IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
BARDY DIAGNOSTICS, INC., a Delaware corporation, Plaintiff/ Counterclaim Defendant,

v. HILL

- ROM, INC., an Indiana corporation, and B ARCELONA MERGER SUB, INC., a Delaware corporation, Defendants/ Counterclaim Plaintiffs. ) ) ) ) ) ) ) ) ) ) ) ) ) ) C .A. No. 2021 - 0175 - JRS

MEMORANDUM OPINION Date Submitted: June 4, 2021

Date Decided: Ju ly 9 , 2021
Brad D. Sorrels, Esquire, Andrew D. Cordo, Esquire, Jessica A. Hartwell, Esquire, Lindsay K. Faccenda, Esquire, Benjamin M. Potts, Esquire, Nora M. Crawford, Esquire and Jeremy W. Gagas, Esquire of Wilson Sonsini Goodr ich & Rosati P.C., Wilmington, Delawar e and David J. Berger, Esquire and Steven Guggenheim, Esquire of Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California, Attorneys for Plaintiff/Counterclaim Defendant Bardy Diagnostics, Inc. Michael A. Pitteng er, Esquire, T. Brad Davey, Esquire, M atthew F. Davis, Esquire and Aaron R. Sims, Esquire of Potter Anderson & Corroon LLP, Wilmington, Delaware and Richard T. Marooney, Esquire, Alvin Lee, Esquire, Kenneth Fowler, Esquire, Julia Barrett, Esquire and Matth ew Bush, Esquire of King & Spalding LL P, New York, New York, Attorneys for Defendants/Counterclaim Plaintiffs Hill

- Rom, Inc. and Barcelona Merger Sub, Inc. SLIGHTS, Vice Chancellor1 Hill

- Rom, Inc. (“Hillrom”) and its merger subsidiary, Barcelona Merger Su b, Inc. (“Merger Sub”) , committed in a n Agreement and Plan of Merger (the “Agreement”) to acquire Bardy Diagnostics, Inc. (“Bardy” or the “Company”) , a medical device startup, by merger (the “Merger”)

. 1 After the parties signed the Agreement, but before c losing, the Medicare program, through an authorized agent, announced that the rates Medicare would pay for Bardy ’s signature medical device would be dramatically reduced. Soon after, H illrom gave notice to Bardy that it would not close the Merger

. Accord ing to Hillrom, it was excused from c losing because , between signing and closing, Bardy suffered a M aterial A dverse E ffect (“MAE”) as d efined in the Agreement

. This litigation followed. The usual refrain from sellers in “busted deal” case s is that the bu yer developed an acute case of “buyer’s remorse” after signing and then sought to exploit contractual exits to avoid closing. 2 The court often join s the “buyer’s remorse” chorus when it sees evidence that the buyer actually work ed , through deliberate

1 I refer throughout this Opinion to “Hillrom ” in the singular, as Merger Sub is a shell entity created by Hillrom solely to effectuate the transaction.
2 See, e.g. , Snow Phipps Gp., LLC v. Kcake Acq

. , Inc. , 202 1 WL 1714202, at *12 (Del. Ch. Apr. 30, 2021) ( noting the buyer suffered from “ buyer’s rem orse ” ); Hexion Specialty Chems., Inc. v. Hunstman Corp. , 965 A.2d 715, 721

– 36 (Del. Ch. 2008) ( same)

.2 indo lence or sabo t age , to facilitate the demise of the transaction so that it could avoid the deal it struck

. 3 This case is different

. In January 2020 , Hillrom, a publicly

- held , global medical technology
company, expressed interest in acquiring Bardy , a st artup medical device company that, then and now, had a single product offering on the market : a long

- term ambulatory electrocardiogram (“AECG”) device (known alternatively as a long

term H olter device , or “LTH”) called the Carnation Ambulatory Monitor (“CA M”) patch

. The CAM patch is a single

- use , bandage

- size patch designed to be secured to a patient’s chest and worn for up to 14 days, during which it records electrocardiographic data to detect heart arrhythmias

. That data is received by Bardy via th e clo ud (where it is also stored) and then interpreted at one of Bardy ’s independent diagnostic testing facilities (“IDTF”) by trained ECG technicians who create a proprietary report for review by the patient’s physician. More comfortable and accurate tha n com parable devices, Bardy ’s best

- in

- class technology fueled the Company’s explosive growth , and Hillrom came to view Bardy as an inorganic way
to enter the fast

- growing extended AECG device market

.

