Fortis Advisors LLC v. Johnson & Johnson, Ethicon, Inc., Alex Gorsky, Ashley McEvoy, Peter Shen and Susan Morano ( 2021 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
FORTIS ADVISORS LLC, solely in its
)
capacity as representative of former
)
stockholders of Auris Health, Inc.,
)
)
Plaintiff, )
)
v. ) C.A. No. 2020-0881-LWW
)
JOHNSON & JOHNSON, ETHICON, )
INC., ALEX GORSKY, ASHLEY )
MCEVOY, PETER SHEN, and SUSAN )
MORANO, )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: September 14, 2021
Date Decided: December 13, 2021
Bradley R. Aronstam and Roger S. Stronach, ROSS ARONSTAM & MORITZ LLP,
Wilmington, Delaware; Philippe Z. Selendy, Andrew R. Dunlap, Sean P. Baldwin,
Joshua S. Margolin, Greg Wolfe, and Vivek Tata, SELENDY & GAY PLLC, New
York, New York; Martin S. Schenker and Jeffrey S. Karr, COOLEY LLP, San
Francisco, California; Daniel J. Pohlman and Daniel P. Roy III, COOLEY LLP, New
York, New York; Counsel for Plaintiff Fortis Advisors LLC
William M. Lafferty, Susan W. Waesco, and Elizabeth A. Mullin, MORRIS,
NICHOLS, ARSHT, & TUNNELL LLP, Wilmington, Delaware; Gary A. Bornstein
and Damaris Hernández, CRAVATH, SWAINE & MOORE LLP, New York, New
York; Counsel for Defendants Johnson & Johnson, Ethicon, Inc., Alex Gorsky,
Ashley McEvoy, Peter Shen, and Susan Morano
WILL, Vice Chancellor
In April 2019, Johnson & Johnson—through its subsidiary Ethicon, Inc.—
acquired robotic medical company Auris Health, Inc. The merger agreement
provided for an upfront payment of $3.4 billion with post-closing earnout payments
of up to $2.35 billion available upon the achievement of predetermined milestones.
Several milestones were tied to Auris’s iPlatform surgical robot achieving regulatory
clearance through the Food and Drug Administration’s 510(k) premarket approval
pathway.
In August 2019, the FDA informed the parties that iPlatform was no longer
eligible for 510(k) clearance, requiring that a different pathway called De Novo be
followed instead. The merger agreement did not contemplate De Novo regulatory
approval.
After J&J announced that it had released its reserves for the earnout payments
in April 2020, plaintiff Fortis Advisors filed this litigation as the representative of
Auris’s aggrieved former stockholders. Fortis contends that Ethicon breached the
merger agreement. Fortis also asserts that J&J, its officers, and Ethicon made false
promises during negotiations about the development of iPlatform that induced Auris
to enter into the merger agreement.
The plaintiff brings twelve claims based on a variety of legal theories. The
defendants have moved to dismiss the majority of those claims. The individual
defendants have also moved for dismissal based on a lack of personal jurisdiction.
1
In this decision, I grant the motion to dismiss for lack of personal jurisdiction.
I also conclude that Fortis has failed to state a claim for equitable fraud, reformation
based on mutual mistake, and civil conspiracy. The motion to dismiss is otherwise
denied.
I. BACKGROUND
The following facts are based on the plaintiff’s Verified Complaint and the
documents it incorporates by reference.1 Any additional facts are either not subject
to reasonable dispute or are subject to judicial notice.2
A. Johnson & Johnson Enters the RASD Market.
Defendant Johnson & Johnson (“J&J”) is one of the largest healthcare
companies in the world, with over 260 operating companies.3 The company’s
1
Verified Compl. (“Compl.”) (Dkt. 1). See Winshall v. Viacom Int’l, Inc., 76 A.3d 808,
818 (Del. 2013) (“[A] plaintiff may not reference certain documents outside the complaint
and at the same time prevent the court from considering those documents’ actual terms.”
(quoting Fletcher Int’l, Ltd. v. ION Geophysical Corp., 2011 WL 1167088, at *3 n.17 (Del.
Ch. Mar. 29, 2011))); Freedman v. Adams, 2012 WL 1345638, at *5 (Del. Ch. Mar. 30,
2012) (“When a plaintiff expressly refers to and heavily relies upon documents in her
complaint, these documents are considered to be incorporated by reference into the
complaint . . . .”); Elf Atochem N. Am, Inc. v. Jaffari, 727 A.2d 286, 287 n.1 (Del. 1999)
(confining review in the context of a Rule 12(b)(1) motion to the allegations of the
complaint and attached exhibits).
2
See, e.g., In re Books–A–Million, Inc. S’holders Litig., 2016 WL 5874974, at *1 (Del. Ch.
Oct. 10, 2016) (explaining that the court may take judicial notice of “facts that are not
subject to reasonable dispute” (citing In re Gen. Motors (Hughes) S’holder Litig., 897
A.2d 162, 170 (Del. 2006))); Omnicare, Inc. v. NCS Healthcare, Inc., 809 A.2d 1163, 1167
n.3 (Del. Ch. 2002) (“The court may take judicial notice of facts publicly available in filings
with the SEC.”).
3
Compl. ¶ 25.
2
operations are separated into several divisions, including the Medical Devices
division, which generates about a third of J&J’s total sales.4 In the mid-2000s, the
Medical Devices division was generating billions of dollars in revenue from
endomechanical devices—tools used during laparoscopic surgeries.5
After 2012, the growth of J&J’s Medical Devices division was increasingly
challenged by the development of Robotically Assisted Surgical Devices
(“RASDs”).6 RASDs enable surgeons to perform invasive operations using a
computer system that controls surgical instruments through small incisions in the
patient’s body.7 RASDs, such as Intuitive Surgical’s RASD platform da Vinci
Surgical System, began to replace traditional endomechanical tools in the medical
device market.8 By the third quarter of 2015, J&J’s Medical Devices division was
the “poorest-performing segment” of its business and faced scrutiny from analysts
and investors.9
J&J sought to develop its own RASD as an answer to Intuitive’s success. In
March 2015, J&J announced that its wholly owned subsidiary defendant Ethicon,
4
Id. ¶ 34; see Johnson & Johnson, Products, https://www.jnj.com/healthcare-products (last
visited Dec. 13, 2021).
5
Compl. ¶ 34.
6
Id. ¶¶ 3, 35-36.
7
Id. ¶¶ 2, 36.
8
Id. ¶¶ 36-38.
9
Id. ¶ 35.
3
Inc.—a major producer of surgical mesh, sutures, and medical instruments—had
entered into a joint venture with Google affiliate Verily Life Sciences.10 The joint
venture, Verb Surgical Inc., began developing a new RASD called the Verb Surgical
Robot.11
J&J executives publicly touted the development and commercialization of the
Verb Surgical Robot, suggesting that it would be commercialized in 2020.12
Questions about the commercial viability of the product began to emerge within
J&J.13 Meanwhile, RASDs and Intuitive continued to gain market share.14
B. J&J Explores Acquiring Auris.
In addition to Ethicon’s investment in Verb, a separate J&J subsidiary made
an investment in Auris Health, Inc. in 2017.15 Auris was formed by the founder of
Intuitive, Dr. Frederic Moll, and focused on the development of new RASDs.16 In
late 2018, J&J approached Auris about a potential acquisition of Auris by Ethicon.17
10
Id. ¶¶ 4, 40.
11
Id. ¶¶ 4, 41.
12
Id. ¶ 42.
13
Id. ¶¶ 5, 43, 46.
14
Id. ¶ 45.
15
Id. ¶ 48.
16
Id. ¶ 47.
17
Id. ¶ 49.
4
At that time, Auris had two main RASD platforms in development: Monarch and
iPlatform.18
Monarch, a robotic endoscope designed to detect and treat lung cancer, had
already obtained FDA clearance for one use indication.19 iPlatform was designed to
be the next generation successor to the da Vinci Surgical System that Moll had
developed while at Intuitive.20 iPlatform was still in development and had yet to
receive FDA approval.21
C. The Merger Negotiations
Arm’s length negotiations began in December 2018.22 Defendants J&J Chief
Executive Officer Gorsky, Executive Vice President and Worldwide Chairman of
Medical Devices Ashley McEvoy, Vice President of Business Development Susan
Morano, and Global Head of R&D of Medical Devices Peter Shen led negotiations
for J&J and Ethicon.23 Moll, with Auris’s then-Chief Operating Officer Josh
DeFonzo and then-Chief Financial Officer David Styka, led negotiations for Auris.24
18
Id.
19
Id. ¶¶ 2, 50, 127.
20
Id. ¶ 51.
21
Id. ¶¶ 52, 128, 136.
22
Id. ¶ 54.
23
Id. ¶¶ 28-30, 54.
24
Id. ¶¶ 52, 54.
5
The parties’ negotiations lasted for two months. The defendants proposed that
Ethicon would acquire Auris for a base amount with the potential for billions of
dollars in future payments to Auris’s stockholders based primarily on iPlatform
meeting regulatory and sales milestones.25 Given that structure, Auris’s
representatives raised concerns about the relationship between Auris and Verb,
which they viewed as a potential competitor.26 In response, J&J’s representatives
described the Verb Surgical Robot as “complementary to” or “different from”
iPlatform, explaining that the products would “co-exist” post-acquisition and that
the Verb robot was “on track” to launch.27 Auris was told that J&J planned for Auris
to operate “independently from Verb” with “minimal oversight” from J&J following
the merger, with Auris retaining its independence as a distinct unit within J&J.28
Auris was assured that its “space expansion and hiring needs” would be met and that
Auris employees’ compensation would be “align[ed]” with agreed-upon earnout
payments.29
25
Id. ¶ 55.
26
Id. ¶ 58.
27
Id. ¶¶ 8, 62-63, 165-66, 172-73.
28
Id. ¶¶ 8, 63-65, 165.
29
Id. ¶¶ 52, 63-71, 165, 172.
