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This post uses hypothetical scenarios for illustrative purposes only. It does not describe any actual client, transaction, or representation, and is not legal advice.

Picture a 2026 diagnostics M&A pattern. A founder sells her company two years earlier for a number she is happy with at signing and a number she is unhappy with at the second anniversary. The happy number is the cash at closing — sixty-eight million. The unhappy number is the earnout — fourteen million at target, zero dollars actually paid. The buyer’s position is that the regulatory milestone slipped because of FDA review priorities the buyer could not control. The founder’s read is different. The buyer quietly redeployed the FDA-affairs team to a different product line in month nine, told its FDA consultant in month fourteen that there was “no urgency” on the diagnostic, and filed the supplemental submission three months later than the original timeline contemplated.

The question is whether the contractual “commercially reasonable efforts” covenant has been breached. In Delaware, the answer until recently was, in practice, “you have a fight on your hands and you are going to lose more than you win.” After the J&J v. Fortis decision in early 2026, the answer has changed. Chancery reset the efforts-clause baseline in a way that is going to alter how earnout disputes are pleaded, priced, and settled for the next five years. Here is what the opinion says, and what sellers should negotiate into the next deal because of it.

What the Auris earnout case actually decided

The case is Johnson & Johnson v. Fortis Advisors LLC, the post-closing fight over the earnout owed to the former stockholders of Auris Health, the surgical-robotics company J&J acquired in 2019 for $3.4 billion in cash plus up to $2.35 billion in contingent payments tied to FDA regulatory milestones. The sellers’ representative argued J&J had starved the program — favoring its own priorities and failing to use the contractually required efforts. After a 2024 trial, Vice Chancellor Will of the Court of Chancery agreed in large part and awarded the sellers more than a billion dollars.

On January 12, 2026, the Delaware Supreme Court, sitting en banc, affirmed the core of that result and reversed a piece of it. The reversal was narrow: every earnout milestone was expressly conditioned on a specific FDA clearance — “510(k)” premarket notification — and after closing the FDA closed that pathway for first-generation devices like the Auris robot. Chancery had used the implied covenant of good faith and fair dealing to require J&J to chase an alternative pathway for the first milestone; the Supreme Court reversed that single ruling, holding there was no contractual “gap” to fill because the parties had named one pathway and only one. It affirmed the breach finding on the remaining milestones, the express commercially-reasonable-efforts standard, and a separate finding that J&J fraudulently induced Auris into one milestone, remanding only to recompute damages. The headline for most deal lawyers is that the ruling made earnouts somewhat less risky for buyers than Chancery had — but the part founders should sit with is that it did so by enforcing the words on the page, in both directions.

The earnout commercially reasonable efforts standard is a mirror, not a yardstick

Here is the thing about the efforts standard that founders consistently misread. When a contract says the buyer will use “commercially reasonable efforts” to achieve a milestone, the natural reading is that some objective amount of effort a reasonable company would expend sets the bar. That is not how these clauses are usually written, and it is not how the Auris agreement was written. The standard there was inward-facing — it measured J&J’s effort against how it treats its own “priority medical device” products. The yardstick is the buyer’s own behavior, not an outside ideal.

Think about what that does to my diagnostics founder. If the buyer can show it deprioritizes its own marginal programs all the time — that reassigning staff and slow-walking a clearance is exactly what it does to comparable internal products — an inward-facing standard hands it a defense built out of its own mediocrity. The worse the buyer treats its own pipeline, the lower the bar on yours. That is why buyers usually negotiate for the inward-facing version. But Auris shows it can cut the other way: J&J is a top-tier device company, so its “priority” baseline was high, and the agreement barred it from acting with the intention of avoiding the earnout or weighing the payment’s cost. Inward-facing is not automatically buyer-friendly. It depends on whose pipeline you are looking into.

The Supreme Court did not invent this standard; it enforced it. Where the contract specifies the milestone with precision — the Auris milestones were tied to a particular form of FDA clearance, which foreclosed any argument that the contract was silent about what counted — the court holds the parties to what they wrote and will not let the implied covenant rewrite it. : the opinion is a drafting opinion. It rewards precision and punishes the seller who left a contingency to a court’s sense of fairness rather than to the contract.

