of sellers taking less than the headline number, see mistakes when selling a business.

A sample earnout clause

This is what a stronger earnout clause looks like on the page. A sample earnout efforts clause (a general illustration; every deal is different):

It gives “efforts” a yardstick, bars decisions made to dodge the payment, gives the sellers a view of progress, and sets a trigger if the buyer walks away. Buyers push back hard on that last sentence and on anything that limits how they run what they bought, so expect to trade for it. Our corporate and M&A attorneys negotiate these terms on the sell side.

For your CPA or banker

Advisors see the same earnout clause problem from a different seat. The red flag in the file: a client counting earnout money in a personal plan, a loan, or a partner buyout, when the contract promises only “commercially reasonable efforts” and no reporting. One question for your next client meeting: “If the buyer decides your product isn’t a priority anymore, what does your agreement say happens to the earnout?”

Earnout clause FAQ

What is an earnout clause?

An earnout clause makes part of the purchase price depend on what happens after closing. The buyer pays some money up front and more later if the business reaches agreed milestones, such as sales targets or regulatory approvals.

Does “commercially reasonable efforts” protect a seller?

It depends on what the contract ties those efforts to. The Auris sellers had more than that phrase. J&J promised efforts “consistent with the usual practice” it used for its “priority medical device products,” and promised not to act “with the intention of avoiding” an earnout payment. The court enforced those written promises.

Will a court fill a gap in an earnout clause?

Not when the contract already assigns the risk. The Delaware Supreme Court reversed the one part of the award that rested on the implied covenant of good faith and fair dealing. It held there was “no genuine contractual gap” for the covenant to fill, because the agreement had put the risk of an FDA change on the sellers.

How does Illinois treat good faith in a contract?

Illinois courts read a duty of good faith into contracts as a limit on discretion. In Dayan v. McDonald’s Corp., the appellate court said a party with contractual discretion “must exercise that discretion reasonably and with proper motive.” In Voyles v. Sandia Mortgage Corp., the Illinois Supreme Court said the duty “is not generally recognized as an independent source of duties giving rise to a cause of action in tort.” It works inside the contract the parties signed.

Sources

• Fortis Advisors LLC v. Johnson & Johnson, C.A. No. 2020-0881-LWW (Del. Ch. Sept. 4, 2024): CourtListener
• Johnson & Johnson v. Fortis Advisors LLC, No. 490, 2024 (Del. Jan. 12, 2026): CourtListener
• Dayan v. McDonald’s Corp., 125 Ill. App. 3d 972 (1st Dist. 1984): CourtListener
• Voyles v. Sandia Mortgage Corp., 196 Ill. 2d 288 (2001): CourtListener

This article is for informational purposes only and does not constitute legal advice.

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