6
D. The Merger Agreement
On February 12, 2019, the parties’ agreement for Ethicon to acquire Auris was
memorialized in an Agreement and Plan of Merger between Ethicon, Antwerp
Merger Sub, Inc., Auris, and Fortis (the “Merger Agreement”).30 Under the Merger
Agreement, Ethicon agreed to pay Auris’s former stockholders $3.4 billion dollars
at closing.31 Ethicon also agreed to pay up to an additional $2.35 billion in earnout
payments based on Monarch and iPlatform meeting eight regulatory milestones and
two sales milestones.32
Section 2.07(a) of the Merger Agreement set out the conditions for triggering
each of the ten earnout payments.33 The eight regulatory milestones trigger earnout
payments totaling $1.35 billion, with two related to Monarch and six related to
iPlatform.34 The iPlatform regulatory milestones hinge on iPlatform obtaining
regulatory approval by certain deadlines through the FDA’s “510(k) premarket
notification process,” allowing for the marketing and sale of iPlatform for a specified
medical indication.35
30
Id. ¶¶ 10, 79.
31
Id. ¶ 80.
32
Id. ¶¶ 81-82.
33
Defs.’ Opening Br. Ex. A § 2.07(a) (“Merger Agreement”) (Dkt 24).
34
Id. §§ 2.07(a)(i)-(viii).
35
Compl. ¶¶ 86-87; Merger Agreement §§ 2.07(a)(iii)-(viii).
7
Ethicon promised in Section 2.07(e)(i) that it and its affiliates would “use
commercially reasonable efforts to achieve each of the Regulatory Milestones.”36
Section 2.07(e)(ii) defines “commercially reasonable efforts” as the expenditure of
effort and resources toward “obtaining the applicable 510(k) premarket
notification . . . consistent with the usual practice of [Ethicon] and [J&J] with respect
to priority medical device products of similar commercial potential at a similar stage
in product lifecycle to [Monarch and iPlatform].”37
The Merger Agreement contains a one-sided anti-reliance provision in which
Ethicon disclaimed reliance on any representations made outside of the Merger
Agreement.38 The Merger Agreement includes a set of indemnification provisions
under which the parties agreed to indemnify each other against losses deriving from
any breach, inaccuracy, or failure to perform a representation, warranty, or covenant
found in the Merger Agreement.39 The parties agreed that the indemnification
provisions “will be the exclusive remedy with respect to claims made after the
Closing that relate to this Agreement or the transactions contemplated by this
Agreement,” subject to specified exceptions.40 Those exceptions include Auris’s
36
Merger Agreement § 2.07(e)(i).
37
Id. § 2.07(e)(ii).
38
Id. § 4.08(b).
39
Id. §§ 8.01-02.
40
Id. § 8.05(b).
8
former stockholders’ right to the earnout payments and “in the case of fraud by the
Company, Parent or Merger Sub with respect to making the representations and
warranties in th[e] [Merger] Agreement.”41
E. The FDA Requires De Novo Approval.
In November 2018—three months before the Merger Agreement was
signed—the FDA publicly announced “steps ‘to modernize’ its 510(k) program and
consider more products” through the alternative 513(f)(2) regulatory pathway
referred to as “De Novo” approval.42 The announcement explained that the FDA
planned on developing policy proposals that would limit the use of the 510(k)
pathway for certain new devices.43
De Novo and 510(k) approval are two pathways the FDA provides for Class
I and II medical devices—i.e., those posing low to moderate risk to patients—to
receive clearance to be marketed and sold in the United States.44 The 510(k)
pathway is a premarket submission made to the FDA demonstrating that the medical
device is at least as safe and effective as a substantially equivalent device that has
already received FDA approval.45 The De Novo pathway is designed to evaluate
41
Id.
42
Compl. ¶¶ 125, 131; see also 21 U.S.C. §§ 360, 360c (2021); 21 C.F.R. §§ 807.81-100(2021); 83 Fed. Reg. 63127 (proposed Dec. 7, 2018) (to be codified at 21 C.F.R. § 860).
43
Defs.’ Opening Br. Ex. D. at 3-8.
44
Compl. ¶¶ 124-25.
45
Id. ¶ 124; Defs.’ Opening Br. Ex. B.
9
medical devices for which there is not a substantial equivalent that has received FDA
approval.46 For decades, the FDA had evaluated RASDs under the 510(k) pathway,
including for Monarch in 2018.47 And in late 2018, the FDA had indicated to Auris
that the 510(k) pathway would be appropriate for iPlatform.48
On August 5, 2019, the FDA informed Ethicon, Verb, and Auris that it no
longer considered the 510(k) pathway to be appropriate for first-generation RASDs
like iPlatform.49 Instead, the FDA explained, RASDs would be required to use the
De Novo pathway.50
F. Auris’s Development Post-Merger
Following the FDA’s guidance, J&J and Ethicon directed Verb to shift toward
securing De Novo approval for the Verb Surgical Robot.51 Auris was asked to
confirm with the FDA that iPlatform was not eligible for the 510(k) pathway and,
after obtaining that confirmation, that it would not require iPlatform to undertake the
46
Compl. ¶ 125; Defs.’ Opening Br. Ex. C.
47
Compl. ¶ 127.
48
Id. ¶ 128.
49
Id. ¶ 138.
50
Id. ¶¶ 134, 138.
51
Id. ¶ 140.
10
more onerous approval process for Class III medical devices.52 Auris did not begin
preparing a De Novo application for iPlatform until January 2020.53
Meanwhile, Auris was (allegedly) pitted against Verb in a covert “bakeoff”
competition to determine whether iPlatform or Verb’s robot was superior.54 Auris
employees and resources were diverted toward developing tests and comparisons
between iPlatform and the Verb Surgical Robot.55 Auris was also not permitted to
increase its employee hiring or acquire additional space.56 In October 2019, J&J
declared iPlatform the winner.57 In early 2020, Ethicon bought out Verily’s stake in
Verb and integrated Verb into Auris.58
G. This Litigation
In April 2020, J&J publicly announced that it had “released” most of the
reserves it had been carrying for potential earnout payments to former Auris
stockholders.59 On October 12, 2020, Fortis filed this action against J&J, Ethicon,
52
Id.
53
Id.
54
Id. ¶ 99.
55
Id. ¶¶ 11, 103.
56
Id. ¶¶ 104-05.
57
Id. ¶ 107.
58
Id. ¶ 112.
59
Id. ¶ 155.
11
and individual defendants Gorsky, McEvoy, Shen, and Morano.60 Fortis’s complaint
alleges breaches of contract in connection with the earnout provisions, along with a
panoply of additional causes of action.61
II. LEGAL ANALYSIS
The defendants have moved to dismiss Fortis’s claims, other than its breach
of contract and indemnification claims, under Court of Chancery Rule 12(b)(6).62
Specifically, they seek dismissal of two fraud claims (Counts I and II), a claim for
breach of the implied covenant of good faith and fair dealing (Count VI), two mutual
mistake claims pleaded in the alternative (Counts VII and VIII), an unjust
enrichment claim pleaded in the alternative (Count IX), a civil conspiracy claim
(Count X), and a claim seeking specific performance (Count XII). When
considering such a motion:
(i) all well-pleaded factual allegations are accepted as true;
(ii) even vague allegations are well-pleaded if they give
the opposing party notice of the claim; (iii) the Court must
draw all reasonable inferences in favor of the non-moving
party; and (iv) dismissal is inappropriate unless the
plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of
proof.63
60
Dkt. 1.
61
Id.
62
All twelve counts of the Complaint were brought against Ethicon. Counts I, II, and X
were also brought against J&J and the individual defendants.
63
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (internal citation omitted).
12
“[T]he pleading standards for purposes of a Rule 12(b)(6) motion ‘are minimal,’”
and the operative test is “one of ‘reasonable conceivability,’” which “asks whether
there is a ‘possibility’ of recovery.”64
The individual defendants have also moved to dismiss the claims brought
against them for lack of personal jurisdiction under Court of Chancery Rule 12(b)(2).
When a defendant moves to dismiss a complaint under Rule 12(b)(2), “the plaintiff
bears the burden of showing a basis for the court’s exercise of jurisdiction over the
defendant.”65 “[T]he court may consider the pleadings, affidavits, and any discovery
of record, and may even hold an evidentiary hearing.”66 “If, as here, no evidentiary
hearing has been held, plaintiffs need only make a prima facie showing of personal
jurisdiction and ‘the record is construed in the light most favorable to the
plaintiff.’”67
This decision begins by addressing whether the court has jurisdiction over the
individual defendants. After finding that it does not, I address the remaining claims
against J&J and Ethicon. For the reasons stated below, I conclude that Fortis has
64
In re China Agritech, Inc. S’holder Deriv. Litig., 2013 WL 2181514, at *23-24 (Del. Ch.
May 21, 2013) (quoting Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 27
A.3d 531, 536-37 (Del. 2011)).
65
Ryan v. Gifford, 935 A.2d 258, 265 (Del. Ch. 2007).
66
Cornerstone Techs., LLC v. Conrad, 2003 WL 1787959, at *3 (Del. Ch. Mar. 31, 2003).
67
Ryan, 935 A.2d at 265 (citing Benerofe v. Cha, 1996 WL 535405, at *3 (Del. Ch.
Sept. 12, 1996) and quoting Cornerstone Techs., 2003 WL 1787959, at *3).
13
failed to state viable claims for civil conspiracy, equitable fraud, and reformation
based on mutual mistake, but has adequately pleaded claims for common law fraud,
breach of the implied covenant of good faith and fair dealing, unjust enrichment,
rescission based on mutual mistake, and specific performance.