3 See Snow Phipps , 2021 WL 1714202, at *12 (concluding the reco rd showed the acquirer “set on a course of conduct predestined to derail Debt Financing an d supply a basis for terminating the agreements.”) ; Hexion , 965 A.2d at 721

– 36 ( observing that , following the seller’s disappointing quarterly results, the buyer cura t ed a contrived insolvency opinion based on overly pessimistic inputs to dissuade lenders from financing the acquisition).3 Bardy operated under several revenue models to monetize the CAM patch, with its largest tied to servicing Medicare patients

. Medicare sets its rates for reimbursement of medical devices and related services through use of Current Procedural Technology (“CPT”) codes

. The Cent ers for Medicare & Medicaid Services ( “CMS”), an arm of the federal Department of Health and Human Services, develops and administers Medicare’s reimbursement policy, overseeing adoption and pricing of CPT codes for medical services. In certain situations , however, CMS assigns Temporary Categ ory III CPT codes to new services and then delegates pricing authority to local Medicare Administrative Contractors (“MACs”)

— private entities operating within designated regions and vested with authority to set pricing for certain CPT codes. Though price s set by MACs operate with the same legal force as those set by CMS, the means and methods by which MACs arrive at their pricing decisions is

— unlike CMS

— notoriously opaque. The reimbursement rate s attached to the temp orary CPT code s assigned to the CAM pa tch have always been set by a MAC , Novitas Solutions , Inc. (“Novitas”) , which for years consistently priced the device
at around $365 per patch

. As Hillrom and Bardy began their negotiations in early 2020 , both parties understood that CMS was expected t o set a permanent national rate for the CAM patch ’s CPT codes , and both expected the rate to be higher than the rate Novitas had4 previously set . The designation of a national rate for extended AECG device s wa s viewed as a positive development for those op erating in the AECG space , not only because the reimbursement rate was likely to increase but also because the permanent CPT code s would signal to prescribing physicians that the devices had matured into the “ standard of care ” for the diagnosis of cardiac arrythmias

. T o the surprise of Hillrom , Bardy and others in the AECG space , CMS elected not to set the anticipated higher reimbursement rate s , or any reimbursement rate, for the CAM patch’s CPT codes, delegat ing that authority (again) to the MACs

. Hope was not lost, however, as Hillrom and Bardy both expected that, in the worst

- case scenario, Novitas would set reimburs ements for the CAM patch at historic rates. Novitas had not yet issued its decision on pricing when, i n early January 2021, Hillrom signed the Agreement to acquire Bardy

. To shift the risk of a ny decline in

revenue attributable to lower reimbursement rate s onto Bardy , the Agreement contemplated an earnout regime that tied the ultimate purchase price to certain revenue targets, which were invariably affected by a change in the rate at which Bardy was reimbursed for its services by Medicare . The Agreement also contained

a n MAE clause, which excused H illrom from its obligation to close if the Company experienced an MAE , as defined in th e Agreement

. On January 29 , Novitas announced a new rate (the “January Novitas Rate”) for the CPT codes governing the CAM patch: $ 42.68 for Texas and $49.70 for5 New J ersey (the sites of Bardy ’s two IDTFs )

. Novitas’ drastic reduction in Medicare reimbur sement rates came without warning and hit both Bardy and Hillrom like a Tyson right uppercut. The approximately 86% decline in the reimbursement rate was disorienting. 4 After the dust settled and everyone’s e yes rolled back into place, the parties agreed to operate on the premise that Novitas had made a mistake

. Industry players, including Bardy (with Hillrom’s support), undertook a coordinated effort to educate Novit as on the error of its ways. Novitas did not act with dispatch, however, and Hillro m’s appetite to close on the Merger soured as hope for a Novitas correction waned

. On February 21, 2021, three days before the Merger was scheduled to clos e , Hillrom i nformed Bardy that it believed an MAE had occurred , thereby excusing its obligation to c lose