The implied covenant is not your safety net

Founders and their counsel reach for the implied covenant of good faith and fair dealing when the express words run out. The theory is intuitive: even where the contract does not spell out a duty, the buyer cannot deprive the seller of the fruits of the bargain. It is a powerful idea and a narrow tool. Delaware courts apply it only to fill genuine gaps — and the Supreme Court was emphatic that a gap is not the same as a contingency the parties simply chose not to address. If a development could have been anticipated, even if unlikely, the covenant cannot supply protection that “easily could have been drafted at the bargaining table.” Founders selling Florida companies should note this cuts the same way under state law — how Florida’s implied covenant treats earnout disputes versus Delaware is its own drafting question. The court noted that Auris had received pointed FDA feedback that the 510(k) route might be unavailable, and that the FDA had publicly announced it was overhauling the pathway — yet the parties still tied every milestone to 510(k) and nothing else.

The practical lesson is blunt. Do not draft an earnout on the assumption that the implied covenant will catch what the efforts clause and milestone definitions miss. Where you have foreseen a risk — or could have — and left it out, the covenant will not rescue you. The express terms are the whole game.

What to actually do before you sign

If part of your price is going to ride on milestones the buyer controls, the drafting work has to happen at the term sheet, not in litigation three years later. First, get specific about the efforts standard’s direction and its comparators. An outward-facing standard — the efforts a reasonable company in the buyer’s position would use — behaves differently from the inward-facing standard that measures the buyer against its own conduct, and which one favors you depends entirely on the buyer. If you are selling to an industry leader, the inward-facing “priority product” baseline that Auris used may be the stronger leash, and you should consider naming the specific comparator products rather than leaving “priority” to a later fight. Pair it with the Auris-style anti-sandbagging language: no acting with the intention of avoiding the payment, no factoring the cost of the earnout into post-closing decisions.

Second, replace soft efforts language with hard, specific covenants wherever the business will tolerate it. “Commercially reasonable efforts to obtain clearance” is a fight. “Buyer shall file the 510(k) submission no later than nine months after closing, shall maintain a regulatory team of no fewer than X dedicated personnel, and shall not cut the program’s budget below the level in Schedule Y” is a breach you can prove with a calendar and a budget. Operating covenants carry no squishy reasonableness overlay; a missed deadline is a missed deadline. The seller-friendly versus buyer-friendly framing matters most here, because the buyer’s instinct is to keep everything at the level of generalized effort, and yours should be to convert as much as possible into objective obligations.

Third, name the milestone with precision, but anticipate the path. The Supreme Court’s reversal turned on a contingency the parties saw coming and did not address: when the named regulatory route closed for the first milestone, the implied covenant could not bridge the gap. So if hitting your milestone might require a second regulatory track, a different channel, or an additional study, say so — for example, that any alternative approval producing a similar result and not significantly more burdensome must be sought if the named pathway closes. Do not assume a court reads that in. In Auris it did not for the first milestone, even though the express efforts standard happened to require the alternative pathway for the remaining ones — exactly the kind of distinction you do not want riding on litigation.

Fourth, watch what you are told about how certain the earnout is. One of the sharpest seller wins in Auris was not a contract claim but fraud: J&J’s CEO called one near-term milestone so “highly certain” that J&J treated it as part of the upfront price, while knowing of a recent patient death and a related FDA inspection that threatened it. The Supreme Court let that finding stand and noted the deal’s anti-reliance protections ran in the buyer’s favor, not the seller’s. If a buyer is selling you on a milestone’s inevitability, get that optimism into the agreement as a representation.

Fifth, think hard about how much of the price you take in this form at all. An earnout bets the buyer’s incentives stay aligned with yours after closing, and Auris is a billion-dollar reminder that they often do not. Where you can convert earnout dollars into closing dollars, even at a discount, the certainty is frequently worth more than the founder’s optimism about the number. And if you do keep the contingent piece, build in protection for the deal that never reaches its milestones on the original terms — earnout acceleration on a buyer change of control is the clause founders most often forget. The cleanest earnout is a smaller one.

The honest read

The Auris decision did not blow up earnouts. It clarified them, and the clarification runs in the buyer’s favor at the margins. Delaware will enforce the terms the parties actually wrote — the named milestone, the named pathway, the inward-facing efforts standard — and the implied covenant will not rescue a seller who left a foreseeable contingency to a court’s sense of fairness. But it also reminded buyers that a precisely drafted efforts clause can bite hard, and that overselling a milestone is fraud the contract’s boilerplate will not cover. For founders, that is not a reason to refuse every earnout. It is a reason to treat the efforts clause and the milestone definitions as the most important sentences in the document, to draft objective covenants around them, and to price the contingent portion for the real risk that the buyer’s enthusiasm will not survive the closing dinner. A milestone earnout is a contract you litigate-proof at the table, because the courthouse, as the Auris sellers learned, enforces the words you chose — not the deal you wish you had struck.

If you are a founder weighing an earnout-heavy structure and want a second read on the efforts language before you sign, feel free to reach out to my firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.

— John