A. Personal Jurisdiction and the Civil Conspiracy Claim
Delaware courts engage in a two-step analysis to determine whether the court
has jurisdiction over non-resident defendants.68 First, the court must determine
whether service of process is authorized by statute.69 If so, the court will consider
whether the defendant has sufficient minimum contacts with Delaware such that the
exercise of jurisdiction “does not offend traditional notions of fair play and
substantial justice.”70
Fortis argues that this court has personal jurisdiction over Gorsky, McEvoy,
Shen, and Morano under Delaware’s long arm statute, 10 Del. C. § 3104(c)(3).
Fortis also asserts that the conspiracy theory of personal jurisdiction applies.
Because the latter argument rests on whether the plaintiff has pleaded a viable
conspiracy claim, this section resolves the Rule 12(b)(2) motion entirely and the
Rule 12(b)(6) motion as to the civil conspiracy claim.
68
Matthew v. Fläkt Woods Grp. SA, 56 A.3d 1023, 1027 (Del. 2012).
69
Id.70
Id. (quoting Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945)).
14
1. Long-Arm Jurisdiction
Fortis asserts that personal jurisdiction exists under 10 Del. C. § 3104(c)(3)
because the individual defendants “[c]ause[d] tortious injury in the State by an act
or omission in this State.”71 Section 3104(c)(3) is “a ‘single act’ statute that
establishes jurisdiction over nonresidents on the basis of a single act or transaction
engaged in by the nonresident within the state.”72 Thus, Section 3104(c)(3) permits
the exercise of “specific personal jurisdiction over claims arising from the
jurisdictional contacts” at issue.73
Fortis contends that the individual defendants, as officers of J&J, were
“actively involved” in making false representations and omissions that defrauded
Auris’s former stockholders during the merger negotiations. The merger
negotiations did not take place in Delaware and the relevant statements were not
made within this state. Because some of Auris’s former stockholders are Delaware
corporations, Fortis argues that their injuries were suffered in Delaware.74 But none
71
10 Del. C. § 3104(c)(3).
72
Carlton Invs. v. TLC Beatrice Int’l Hldgs., Inc., 1995 WL 694397, at *10 (Del. Ch.
Nov. 21, 1995) (citing Tabas v. Crosby, 444 A.2d 250, 254 (Del. 1982) and Eudaily v.
Harmon, 420 A.2d 1175, 1180 (Del. 1980)).
73
Carlton, 1995 WL 694397, at *10; Chandler v. Ciccoricco, 2003 WL 21040185, at *11
(Del. Ch. May 5, 2003) (explaining that “single act” provisions of the long arm statute “will
only support an exercise of personal jurisdiction with respect to those causes of action that
have a nexus to the transaction of business that took place in the State”).
74
Pl.’s Answering Br. 44 (Dkt. 32).
15
of those corporations are alleged to have a physical presence in Delaware. The
harms had no effect in this state other than “to have been suffered by an entity whose
only nexus to Delaware lies in its legal creation” here.75
Fortis relies on the Delaware Superior Court’s decision in Wavedivision
Holdings, LLC v. Highland Capital Management. L.P., which explains that “when a
Delaware corporation is injured, the court may view the plaintiff corporation’s injury
as having taken place in Delaware.”76 Wavedivision was not, however, a personal
jurisdiction case. The court was assessing whether Delaware’s statute of limitations
applied and was interpreting Delaware’s borrowing statute to determine whether an
injured corporation was a resident of Delaware.77 Fortis cites no authority holding
that an injured party’s incorporation in Delaware is sufficient to show an injury in
this state for purposes of personal jurisdiction.78
Fortis also argues that the individual defendants committed an act in Delaware
by causing the formation of a Delaware corporation, Antwerp Merger Sub, that was
75
Aeroglobal Cap. Mgmt., LLC v. Cirrus Indus., Inc., 2003 WL 77007, at *5 (Del. Super.
Jan. 6, 2003).
76
2011 WL 5314507, at *8 (Del. Super. Nov. 2, 2011).
77
Id.; see 10 Del. C. § 8121.
78
Cf. Sample v. Morgan, 935 A.2d 1046, 1058 (Del. Ch. 2007) (finding that a Delaware
entity was injured in Delaware as the “situs that reflects the center of gravity of the
corporation for all issues involving internal affairs” where directors allegedly caused
financial injury through breaches of fiduciary duty (citing Chandler, 2003 WL 21040185,
at *11 n.46)).
16
merged into Auris.79 Fortis’s theory is that the creation of the Delaware merger sub
was a necessary action for completing the merger and engaging in the purported
fraud alleged in the Complaint. The plaintiff does not, however, allege that the
individual defendants had a role in forming the Delaware entity.
Even if they had, “merely participating in the formation of a Delaware entity,
without more, does not create a basis for jurisdiction in Delaware.”80 Instead, “the
formation of a Delaware entity must be central to the plaintiff’s claims of
wrongdoing.”81 The creation of the merger sub was a technically necessary step to
complete the merger. But it has, at best, a tenuous link to the former stockholders’
claimed injuries and cannot reasonably be viewed as an integral part of the
wrongdoing by the individual defendants alleged in the Complaint. 82
2. Conspiracy Theory of Jurisdiction and Civil Conspiracy
Fortis also maintains that jurisdiction exists over the individual defendants
based on a conspiracy theory.83 The Delaware Supreme Court established the
79
Pl.’s Answering Br. 45-46.
80
Conn. Gen. Life Ins. Co. v. Pinkas, 2011 WL 5222796, at *2 (Del. Ch. Oct. 28, 2011).
81
Dow Chem. Co. v. Organik Kimya Hldg. A.S., 2017 WL 4711931, at *8 (Del. Ch. Oct. 19,
2017) (internal citation omitted).
82
The only references to the merger sub in the Complaint are when Fortis lists the parties
to the Merger Agreement. See Compl. ¶¶ 10, 79.
83
Pl.’s Answering Br. 46.
17
elements of the conspiracy theory of jurisdiction in Instituto Bancario SpA v. Hunter
Engineering Company:
(1) a conspiracy to defraud existed; (2) the defendant was a member of
that conspiracy; (3) a substantial act or substantial effect in furtherance
of the conspiracy occurred in the forum state; (4) the defendant knew
or had reason to know of the act in the forum state or that acts outside
the forum state would have an effect in the forum state; and (5) the act
in, or effect on, the forum state was a direct and foreseeable result of
the conduct in furtherance of the conspiracy.84
“The conspiracy theory of jurisdiction is narrowly and strictly construed.”85
Satisfaction of this test depends on whether the plaintiff has sufficiently
pleaded a claim for civil conspiracy. “[T]o state a claim for civil conspiracy, a
plaintiff must plead facts supporting (1) the existence of a confederation or
combination of two or more persons; (2) that an unlawful act was done in furtherance
of the conspiracy; and (3) that the conspirators caused actual damage to the
plaintiff.”86 As with a substantive claim for civil conspiracy, the conspiracy theory
of personal jurisdiction requires both the existence of an underlying wrong and
legally distinct co-conspirators.87
84
449 A.2d 210, 225 (Del. 1982).
85
Comput. People, Inc. v. Best Int’l Gp., Inc., 1999 WL 288119, at *6 (Del. Ch. Apr. 27,
1999).
86
Allied Cap. Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1036 (Del. Ch. 2006).
87
See Boulden v. Albiorix, Inc., 2013 WL 396254, at *8 (Del. Ch. Jan. 31, 2013, revised
Feb. 7, 2013); Amaysing Techs. Corp. v. Cyberair Commc’ns, Inc., 2005 WL 578972, at
*7 (Del. Ch. Mar. 3, 2005).
18
Fortis cannot show the latter. Because “it is the general rule that the acts of
the agent are the acts of the corporation . . . a corporation generally cannot be deemed
to have conspired with its officers and agents.”88 There is an exception “when the
officer or agent of the corporation steps out of her role as an officer or agent and acts
pursuant to personal motives.”89 Fortis points to two motives it believes were
personal to the individual defendants: “(1) to conceal their commitment of securities
fraud through market misrepresentations about Verb,” and “(2) to inflate J&J’s share
price and earnings per share for personal profit.”90 Neither of these assertions is
supported by the Complaint.
Fortis has not alleged that the individual defendants fraudulently induced
Auris into a merger with Ethicon in order to conceal possible securities fraud. Unlike
the precedent Fortis relies on, the individual defendants are not facing a securities
fraud claim.91 And the facts described in the Complaint provide no indication that
88
Amaysing, 2005 WL 578972, at *7.
89
Id.90
Pl.’s Answering Br. 46.
91
See Reich v. Lopez, 38 F. Supp. 3d 436, 448, 465 (S.D.N.Y. 2014) (finding that individual
defendants acted to further own personal motivates to protect themselves from exposure to
a RICO claim, where that claim had been pleaded against them).
19
the individual defendants made the alleged misrepresentations to cause J&J’s stock
price to inflate.92
Fortis therefore cannot demonstrate that the individual defendants were
members of a conspiracy and this court cannot exercise personal jurisdiction under
the conspiracy theory.93 The individual defendants are dismissed from this action.94
The civil conspiracy claim is also pleaded against J&J and Ethicon. As with
the individual defendants, Fortis cannot establish a conspiracy among distinct actors.
“[A] corporation generally cannot be deemed to have conspired with its wholly
owned subsidiary.”95 “There are exceptions to this general principle. For example,
the rule may not apply when a parent and its subsidiary do not ‘share common
92
Any financial gain would be unlikely to satisfy the exception anyway because it would
not be a “benefit independent of their financial interest resulting from their employment.”
Amaysing, 2005 WL 578972, at *8.
93
The plaintiff also argues that “to the extent the [i]ndividual [d]efendants contend they
are entitled to take advantage of Section 8.05(b) of the Merger Agreement,” jurisdiction is
proper “by operation of the forum selection clause in the Merger Agreement.” Pl.’s
Answering Br. 44. Each party to the Merger Agreement submitted to jurisdiction in
Delaware in the forum selection clause. See Merger Agreement § 10.10. But the individual
defendants are not parties to the Merger Agreement and did not become parties by virtue
of the fact that they rely on the exclusive remedy provision in Section 8.05(b) in seeking
dismissal of Fortis’s fraud claims. See infra Part II.B.