. Bardy filed its Complaint a week later, on February 28, 2021, seeking specific performance of the Agreement and money damages for Hillrom’s unexcused delay. Hil lrom counterclaimed alleging that an MAE had occurred or, in the alternative, the purpos e of the Agreement had been frustrated. O n April 10 , 2021 , Novitas increased the January Novitas Rate by nearly three times, to roughly $133 (the “ April Novitas Rat e ”) , still less than half of the historic
rate
. Bardy remains optimistic that either No vitas or CMS will increase

4 “Everyone has a plan until they get punched in the mouth.” Mike Tyson.6 reimbursement rates further. In the meantime, it maintains that its unit economics are strong and it continues to project record

- breaking growth . For its part, Hillrom believes Bardy will run out of cash before it turns a profi t. Thus, by Hillrom’s lights, Bardy is either conjuring litigation

- driven optimism or is unknowingly dancing in quicksan d

. Either way, Hillrom remains adamant that the April Novitas Rate was and is an MAE

. The matter was tried over the course of three d ays. After carefully considering the evidence , I am satisfied this is not a case of “buyer’s remorse.” Hillrom remained optimistic about Bardy ’s potential even after CMS and Novitas delivered disappointing news, and it stood ready to close if either Novi tas or CMS restored reimbursement rates to historic levels. Rather than work to skuttle the deal, Hillrom encouraged Bar dy ’s efforts to convince Novitas to change its mind. When that did not happen, Hillrom invoked contractual exits in good faith. Of c ourse, the fact Hillrom did not act in bad faith does not mean it has properly refused to close on the basis of the Agree ment. Good faith does not excuse a breach of contract. After carefully considering the evidence, I am satisfied Hillrom did not carry its burden to prove that Bardy suffered an MAE given its failure to
prove the durational significance of the April Novit as Rate

. E ven if an MAE occurred, the April Novitas Rate was carved out from the definition of MAE as a “Healthcare Law.” Though the Agreement sets forth an exception to this carve - out7 for events that disproportionately affect Bardy relative to similarly situated companies operating in the same industr ies , the preponderance of the evidence reveals the April Novitas Rate did not dispropo rtionately impact Bardy

. For the

same reasons the Company did not suffer an MAE , Hillrom’s invocation of the frustration of purpose doctrine is misplaced

. Given these factual findings, Bardy is entitled to specific performance and prejudgment interest o n the deal price , but its claim for indemnification under the A greement fails . My reasoning follows. I. BACKGROUND The trial record comprises 82 4 trial exhibits, 5 live testimony from six fact and five expert witnesses, 6 deposition testimony from 13 fact and five expert witnesses 7 and 38 stipulations of fact. 8 The following are the facts proven by a preponderance of the credible, competent evidence, with the parties’ respective burdens of proof in mind

.

5 D.I. 74.
6 D.I. 68 (Joint Pre

- Trial Stip. and Order) ( “PT O”) ¶¶ 49

– 52.
7 D.I. 71

– 72.
8 I cite to the joint trial exhibits as “JX __,” the trial transcript as “Tr. __ (witness name)”; and depositions lodged as evidence as “(Name) Dep. __.”8 A. The Parties Plaintiff, Bardy , is a Delaware corporat ion that makes and sells AECG monitors and provides related diagnostic services . It operates IDTF facilities in Houston , Texas and New Providence, New Jersey. 9 Defendant, Hillrom, is an Indiana corporation with its principal place of business in Chicag o, Illinois. 10 Defendant, M erger Sub, is a Delaware corporation and a wholly

- owned subsidiary of Hillrom. 11 B. Bardy ’s Business In 2013, Gust Bardy , M.D., a cardiac electrophysiologist, founded Bardy to overcome challenges commonly faced in ambulatory cardi ac monitoring (“ ACM ”)

. 12 F or Dr. Bardy , the Company was a labor of love formed in memory of his wife , who had passed away the year before from complications associated with poorly diagnosed cardiac rhythm disorders. 13

