Johnson & Johnson v. Fortis Advisors LLC, No. 490, 2024 (Del. Jan. 12, 2026)
The implied covenant of good faith and fair dealing is a narrow doctrine that is employed to imply terms in contracts to protect the reasonable expectations of the parties. This case highlights the contours of the doctrine—particularly, the limitations of its use.
In this case, sellers of a medical robotics company brought claims against the buyers for fraud, breach of the implied covenant, and breach of contract. Specifically, buyers alleged that sellers had intentionally thwarted milestones that would have obligated them to make contingent payments. With respect to the implied covenant claim, sellers claimed buyers breached the covenant when they failed to seek an alternate pathway for regulatory approval for the company’s chief product. After trial, the Court of Chancery awarded over $1 billion in damages for breaches of the implied covenant, breach of contract, and fraud. Buyers appealed the decision, arguing that the Court erred when it found that buyer had breached the covenant by failing to pursue an alternate pathway for regulatory approval.
The Supreme Court reversed as to the implied covenant claim, resulting in a reduction of $400 million from the damages award. The Supreme Court noted that the implied covenant looks to “foreseeability” and not “likelihood” when it is applied. When applying the doctrine, the Court should not ask if a particular risk is “logical” or “unlikely to occur”, but rather whether that risk was foreseeable and “within the range of risks that reasonable parties in their position could anticipate and bargain over.” If the risk falls within that range, then the Supreme Court reasoned, the implied covenant cannot be used to provide additional protections that were not specifically bargained for. Here, the risk that an alternative pathway would be necessary for regulatory approval was foreseeable. The Supreme Court thus held that the implied covenant was applied in error. The Supreme Court affirmed the remainder of the decision—leaving in place the remaining damages based on fraud and breach of contract.