94
Because the plaintiff has failed to allege a non-frivolous basis for personal jurisdiction,
the court declines to grant the plaintiff jurisdictional discovery. “[T]he decision to grant
jurisdictional discovery is discretionary.” Neurvana Med., LLC v. Balt USA, LLC, 2019
WL 5092894, at *2 (Del. Ch. Oct. 10, 2019). “Before ordering personal jurisdiction
discovery there must be at least ‘some indication that this particular defendant is amenable
to suit in this forum.’” Id., at *1 (quoting In re Am. Int’l Gp., Inc., 965 A.2d 763, 831 n.195
(Del. Ch. 2009)). There is no such indication here.
95
In re Transamerica Airlines, Inc., 2006 WL 587846, at *6 (Del. Ch. Feb. 28, 2006).
20
economic interests.’”96 Fortis does not allege that any such exceptions apply. The
civil conspiracy claim is therefore dismissed pursuant to Rule 12(b)(6).
B. The Fraud Claims
Fortis contends that J&J and Ethicon committed fraud by making false extra-
contractual representations to and withholding material facts from Auris during the
merger negotiations.97 Before analyzing the merits, I must consider whether the
Merger Agreement bars Fortis from pursuing those claims.
Delaware law respects bargained-for contractual rights negotiated between
sophisticated parties.98 At the same time, “Delaware’s public policy is intolerant of
fraud.”99 Delaware courts have balanced those interests by refusing to “insulate a
party from liability for its counterparty’s reliance on fraudulent statements made
outside of an agreement absent a clear statement by that counterparty—that is, the
96
Dow Chem., 2017 WL 4711931, at *12 (quoting Allied Cap., 910 A.2d at 1042) (finding
a conspiracy where a subsidiary was insolvent and the parent and the subsidiary conspired
to strip the subsidiary of its assets).
97
Counts I and II are also pleaded against the individual defendants. Because I have found
that no personal jurisdiction exists over them, I only address the claims as brought against
J&J and Ethicon.
98
See Anschutz Corp. v. Brown Robin Cap., LLC, 2020 WL 3096744, at *13 (Del. Ch.
June 11, 2020) (“Delaware courts have consistently held that ‘sophisticated parties to
negotiated commercial contracts may not reasonably rely on information that they
contractually agreed did not form a part of the basis for their decision to contract.’” (quoting
H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 142 n.18 (Del. Ch. 2003))).
99
Abry P’rs V, L.P. v. F & W Acq. LLC, 891 A.2d 1032, 1059 (Del. Ch. 2006).
21
one who is seeking to rely on extra-contractual statements—disclaiming such
reliance.”100
Prior decisions of this court have found that a standard integration clause,
without anti-reliance language, cannot disclaim reliance on representations outside
of the written contract.101 In Abry Partners V, L.P. v. F & W Acquisition LLC, then-
Vice Chancellor Strine explained that an agreement “must contain ‘language that . . .
can be said to add up to a clear anti-reliance clause by which the plaintiff has
contractually promised that it did not rely upon statements outside the contract’s four
corners in deciding to sign the contract.’”102 That approach strikes a “sensible
100
FdG Logistics LLC v. A&R Logistics Hldgs., Inc., 131 A.3d 842, 859 (Del. Ch. 2016);
see also Anschutz, 2020 WL 3096744, at *13 (stating that provisions disclaiming reliance
must be “explicit and comprehensive, meaning the parties must forthrightly affirm that they
are not relying upon any representation or statement of fact not contained in the contract”
(quoting Kronenberg v. Katz, 872 A.2d 568, 593 (Del. Ch. 2004))); Kronenberg, 872 A.2d
at 593 (“Because Delaware’s public policy is intolerant of fraud, the intent to preclude
reliance on extra-contractual statements must emerge clearly and unambiguously from the
contract.”).
101
Anschutz, 2020 WL 3096744, at *14 (“While our law does not require ‘magic words’
to disclaim reliance, when the contract does not actually include a specific
acknowledgement by a party that it is only relying on information contained within the four
corners of the agreement, that party is not shirking its bargain when it later alleges that it
did, in fact, rely on extra-contractual representations.”); Anvil Hldg. Corp. v. Iron Acq. Co.,
Inc., 2013 WL 2249655, at *8 (Del. Ch. May 17, 2013) (“Delaware courts will honor
clauses in which sophisticated parties disclaim reliance on extra-contractual
representations. This Court, however, will not give effect to so-called merger or integration
clauses that do not clearly state that the parties disclaim reliance upon extra-contractual
statements.” (internal citation omitted)).
102
891 A.2d at 1059 (quoting Kronenberg, 872 A.2d at 593).
22
balance between fairness and equity—parties can protect themselves against
unfounded fraud claims through explicit anti-reliance language.”103
Here, the Merger Agreement contains a one-way anti-reliance provision
disclaiming reliance by Ethicon on extra-contractual representations.104 Auris made
no such disclaimer. According to Fortis, because the parties did not follow the well-
worn path laid by Abry and its progeny, it cannot be foreclosed from pursuing its
fraud claims. But this case presents a twist. The defendants argue that anti-reliance
language was not necessary to bar Fortis’s fraud claims based on statements outside
the contract because the exclusive remedy provision in the Merger Agreement serves
that purpose.
The exclusive remedy provision is far from the “murky” integration clauses
this court is often confronted with when asked to assess whether a party has
disclaimed reliance on extra-contractual statements.105 Section 8.05(b) of the
103
Id.104
See Merger Agreement § 4.08 (“Except for the representations and warranties contained
in Article III [of the Merger Agreement], [Ethicon] and Merger Sub acknowledge that none
of [Auris] or any person on behalf of the [Auris] makes, and neither [Ethicon] nor Merger
Sub have relied upon, any other express or implied representation or warranty with respect
to [Auris] or any of its Subsidiaries or with respect to any other information provided or
made available to [Ethicon] or Merger Sub in connection with the transactions
contemplated by this Agreement . . . . Each [Ethicon] and Merger Sub disclaims any
representations and warranties other than those that are expressly set forth in Article III.”).
105
Abry P’rs, 891 A.2d at 1059; see also Anschutz, 2020 WL 3096744, at *14 (finding that
a standard integration clause was insufficient to disclaim reliance on extra-contractual
statements); FdG Logistics, 131 A.3d at 860 (“[T]he integration clause . . . merely states in
general terms that the Merger Agreement constitutes the entire agreement between the
23
Merger Agreement is a detailed provision stating that, except as otherwise provided,
“the indemnification provisions contained in [the Merger Agreement] will be the
exclusive remedy with respect to claims made after the Closing that relate to th[e]
[Merger] Agreement or the transactions contemplated by th[e] [Merger]
Agreement.”106 Fortis’s fraud claims were brought more than a year post-closing
and are not indemnification claims. The claims therefore must be viewed as barred
by the exclusive remedy provision, the defendants maintain, unless they fall within
an express exception. The exceptions listed in Section 8.05(b) include fraud claims
“with respect to making the representations and warranties in this Agreement.”107
But fraud claims based on extra-contractual representations—like those pressed by
Fortis—are not.108
The exclusive remedy provision in the Merger Agreement reflects careful
drafting evidencing the parties’ intention to limit the scope of claims that could be
brought after the merger closed.109 This court has recognized that provisions, such
parties, and does not contain an unambiguous statement by [the] Buyer disclaiming reliance
on extra-contractual statements.”); Kronenberg, 872 A.2d at 594 (“The integration clause
in the LLC Agreement is not an unambiguous acknowledgement by the plaintiffs that they
were not relying on factual statements not contained within the LLC Agreement itself.”).
106
Merger Agreement § 8.05(b); see also Defs.’ Opening Br. 17 (Dkt. 23).
107
Merger Agreement § 8.05(b); see also Defs.’ Opening Br. 17-18.
108
Defs.’ Opening Br. 18.
109
See Khushaim v. Tullow Inc., 2016 WL 3594752, at *3 (Del. Super. June 27, 2016)
(“While no ‘magic words’ are required to create a sole remedy clause, the parties must
demonstrate some showing of intent that they planned to create one.”).
24
as “deal-related indemnification provisions,” that address post-closing risk
allocation “serve the laudable purpose of making the contractual structure feasible
or more attractive to the participants.”110 But in the context of a fraud claim based
on a knowingly false contractual representation, Delaware courts have declined to
enforce such provisions in keeping with the state’s strong public policy against
intentional fraud.111 Consistent with that principle, the Merger Agreement explicitly
preserves fraud claims based on representations in the contract.
That leaves the question of whether an exclusive remedy provision can
foreclose a plaintiff from pursuing intentional fraud claims based on extra-
contractual statements in the absence of anti-reliance language. The defendants cite
to Airborne Health, Inc. v. Squid Soap, LP in support of their position that the
110
EMSI Acq., Inc. v. Contrarian Funds, LLC, 2017 WL 1732369, at *8 (Del. Ch. May 3,
2017) (internal citation omitted); see also 2 Bradley W. Voss, Voss on Delaware Contract
Law § 8.144[10][b] (2021).
111
See EMSI Acq., 2017 WL 1732369, at *8 (“‘Delaware’s strong public policy against
intentional fraud’ will not permit a party to a contract to disclaim or eliminate a claim that
it made ‘a knowingly false contractual representation.’” (quoting Airborne Health, Inc. v.
Squid Soap, LP, 984 A.2d 126, 136-37 (Del. Ch. 2009))); Abry P’rs, 801 A.2d at 1064
(holding that the “public policy of this State will not permit the Seller to insulate itself from
the possibility that the sale would be rescinded if the Buyer can show either (1) that the
Seller knew that the Company’s contractual representations and warranties were false; or
(2) that the Seller itself lied to the Buyer about a contractual representation and warranty”);
Edward P. Welch et al., Mergers & Acquisitions Deal Litigation Under Delaware
Corporation Law § 6.06 (2020) (“Delaware courts have stated that an agreement cannot
disclaim fraud claims that are based on false representations of fact made within the
contract itself.”).