9 PTO ¶¶ 7, 9.
10 PTO ¶ 10.
11 PTO ¶ 12.
12 PTO ¶ 8.
13 Tr. 15:2

– 16:21 (Bar dy) ; see also JX 62 at 7 (providing a picture of Dr. Bardy’s wife captioned “[t]he reason the company was founded”).9 Bardy currently manufactures and mark ets a single pro duct c alled the CAM patch , which belongs to a category of ACM products sometimes referred to as long

term ambulatory electrocardiogram (AECG) or long

- term H olter (LTH) device s . 14 Bardy ’s CAM patch is a single

- use , bandage

- size pat ch designe d to be affixed to a patient’s chest and worn for up to 14 days, 15 during which it records electrocardiographic data. 16 That data is uploaded to Bardy via the cloud and read
at one of Bardy ’s two IDTF s by trained ECG technicians who create a proprietary
rep ort fo r review by the patient’s physician. 17 Bardy ’s CAM patch is, by all accounts, exceptional. 18 T wo separate head

- to

head studies published in the American Heart Journal conclude that the CAM patch detect s arrhythmias with accuracy superior to both tr adit ional H olter monitor s and other extended AECG monitors, including the monitor developed by Bardy ’s

14 PTO ¶ 13; JX 396.
15 PTO ¶ 13.
16 JX 337 at 14

– 15; JX 386 at 2.
17 PTO ¶ 13; JX 62 at 27

– 31, 72; JX 337 at 15.
18 See JX 204 at 3 (Hillrom’ s D r. Johannes de Bie noting, “I have little doubt that the [ Bardy ] solution (CAM+IDTF) is currently the clinically best solution for [extended AECG] for the diagnosis of infrequent arrhythmias and that it is not easy to copy.”); see also (Blanchard) Dep. 46: 3

- 11 ( explaining that Dr. de Bie is Hillrom’s “chief scientist expert, ECG person”); Tr. 36:11

– 38:14, 84:19

– 24 (Bardy) (agreeing with Dr. de Bie’s assessment); id. at 104:2

– 17 (LaViolette) (same).10 competitor , iRhythm Technologies, Inc. (“iRhythm”) , called the “Zio XT” patch. 19 AECG mon itors like the CAM patch are also more patient

- friendly, comfort able and inconspicuous than traditional H olter monitors. 20 Bardy has fortified its competitive
moat with intellectual property ; indeed, the CAM patch incorporates technology covered by 80 pat ents

— more than the rest of the industry combined. 21 Bardy is also developing several other products, including an insertable cardiac monitor (“ ICM ”) it expects to bring to market in 2023. 22 An ICM is a device that is inserted below the skin in a patient’ s chest for continuous, long

- term biometric monitoring. 23 Unlike cu rrent ICMs, Bardy ’s product will have a rechargeable battery, superior signal quality and enabled cloud

- based analysis. 24 The ICM market is “a billion dollar category” with a reimbursement structure distinct from the CAM

19 See JX 40 at 2; JX 54 at 4 , 7 ; JX 62 at 15 ; JX 397 at 2.
20 JX 509 at 4; JX 54 at 4. For example, unlike older technology, the CAM patch does not require lead wires or a recording device attached to a belt or lanyard , making for a more comfortable user experience

. See PTO ¶ 13.
21 Tr. 18:12

– 20:10 (Bardy); s ee also JX 204 at 3 (Hillrom’s chief scientist expert observing that the CAM patch “is not easy to copy.”).
22 PTO ¶ 14; Tr. 32:1

– 2, 63:13

– 17 (Bardy); id. at 105:5

– 20, 105:21

– 106:9 (LaViolette).
23 JX 331 at 16; JX 94 at 52

– 58.
24 T r. 29:5

– 31:11 (Bardy); id. at 105:5

– 20 (LaViolette); JX 62 at 42; JX 194.11 patch. 25 Bardy is also developing n ext

- generation patches that it hopes will allow it to serve different market segments at lower cost as “the only company in the world with the entire spectrum of moni toring technologies at [its] disposal.” 26 For now, t he CAM patch comprises 1 00% of Bardy ’s revenue. 27 That revenue is principally derived from either of two models: “split bill ing ” or “ fee for service. ” 28 Split Billing Under the split billing model, Bardy provides the CAM patch to a physician for free, and the physician applies the patch to a patient. 29 The bill is then “split” into two components. In t he “professional component , ” t he physician bills the insurer for the application of the patch and the interpretation of Bardy ’s report

