Delaware Supreme Court Explains the Limits of the Implied Covenant in an Earn-Out Dispute

On January 12, 2026, the Delaware Supreme Court issued an en banc opinion in Johnson & Johnson v. Fortis Advisors LLC, No. 490, 2024, (Del. Jan. 12, 2026). This opinion affirmed in part and reversed in part a post-trial decision from the Delaware Court of Chancery involving a post-closing earn-out (or milestone) dispute between Johnson & Johnson and the former stockholders of Auris Health, Inc. which awarded over $1 billion in damages including interest. Aside from the high stakes, a key takeaway from the opinion concerns the court’s explanation of the limited availability of the implied covenant of good faith and fair dealing.

The court began with its typical analysis that the implied covenant is included in every contract, but that it should not be used to “re-write a contract” and “is a narrow gap-filling tool of last resort.” The court went on to explain that the implied covenant operates primarily in two ways. The first is when, for example, the contract allocates discretionary authority to one party over a central aspect of a contract. Under this circumstance, the grant of such discretion is conditioned on the party operating with “sincerity, honesty, fair dealing and good faith.” 

The second way, which was at issue on appeal, is when the implied covenant is used to address unforeseen developments or contingencies that neither party anticipated nor resolved by contract which threaten the parties’ bargained-for economic expectations. The court re-emphasized that employing the implied covenant as a gap-filler is a “limited and extraordinary remedy” that only applies when there is a “genuine contractual gap about a truly unanticipated development and only then to vindicate the parties’ shared expectations at signing.” At issue on appeal was a risk that occurred months after closing when the FDA confirmed that first-generation robotic-assisted surgical devices would no longer be eligible for 510(k) clearance and, instead, would require a more rigorous de novo review. Johnson & Johnson believed this post-closing development excused its earnout obligation. The Court of Chancery disagreed and employed the implied covenant. The court, on appeal, held that the fact that the FDA would require the de novo pathway for the first earnout instead of the 510(k) pathway was “both foreseeable and addressed in the parties’ carefully negotiated agreement.” Thus, the court reversed the Court of Chancery’s application of the implied covenant. 

The opinion reinforces the narrowness of the implied covenant, particularly where the circumstances are expressly addressed in the underlying contract or when the risk (e.g., a regulatory development) was foreseeable at signing. In such cases, Delaware courts will hold parties to their bargain and will not imply terms that the parties could have negotiated.