25
Section 8.05(b) of the Merger Agreement does just that.112 In Squid Soap, the court
considered whether an exclusive remedy provision that carved out “claims involving
fraud or intentional misrepresentation” was limited to fraud based on intra-
contractual representations, excluding extra-contractual fraud claims.113 Vice
Chancellor Laster observed that the provision was not so circumscribed because
“[w]hen drafters specifically preserve the right to assert fraud claims, they must say
so if they intend to limit that right to claims based on written representations in the
contract.”114 The court did not, however, indicate that if the parties had explicitly
carved out fraud claims based on contractual representations, claims based on
representations outside of the contract would be barred by the provision despite the
absence of anti-reliance language.115
The defendants also point to the United States District Court for the District
of Delaware’s decision Harland Clarke Holdings Corp. v. Milken, where the court
rejected the argument that an exclusive remedy provision barring fraud claims was
“unenforceable on public policy grounds.”116 The court noted that the plaintiffs
112
984 A.2d 126 (Del. Ch. 2009).
113
Id. at 140-41.
114
Id. at 141.
115
Id.; see also Cont’l Ill. Nat. Bank & Tr. Co. of Chi. v. Hunt Int’l Res. Corp., 1987 WL
55826, at *6 (Del. Ch. Feb. 27, 1987) (finding that an exclusive remedies provision did not
bar the plaintiff from bringing a claim for common law fraud).
116
2015 WL 12868204, at *3 (D. Del. Mar. 4, 2015).
26
“fail[ed] to distinguish between fraud within the contract and fraud outside of the
contract.”117 Despite that, the agreement at issue in Harland contained both an anti-
reliance provision and an exclusive remedy provision, which effectively reinforced
the parties’ expression of their intent to disclaim reliance on extra-contractual
statements and bar fraud claims based on such statements.118
No 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. To be sure, there is no “general rule
prohibit[ing] parties from using contracts to shield themselves for liability from their
own fraud.”119 As the Delaware Supreme Court has recognized, sophisticated parties
may craft provisions insulating them from “fraud claims based on representations
made outside of a merger agreement.”120 But to do so, the claims must “be
disclaimed through non-reliance language.”121
117
Id.118
Id.119
RAA Mgmt. LLC v. Savage Sports Hldgs., Inc., 45 A.3d 107, 116-18 (Del. 2012); see
also Great Lakes Chem. Corp. v. Pharmacia Corp., 788 A.3d 544, 556 (Del. Ch. 2001)
(“To allow [a plaintiff] to assert, under the rubric of fraud, claims that are explicitly
precluded by contract, would defeat the reasonable commercial expectations of the
contracting parties and eviscerate the utility of the written contractual agreements.”).
120
RAA Mgmt., 45 A.3d at 117.
121
Id. (citing Abry P’rs, 891 A.2d at 1059).
27
In my view, Delaware’s policy of restricting the circumstances for which
fraud claims can be eliminated by contract does not extend only to written
contractual representations. Where there is no applicable anti-reliance provision,
extra-contractual or contractual representations can equally induce an agreement and
give rise to a claim for intentional fraud. In Abry Partners, the court found that when
a party lies intra-contract, Delaware public policy will not permit a contractual
provision to limit the remedies of the counterparty to a capped damages claim.122
Although the holding in Abry Partners was focused on contractual
misrepresentations, its logic extends to extra-contractual misrepresentations where
a party asserting a fraud claim did not promise to rely exclusively on representations
made in the agreement.
Much like the exclusive remedy provision in Abry Partners, Section 8.05(b)
of the Merger Agreement evidences a bargained for allocation of risk that limited
the defendants’ exposure to extra-contractual fraud claims post-closing.123 That is
not the end of the inquiry. Because of the policy concern inherent in respecting “the
law’s traditional abhorrence of fraud,” this court must then look to whether the
parties’ agreement “clearly state[s] that the parties disclaim reliance on extra
122
Abry P’rs, 891 A.2d at 1064.
123
Merger Agreement § 8.05(b); Abry P’rs, 891 A.2d at 1044, 1053.
28
contractual statements.”124 “If parties fail to include unambiguous anti-reliance
language, they will not be able to escape responsibility for their own fraudulent
representations made outside of the agreement’s four corners.”125
Unlike the parties in Abry Partners, Auris did not disclaim reliance on extra-
contractual statements anywhere in the Merger Agreement.126 Indeed, the fact that
Ethicon expressly disclaimed reliance but Auris did not suggests that Auris was
permitted to rely on the defendants’ assurances. The exclusive remedy provision
therefore cannot, by itself, eliminate Fortis’s fraud claims. To find otherwise would
ignore the delicate balance that Delaware courts have struck between supporting
freedom of contract and condemning fraud. If the defendants intentionally
misrepresented a fact that induced Auris to enter into the Merger Agreement, and
Auris did not explicitly disclaim reliance on extra-contractual representations, it
cannot be barred from recovering for that purported fraud.
1. Common Law Fraud
Having concluded that the exclusive remedy provision does not bar Fortis’s
fraud claims, I next consider whether it has adequately pleaded a claim for common
law fraud. To state a claim for common law fraud, a plaintiff must allege that:
124
Abry P’rs, 891 A.2d at 1058.
125
Id. at 1059.
126
See Merger Agreement § 4.08; Abry P’rs, 891 A.2d at 1041-43.
29
(1) the defendant falsely represented or omitted facts that the defendant
had a duty to disclose; (2) the defendant knew or believed that the
representation was false or made the representation with a reckless
indifference to the truth; (3) the defendant intended to induce the
plaintiff to act or refrain from acting; (4) the plaintiff acted in justifiable
reliance on the representation; and (5) the plaintiff was injured by its
reliance.127
Court of Chancery Rule 9(b) requires that “the circumstances constituting fraud . . .
be stated with particularity.”128
Fortis alleges that the defendants made numerous misrepresentations to Auris
and its former stockholders during merger negotiations to induce them to enter into
the Merger Agreement.129 The alleged misrepresentations concern statements
falsely portraying the Verb Surgical Robot as both successful and differentiated from
iPlatform and describing the defendants’ plans for operating Auris post-
acquisition.130
The defendants do not dispute that Fortis has pleaded actionable
misrepresentations with particularity. They contend that dismissal is warranted
127
Abry P’rs, 891 A.2d at 1050.
128
Ct. Ch. R. 9(b); see also Abry P’rs, 891 A.2d at 1050 (“To satisfy Rule 9(b), a complaint
must allege: (1) the time, place, and contents of the false representation; (2) the identity of
the person making the representation; and (3) what the person intended to gain by making
the representations.”).
129
Pl.’s Answering Br. 17.
130
Compl. ¶¶ 172-73.
30
because Fortis has failed to sufficiently show justifiable reliance and the necessary
intent for those statements.131 I disagree.
First, Fortis has adequately pleaded justifiable reliance. The defendants’
alleged statements about Verb are not, as the defendants contend, “so vague as to be
nearly meaningless.”132 The plaintiff states that during merger negotiations, the
defendants represented to Auris that they viewed the Verb Surgical Robot as
“different from” and “complementary to” iPlatform and that the two products would
be developed and marketed in parallel.133 The Complaint also specifies that, after
Auris raised concerns about Verb during meetings, the defendants allegedly assured
Auris that Verb was not a threat.134 Among other things, Fortis alleges that Auris
was told that it would operate independently within J&J, that its hiring and space
requirement would be met, and that Auris and Verb would not have to compete for
resources.135
The defendants insist that Auris could not have justifiably relied on those
extra-contractual assurances given the specific provisions of the Merger Agreement
131
Defs.’ Opening Br. 16-17.
132
Id. at 24.
133
Compl. ¶¶ 58, 62.
134
Id. ¶¶ 60-66. The plaintiff has met the particularity requirement of Rule 9(b). The
Complaint describes when those alleged meetings occurred, who attended, what was said,
and indicates what the defendants hoped to gain.
135
Id. ¶¶ 62-65; see supra notes 27-29.
31
about the post-closing conduct of the business.136 The Merger Agreement, for
example, committed Ethicon to use “commercially reasonable efforts” to achieve
the regulatory milestones and detailed what factors Ethicon would account for in
doing so.137 But as I previously discussed, the Merger Agreement also contains a
one-sided anti-reliance provision applicable to Ethicon.138 The parties’ choice to
permit Auris, but not Ethicon, to rely on extra-contractual representations like those
about Auris’s operations post-merger supports an inference that its reliance was
justified.139
The defendants also argue that, to the extent that Fortis’s fraud claims rest on
statements about the Verb Surgical Robot, it cannot show justifiable reliance because
Auris had the ability to assess Verb’s technology during due diligence.140 “To
establish justifiable reliance, [a plaintiff] must demonstrate he did not have either
136
Defs.’ Opening Br. 26.
137
E.g., Merger Agreement §§ 2.07(e)(i)-(iii).
138
Id. § 4.08.
139
See Surf’s Up Legacy P’rs, LLC v. Virgin Fest, LLC, 2021 WL 117036, at *14 (Del.
Super. Jan. 13, 2021) (denying motion to dismiss where sophisticated parties did not
include anti-reliance language); TrueBlue, Inc. v. Leeds Equity P’rs IV, LP, 2015 WL
5968726, at *7 (Del. Super. Sept. 25, 2015) (same); compare ChyronHego Corp. v. Wight,
2018 WL 3642132, at *4-5 (Del. Ch. July 31, 2018) (finding that an anti-reliance clause
prevented a finding that the plaintiffs had acted in justifiable reliance on extra-contractual
representations, requiring dismissal).
140
Defs.’ Opening Br. 23.
32
the awareness or opportunity to discover the accurate information.”141 A
sophisticated party generally cannot justifiably rely on extra-contractual
representations that could have been discovered with adequate due diligence.142
Viewing the facts in the light most favorable to the plaintiff, including allegations
that Auris repeatedly inquired about Verb during negotiations, I cannot conclude that
Auris’s due diligence was so lacking that it could not have justifiably relied on the
defendants’ representations.143
Whether the defendants acted with intent to defraud Auris likewise cannot be
resolved on the defendants’ Rule 12(b)(6) motion.144 The parties debate whether
Fortis only needs to plead fraud “generally” or if the higher pleading standard for a
claim based on promissory fraud—requiring it to allege “specific facts that lead to a
reasonable inference that the [promisor] had no intention of performing at the time
141
Tekstrom, Inc. v. Savla, 2006 WL 2338050, at *11 (Del. Super. July 31, 2006).
142
See Edinburgh Hldgs., Inc. v. Educ. Affiliates, Inc., 2018 WL 2727542, at *12 (Del. Ch.
June 6, 2018) (dismissing a fraud claim based on representations made “prior to . . . due
diligence” about “future performance of the business and management capabilities”).
143
See Compl. ¶¶ 62-63, 66; compare Squid Soap, 2010 WL 2836391, at *10 (dismissing
fraud claim where the seller did not allege any acts of due diligence, including “the simple
expedient of asking questions” of its counterparty and the counterparty remained silent
rather than affirmatively made misrepresentations).
144
See TrueBlue, 2015 WL 5968726, at *7 (“The question of whether one’s reliance was
reasonably generally is a question of fact.”); Vague v. Bank One Corp., 850 A.2d 303 (Del.
2004) (TABLE); Work Cap., LLC v. AlphaOne Cap. P’rs LLC, 2020 WL 3475887, at *4
(Del. Super. June 25, 2020) (explaining that matters of intent present “factual
question[s] . . . inappropriate for resolution on a Rule 12(b)(6) motion to dismiss”).
33
the promise was made”—applies.145 Fortis maintains that the challenged statements
are ones of “present fact” rather than future intent because they concern the
defendants’ plans at that moment in time for Verb and Auris.146 The defendants, on
the other hand, describe Fortis’s theory as “fraud by hindsight.”147
The allegations in the Complaint are sufficient to meet either standard. For
example, Fortis alleges that the purported bakeoff and the defendants’ restrictions
on Auris’s hiring and expansion needs began immediately upon closing.148 A
reasonable inference can be drawn that the defendants planned those actions during
negotiations.149 Fortis has also alleged that the defendants’ post-closing intentions
during negotiations, which were inconsistent with the defendants’ statements, were
145
Grunstein v. Silva, 2009 WL 4698541, at *13 (Del. Ch. Dec. 8, 2009).
146
Pl.’s Answering Br. 24.
147
Defs.’ Opening Br. 29.
148
Compl. ¶¶ 99, 104-05, 110.
149
See Maverick Therapeutics, Inc. v. Harpoon Therapeutics, Inc., 2020 WL 1655948, at
*29 (Del. Ch. Apr. 3, 2020) (“The third element of fraud requires that the defendant made
the false statements recklessly or with the specific intent to obtain the desired action. Such
scienter may be demonstrated through circumstantial evidence, including demonstrating
motive and opportunity for the inducement. In cases where a fraud claim centers on a
transaction, the transaction itself may serve as both the motive and opportunity to commit
the fraud.”); Winner Acceptance Corp. v. Return on Cap. Corp., 2008 WL 5352063, at *3,
10 (Del. Ch. Dec. 23, 2008) (finding that events occurring months after misrepresentations
were made supported an inference of fraudulent intent).
34
known to the defendants and within the defendants’—rather than Auris’s—
control.150
Fortis has therefore adequately pleaded a claim for common law fraud.
2. Equitable Fraud
I reach a different conclusion with regard to the viability of Fortis’s equitable
fraud claim, though it is based on the same factual allegations cited in support of its
common law fraud claim. An equitable fraud (or negligent misrepresentation) claim
is essentially a fraud claim with a reduced state of mind requirement, requiring
“proof of all of the elements of common law fraud except that [the] plaintiff need
not demonstrate that the misstatement or omission was made knowingly or
recklessly.”151 “Scienter is replaced by negligence, but the doctrine requires
additional elements to compensate for this significant concession.”152 “An equitable
150
Compl. ¶¶ 54, 75, 111; see Brightstar Corp. v. PCS Wireless, LLC, 2019 WL 3714917,
at *9 (Del. Super. Aug. 7, 2019) (“When the necessary facts are typically within the
opposing party’s control, less particularity is required and the claim can prevail so long as
the claimant describes the circumstances of fraud with detail sufficient to apprise the
defendant of the basis for the claim.” (internal citation omitted)); compare Neurvana Med.,
LLC v. Balt USA, LLC, 2020 WL 949917, at *25 (Del. Ch. Feb. 27, 2020) (finding that a
forward-looking statement could not support a fraud claim because the complaint did not
plead that the declarant knew the statement was false at the time it was made); Edinburgh,
2018 WL 2727542, at *12 (holding that whether a forward-looking revenue forecast would
be achieved was unknowable and the fact that “actual performance” fell below the forecast
was not enough to infer intent).
151
Williams v. White Oak Builders, Inc., 2006 WL 1668348, at *7 (Del. Ch. June 6, 2006)
(internal citations omitted).
152
Corp. Prop. Assoc. 14 Inc. v. CHR Hldg. Corp., 2008 WL 963048, at *8 (Del. Ch.
Apr. 10, 2008).
35
fraud or negligent misrepresentation claim lies only if there is either: (i) a special
relationship between the parties over which equity takes jurisdiction (like a fiduciary
relationship) or (ii) justification for a remedy that only equity can afford.”153
Fortis has not pleaded that the defendants had a fiduciary relationship or other
relationship of trust with Auris or its former stockholders.154 And there is no reason
put forth by Fortis why an equitable remedy (as opposed to damages) is required to
make it whole.155 Fortis has sought expectancy damages in the alternative to remedy
the defendants’ alleged equitable fraud.156 It can also seek an adequate remedy at
law through certain of its other claims.157 The equitable fraud claim is therefore
dismissed.
153
Envo, Inc. v. Walters, 2009 WL 5173807, at *6 (Del. Ch. Dec. 30, 2009).
154
See Fortis Advisors LLC v. Dialog Semiconductor PLC, 2015 WL 401371, at *9 (Del.
Ch. Jan. 30, 2015) (explaining that where “the gravamen of the . . . dispute arises from a
transaction that ostensibly was the product of arm’s length negotiation between
sophisticated parties,” a special relationship does not exist).
155
See Bamford v. Penfold, L.P., 2020 WL 967942, at *22 (Del. Ch. Feb. 28, 2020)
(dismissing an equitable fraud claim because there was not reason to believe that monetary
damages could make the plaintiff whole).
156
Compl. ¶ 170.
157
See Paul Elton, LLC v. Rommel Del., LLC, 2020 WL 2203708, at *12 (Del. Ch. May 7,
2020) (dismissing an equitable fraud claim and explaining that the plaintiff could “seek an
adequate remedy at law through its claims for breach of contract and specific
performance”).
36
C. The Implied Covenant of Good Faith and Fair Dealing Claim
The plaintiff next contends that Ethicon’s conduct violated the implied
covenant of good faith and fair dealing by frustrating the parties’ expectation that
development for iPlatform should be pursued under whichever pathway the FDA
required. Although “an implied covenant of good faith and fair dealing inheres in
every contract,”158 Delaware courts apply it only in “narrow circumstances.”159 One
such circumstance is “when it is argued that a situation has arisen that was
unforeseen by the parties and where the agreement’s express terms do not cover what
should happen.”160
According to Fortis, the parties failed to anticipate that the FDA might alter
its policy and require iPlatform to receive clearance through a regulatory pathway
other than 510(k).161 Had the parties anticipated the change in the FDA’s approval
process, Fortis asserts, they would have tied the regulatory milestones to the De
Novo pathway.162 Fortis therefore advocates for the inclusion of two implied terms
158
Chamison v. HealthTrust, Inc.—The Hosp. Co., 735 A.2d 912, 920 (Del. Ch. 1999),
aff’d, 748 A.2d 407 (Del. 2000).
159
Allied Cap., 910 A.2d at 1032; Cincinnati SMSA, Ltd. P’r v. Cincinnati Bell Cellular
Sys. Co., 708 A.2d 989, 992 (Del. 1998) (explaining that application of the implied
covenant “should be rare and fact-intensive, turning on issues of compelling fairness”).
160
Oxbow Carbon & Mins. Hldgs., Inc. v. Crestview-Oxbow Acq., LLC, 202 A.3d 482, 504
n.93 (Del. 2019).
161
Pl.’s Answering Br. 48.
162
Id.37
in the Merger Agreement: (1) in Section 2.07(e)(i) requiring Ethicon to use
commercially reasonable efforts to achieve each of the regulatory milestones for the
iPlatform product offerings using the De Novo pathway, and (2) in Section 2.07(a)
requiring Ethicon to make the earnout payments connected to regulatory milestones
if Ethicon timely obtains regulatory approval for iPlatform through the De Novo
pathway.163 The defendants argue that the implied covenant cannot be invoked
because the Merger Agreement speaks to the type of regulatory clearance (i.e.,
510(k) clearance) that triggers the associated milestone payments and that Ethicon
must use commercially reasonable efforts to obtain.164
The implied covenant comes into play in precisely this scenario, where “the
parties simply failed to foresee the need for the term and, therefore, never considered
to include it.”165 Fortis alleges that the FDA had routinely cleared RASDs through
the 510(k) pathway for decades and that the parties to the Merger Agreement
believed the FDA would clear iPlatform through the 510(k) pathway.166 Fortis also
asserts that the FDA indicated to Auris in late 2018 that the 510(k) pathway would
163
Id.; Compl. ¶¶ 203-04.
164
Defs.’ Opening Br. 51-52 (citing Merger Agreement §§ 2.07(a), (e)(ii)).
165
In re El Paso Pipeline P’rs, L.P. Deriv. Litig., 2014 WL 2768782, at *18 (Del. Ch.
June 12, 2014).
166
Compl. ¶¶ 127-28.
38
be appropriate for iPlatform.167 The implied covenant is well situated to address
such “unanticipated developments” as a means to assess what the parties would have
agreed to had they known about the FDA’s policy change when they executed the
Merger Agreement.168
The defendants point to additional provisions of the Merger Agreement that
recognize the potential for uncertainty as demonstrating that the parties understood
the FDA’s regulatory regime might change.169 But the Merger Agreement is silent
on how Ethicon’s best efforts and earnout payment obligations would be affected in
that circumstance. Moreover, the defendants argue, under Nemec v. Shrader, the
implied covenant “only applies to developments that could not be anticipated, not
developments that the parties failed to consider.”170 It is reasonable to infer,
however, that the parties were unaware of the FDA’s shift from a 510(k) to De Novo
pathway for RASDs when the Merger Agreement was signed and reasonably
expected that approval would be obtained in the former manner. According to the
167
Id. ¶ 128.
168
Oxbow Carbon, 202 A.3d at 506; see Blaustein v. Lord Balt. Cap. Corp., 84 A.3d 954,
959 (Del. 2014) (“[T]he implied covenant is used in limited circumstances to include what
the parties would have agreed to themselves had they considered the issue in their original
bargaining positions at the time of contracting.” (internal citation omitted)).
169
Defs.’ Reply Br. 32-33 (Dkt. 35) (quoting Merger Agreement §§ 2.07(e)(v), 10.03(f)).
170
Id. at 33 (quoting Nemec v. Shrader, 991 A.2d 1120, 1126 (Del. 2010) (“When
conducting this [implied covenant] analysis, we must assess the parties’ reasonable
expectations at the time of contracting and not rewrite the contract to appease a party who
later wishes to rewrite a contract he now believes to have been a bad deal.”)).
39
Complaint, after the FDA publicly changed its guidance in the summer of 2019,
Ethicon called the shift “shocking.”171 In view of these allegations, I cannot find
that Fortis would be unable to recover on its implied covenant claim under any
reasonably conceivable set of circumstances.
D. The Mistake Claims
The FDA’s manner of regulatory approval also forms the basis of two claims
for mistake. “Mutual mistake occurs when both parties were mistaken as to a
material portion of the written agreement, or when both parties are under
substantially the same erroneous belief as to the facts.”172 Mistake claims take two
forms. When the parties both have a mistaken about such facts, the contract is
potentially voidable by the adversely affected party.173 When parties enter into an
agreement but fail to accurately express the agreement in writing, the court may
reform the writing to express the party’s agreement.174
Fortis brings a claim for mutual mistake under both theories. First, Fortis
avers that it is entitled to rescission of the Merger Agreement—or in the alternative,
171
Compl. ¶ 135.
172
CC Fin. LLC v. Wireless Prop., LLC, 2012 WL 4862337, at *7 (Del. Ch. Oct. 1, 2012)
(internal citations omitted).
173
Restatement (Second) of Contracts § 152 (1981); see also Am. Bottling Co. v.
Crescent/Mach I P’rs, L.P., 2009 WL 3290729, at *2 (Del. Super. Sept. 30, 2009) (“The
Restatement (Second) of Contracts test for mutual mistake is followed by the Delaware
Courts.”).
174
Restatement (Second) of Contracts § 157 (1981).
40
rescissory damages—because the parties each held the erroneous belief that the FDA
would review iPlatform using the 510(k) pathway.175 Second, Fortis claims that it
is entitled to reformation of the Merger Agreement to reflect the parties’ intent that
“Auris would be paid if any regulatory clearance were timely achieved.”176 Each
claim is addressed in turn.
1. Rescission Based on Mutual Mistake
A party seeking recission of a contract based on mutual mistake must show
that “(1) both parties were mistaken as to a basic assumption; (2) the mistake
materially affects the agreed-upon exchange of performances; and (3) the party
adversely affected did not assume the risk of the mistake.”177 “The mistake must be
as to a fact which enters into, and forms the very basis of, the contract; it must be of
the essence of the agreement, the sine qua non or, as it is sometimes expressed, the
efficient cause of the agreement.”178
The satisfaction of the second element regarding materiality is not in dispute.
The defendants contend that Fortis has failed to adequately plead the first and third
elements: that the parties were mistaken at the time of signing and that Auris
175
Pl.’s Answering Br. 53-54.
176
Id. at 59.
177
Liberto v. Bensinger, 1999 WL 1313662, at *12 (Del. Ch. Dec. 28, 1999).
178
Am. Bottling, 2009 WL 3290729, at *2 (internal citation omitted).
41
assumed the risk of the mistake at issue.179 The parties’ arguments largely come
down to when the FDA’s policy change went into effect and when Auris anticipated
the change. Neither issue can be resolved at the pleadings stage.
A mutual mistake claim must stem from a mistake of fact that existed at the
time of contracting.180 Fortis alleges that, when signing the Merger Agreement, the
parties believed that iPlatform would only obtain regulatory approval through 510(k)
clearance.181 The Complaint explains that the FDA announced steps to modernize
the 510(k) program and consider more products through the De Novo pathway in
November 2018.182 Though the FDA did not inform the parties that first-generation
RASDs like iPlatform would be required to use the De Novo pathway until the
summer of 2019, Fortis alleges that those discussions were the result of an earlier
policy change being implemented.183
179
Defs.’ Opening Br. 40.
180
Restatement (Second) of Contracts § 151 (1981) (“[T]he erroneous belief must relate to
the facts as they exist at the time of the making of the contract.”); Hicks v. Sparks, 89
A.3d 476 (Del. 2014) (TABLE) (“[T]he mutual mistake ‘must relate to a past or present
fact material to the contract and not to an opinion respecting future conditions as a result
of present facts.’” (quoting Alvarez v. Castellon, 55 A.3d 353, 354 (Del. 2012))).
181
Compl. ¶¶ 128-29.
182
Id. ¶ 131.
183
Id. ¶ 209 (“In reality, in connection with its November 2018 policy announcement, the
agency reversed its guidance to Auris and determined that first-generation RASDs should
not rely on older predicate devices—preventing a successful submission via the 510(k)
pathway for an iPlatform product.”).
42
There are two reasonable inferences that flow from the allegations in the
Complaint. One is that the FDA changed its policy on the availability of the 510(k)
pathway for first generation RASDs in the nearly three months between its
November 26, 2018 announcement and the signing of the Merger Agreement. The
other is that—as the defendants argue—the FDA’s November announcement merely
reflected that it was “considering” modernizing the 510(k) pathway but did not
change its policy until after the Merger Agreement was executed.184 Additional
evidence will be needed to adduce which is correct.185 At this stage in the litigation,
I must draw the inference that favors the plaintiff and conclude that Fortis has alleged
a mistake of fact about a central aspect of the parties’ agreement that existed at the
time of contracting.
184
Defs.’ Opening Br. 40 (citing the FDA’s November 26, 2018 announcement and arguing
that the FDA was merely “considering” modernizing the 510(k) pathway and “developing
proposals” to revise it); Defs.’ Opening Br. Ex. D at 3-4.
185
See Lang v. Koziarz, 1987 WL 15554, at *5 (Del. Ch. Aug. 11, 1987) (finding mistake
proven at trial where a party showed that an agency had “changed its enforcement policy”
before contract execution without the knowledge of the parties); Joyce v. RCN Corp., 2003
WL 21517864, at *4 (Del. Ch. July 1, 2003) (“[T]he Court makes an informed judgment
to determine if the allegations, if assumed to be true, would plead the elements of a mutual
mistake, and would put the defendants on notice of the nature of their mutual mistake.”);
In re TIBCO Software Inc. S’holders Litig., 2015 WL 6155894, at *12 (Del. Ch. Oct. 20,
2015) (“[T]he facts upon which a plaintiff relies in pleading reformation must be set forth
with at least some particularity in order to put the defendant on notice of what is charged
against him, but does not go so far as to require a textbook pleading or the use of specific
words or phrases.”).
43
I also reject the defendants’ argument that Auris assumed the risk of a change
in the FDA’s regulatory regime. A party assumes the risk of a mistake where:
(i) the contract expressly assigns the risk to that party; (ii) the mistaken
party undertook to perform under a contract aware that his knowledge
was limited with respect to the facts to which the mistake relates; or
(iii) the court finds that it is reasonable to assign the risk to the party
seeking rescission.186
The defendants argue that the Merger Agreement allocated the risk to Auris, that the
FDA’s November 2018 announcement put Auris on notice that the FDA was
developing proposals to alter its 510(k) pathway, and that it is reasonable to assign
the risk to Fortis. After considering the allegations in the Complaint, I cannot
conclude that dismissal is warranted under any of those theories.
First, the Merger Agreement does not expressly allocate to either party the
risk that 510(k) clearance would become unavailable. Section 2.07(e)(v) provides
that the “achievement of [the milestones] is subject to a variety of factors and
uncertainties, including many outside of the control of [Ethicon]” and that the
associated earnout payments are “contingent on the achievement of the applicable
[milestone] . . . which may not be achieved, and as a result . . . may never be paid.”187
But that provision is simply an acknowledgement that purports to limit the claims
Fortis could bring if a milestone was not achieved. It does not expressly allocate to
186
Am. Bottling, 2009 WL 3290729, at *2.
187
Merger Agreement § 2.07(e)(v).
44
Auris the risk that the parties were mistaken about the appropriate regulatory
pathway at the time that they signed the Merger Agreement.
Second, the allegations in the Compliant belie the notion that Auris assumed
the risk of a change in the FDA’s clearance practices through its own “conscience
ignorance.”188 Fortis alleges that neither party understood, when executing the
Merger Agreement, that the FDA was changing its enforcement policy for first-
generation RASDs.189 Even if Auris was put on notice by the FDA’s November
2018 announcement that a change was possible (which is not alleged and would
require the court to draw an inference against the plaintiff), Fortis alleges that Auris
took reasonable steps to avoid a mistake by communicating with the FDA in late
2018 about the applicability of the 510(k) pathway to iPlatform.190
Third, it would not be reasonable for the court to assign the risk of any mistake
to Auris. Allocating the risk of a mistake to a party based on reasonableness is a
188
Am. Bottling, 2009 WL 3290729, at *3 (“[D]etermining whether a party assumed the
risk of a mistake by way of conscious ignorance depends upon whether the party seeking
rescission took steps to avoid the mistake.”).
189
Compl. ¶¶ 127-29, 134-35.
190
Id. ¶ 128; see Lang, 1987 WL 15554, at *6 (holding that a party with limited knowledge
as to the mistaken fact did not assume the risk of mistake when the party took reasonable
steps to avoid the mistake); Am. Bottling, 2009 WL 3290729, at *3 (finding that a plaintiff
with limited knowledge as to a mistaken fact did not assume the risk of mistake because
the plaintiff consulted with and relied on advice of an expert advice); see also Shore
Builders, Inc. v. Dogwood, Inc., 616 F. Supp. 1004, 1019 (D. Del. 1985) (finding that a
plaintiff’s lack of knowledge regarding the extent of a federal agency’s jurisdiction over
its property raised a matter of fact that would “require the Court to consider the issue of
allocation of risk at trial”).
45
highly factual inquiry best suited for a later phase of the litigation.191 The defendants
cite no authority suggesting otherwise.192
For these reasons, Fortis has stated a claim for rescission based on mutual
mistake.
2. Reformation Based on Mutual Mistake
A party seeking reformation of a contract on the grounds of mutual mistake
must allege “(i) the terms of an oral agreement between the parties; (ii) the execution
of a written agreement that was intended, but failed, to incorporate those terms;
(iii) the parties’ mutual-but mistaken-belief that the writing reflected their true
agreement; and (iv) the precise mistake.”193 A “specific meeting of the minds
regarding a term that was not accurately reflected in the final, written agreement”
must be shown.194
191
See Restatement Second of Contracts § 154(d) cmt. a (1981) (“In dealing with such
issues, the court will consider the purposes of the parties and will have recourse to its own
general knowledge of human behavior in bargain transactions.”); Liberto, 1999
WL 1313662, at *16 (finding, on a summary judgment record, that it was reasonable to
allocate to a party the risk of mistake).
192
Defs.’ Opening Br. 46-47. The only case the defendants cite concerns a motion for
summary judgement where the court found that it was reasonable to assign the risk of
mistake to the plaintiff, after finding that the plaintiff had assumed the risk of mistake under
the other tests. See Liberto, 1999 WL 1313662, at *15-16.
193
Joyce, 2003 WL 21517864, at *4.
194
Glidepath Ltd. v. Beumer Corp., 2018 WL 2670724, at *10 (Del. Ch. June 4, 2018).
46
Fortis argues in its brief that the parties came to an understanding during
negotiations that regulatory milestones could be achieved through alternate
regulatory pathways if 510(k) clearance became unavailable.195 The parties then, it
asserts, mistakenly drafted Sections 2.07(a) and 2.07(e)(ii) to refer solely to the
510(k) pathway. But that argument is unsupported by the allegations in the
Complaint.
The Complaint contains no factual allegations indicating that the parties had
an understanding that pathways other than 510(k) could satisfy the regulatory
milestones in the Merger Agreement. Rather, Fortis alleges that the parties believed
while negotiating that the FDA would evaluate iPlatform under the 510(k) pathway
and “memorialized this shared understanding in the Merger Agreement.”196 “It is
not enough that the parties would have come to a certain agreement had they been
aware of the actual facts. Reformation requires an antecedent agreement, which the
written instrument attempts to express.”197 Fortis has not alleged such an agreement,
requiring the dismissal of its reformation claim.
195
Pl.’s Answering Br. 59-60; see Compl. ¶¶ 128-29, 216-17.
196
Compl. ¶ 129.
197
Interim Healthcare, Inc. v. Sherion Corp., 2003 WL 22902879, at *7 (Del. Ch. Nov. 19,
2003) (quoting Richard A. Lord, Williston on Contracts § 70:19, at 255 (4th ed. 2003)).
47
E. The Unjust Enrichment Claim
The plaintiff also brings a claim, pleaded in the alternative to its breach of
contract claims, that Ethicon was unjustly enriched by its false representations.
Ethicon was enriched, Fortis contends, by causing Auris and its former stockholders
to agree to a lower guaranteed payment and allocate a greater share of the
consideration toward potential earnout payments.198 Because the defendants’
purported false representations made the earnout payments less valuable, Fortis
believes that Ethicon paid a fraction of Auris’s true value.199
To state a claim for unjust enrichment, a plaintiff must prove: “(1) an
enrichment, (2) an impoverishment, (3) a relation between the enrichment and
impoverishment, (4) the absence of justification, and (5) the absence of a remedy
provided by law.”200 “Before a court engages in this analysis, however, it must
consider the threshold question of ‘whether a contract already governs the relevant
relationship between the parties.’”201 Unjust enrichment claims are generally
198
Compl. ¶¶ 219-21.
199
Id. ¶ 220.
200
Jackson Nat. Life Ins. Co. v. Kennedy, 741 A.2d 377, 393 (Del. Ch. 1999).
201
SerVaas v. Ford Smart Mobility LLC, 2021 WL 3779559, at *11 (Del. Ch. Aug. 25,
2021) (quoting BAE Sys. Info. & Elec. Sys. Integration, Inc. v. Lockheed Martin Corp.,
2009 WL 264088, at *7 (Del. Ch. Feb. 3, 2009)).
48
dismissed “when the complaint alleges an express, enforceable contract that controls
the parties’ relationship.”202
“Although merely suggesting that the validity of a contract may be in doubt
is insufficient to support a claim for unjust enrichment, a claim that the underlying
agreement is subject to rescission due to fraudulent conduct or omissions is sufficient
to do so.”203 I have already found that Fortis has pleaded viable claims for fraud and
a claim for mutual mistake seeking the remedy of recission. Thus, the unjust
enrichment claim cannot be dismissed.204
F. The Specific Performance Claim
Finally, Fortis seeks specific performance of a provision of the Merger
Agreement requiring the parties to address terms that become incapable to
enforce.205 Section 10.11 of the Merger Agreement provides that:
[i]f any term or other provision of [the Merger Agreement] is invalid,
illegal or incapable of being enforced by any rule of law or public
policy . . . the parties . . . shall negotiate in good faith to modify [the
Merger Agreement] so as to effect the original intent of the parties as
closely as possible to the fullest extent permitted by applicable law.206
202
Bakerman v. Sidney Frank Importing Co., Inc., 2006 WL 3927242, at *18 (Del. Ch.
Oct. 10, 2006).
203
Haney v. Blackhawk Network Hldgs., Inc., 2016 WL 769595, at *9 (Del. Ch. Feb. 26,
2016).
204
See Anschultz, 2020 WL 3096744, at *18.
205
Pl.’s Answering Br. 51.
206
Merger Agreement § 10.11.
49
According to Fortis, Section 2.07(a) regarding 510(k)-based regulatory milestones
and the associated commercially reasonable efforts discussed in Section 2.07(e)(ii)
are now “incapable of enforcement” following the FDA’s revised approach to the
availability of 510(k) clearance for first-generation RASDs.207
The defendants argue that—despite the FDA’s policy change—the Merger
Agreement can technically be enforced as written.208 The result of doing so would
be that the contractual condition of achieving 510(k) clearance to trigger certain
earnout payments (at least for the first iPlatform-related regulatory milestone) cannot
be satisfied.209 In other words, the FDA’s policy change might render the regulatory
milestones “unachievable” but not necessarily “unenforceable,” as Section 10.11
requires.
Applying the plaintiff-friendly motion to dismiss standard, I view that
distinction to be one without a difference. Auris did not fail to achieve 510(k)
approval after attempting to follow the pathway. The pathway is no longer available
to it—at least for one regulatory milestone. And I cannot find, out of hand, that the
FDA’s shift toward requiring RASDs to follow the De Novo pathway does not
reflect a public policy determination. The FDA’s announcement explained that the
207
Pl.’s Answering Br. 52; Compl. ¶¶ 238-39; Merger Agreement §§ 2.07(a), 2.07(e)(ii).
208
Defs.’ Opening Br. 56-58.
209
Id.; see Merger Agreement § 2.07(a).
50
change was “aimed at continuing the ensure that new and existing devices meet our
gold standard for safety and effectiveness.”210
A fair reading of Section 10.11 is that the relevant contractual provision must
be rendered “incapable of being enforced” by an applicable “public policy,” rather
than requiring that the provision must itself offend the policy to be considered
unenforceable.211 I am unable to conclude that there is no reasonably conceivable
set of circumstances under which the plaintiff could recover on its specific
performance claim and decline to dismiss it on that basis.
III. CONCLUSION
For the reasons explained above, the individual defendants’ motion to dismiss
for lack of personal jurisdiction under Court of Chancery Rule 12(b)(2) is granted.
The defendants’ partial motion to dismiss for failure to state a claim under Court of
Chancery Rule 12(b)(6) is granted in part and denied in part. The motion is granted
as to Counts I, VIII, and X. The motion is denied as to Count II, VI, VII, IX, and
XII.
210
Compl. ¶ 131; see id. ¶¶ 131-37.
211
Merger Agreement § 10.11; see Defs.’ Opening Br. 57-58 (arguing that the “provision
at issue here stands in stark contrast to the kinds of provisions that courts have previously
held unenforceable as against public policy, where the provision itself offended an
applicable public policy or principle of law”). Whether Section 10.11 requires that the
relevant provision be rendered unenforceable by public policy concerns or must itself
violate the public policy is ambiguous, further precluding dismissal of the specific
performance claim.
51