. 30 In
t he “technical component , ” Bardy bills the insurer for the data analysis and preparation of the resulting report
. 31 If a patient is insured under Medicare , then

25 Tr. 105:23

– 106:9 (LaViolette); see also (Bardy) Dep. 174:13

– 175:2 (describing ICM potential to be “a much bigger business than our dermal monitoring business [ i.e. , the CAM patch]”).
26 Tr. 32:3

– 15, 58:19

– 24 (Bardy).
27 See (Bardy) Dep. 99:4

– 6, 242:19

– 21.
28 Tr. 154:4

– 18 (Querry).
29 JX 110 at 8; Tr. 238:18

– 239:17 (Querry).
30 Tr. 238:18

– 239:17 (Querry).
31 Id. ; see also JX 110 at 8 (Hillrom presentation describing mechanics of tec hnical fees).12 Medicare rei mburses Bardy at the rate that has historically been set by Novitas. 32 In 2020, the Novitas reimbursement rate was $365 per patch . Ov er the eight

- year period before the Merger , “that rate had remained largely unchanged, give or take a couple of dollars.” 33 If a patient is insured by a commercial (private) third

- party payor, then Bardy ’s reimbursement rates are determined through negotia tion with each p ayor. 34 When determining whether to contract with a commercial payor, Bardy considers if it ( i ) can obtain a higher payment by negotiating a fixed rate, or (ii) should remain

non - contracted and charge a percentage of its “usual and customar y” rates as an “out

of

- network” provider. 35 Bardy ’s largest commercial payors in 2020 were Horizon BCBS (roughly 28% of Bardy ’s patients), United Health Care (9%) and Aetna (6%). 36 In 2020, the split bill ing model accounted for roughly two

- thirds of Bardy ’ s

revenue. 37 Becaus e it is the more profitable of its two models, Bardy projects that

32 PTO ¶¶ 16

– 19.
33 Tr . 170:19

– 23 (Querry).
34 Id. at 157:5

– 7 (Querry).
35 Id. at 157:15

– 159:4 (Querry); id. at 251:20

– 252:6 (Burke).
36 Tr. 157:18

– 158:14 (Querry).
37 Id. at 155:1

– 156:4 , 170:19

– 23 (Querry); JX 700 at 2.13 split billing will account for an increasing proportion of its revenue in the years to

come . 38 Fee - For - Service Billing Bardy earns the balance of its revenue through its so - called “fee for service” model, under which Bardy sells its CAM patch and IDTF services to physicians and hospitals for a negotiated flat fee. 39 The healthcare provider then bills the insurer under a “global” rate that incorporates both the professional and technical

co mponents. 40 The healthcare provider’s profit is the delta between the flat fee paid
to Bardy and the reimbursement received under the global rate. 41 C. Bardy ’s Competition The AECG market in which Bardy operates is comprised of Bardy and th ree main competitors: iRhythm, BioTelemetry and Preventice. 42 iRhythm is Bardy ’s “main” and “most logical” competitor. 43 Like Bardy , iRhythm derives nearly all its

38 Tr. 156:5

– 12 (Querry); JX 613 at 8.
39 PTO ¶ 20; Tr. 235:1

– 2 37:15 (Querry).
40 JX 110 at 8.
41 (Burke) Dep. 59:6

– 10.
42 PTO ¶ 21.
43 Tr. 125:13

– 14 (LaViolette); id. at 159:5

– 13 (Querry); see also (McClanahan) Dep. 98:14

– 99:6 (noting that Hillrom specifically l ooked at iRhythm’s growth rates and margin expectation when it was assessing Bardy’s value ).14 revenue from its extended AECG patch. 44 BioTelemetry and Preventice offer AECG patches that are lower cost and lower quality, but both companies focus primarily on MCOT devices that target different patient s than those who will benefit from extended AECG monitors. 45 D. Overview of the ACM Medicare Reimbursement Landscape As mentioned, r eimburs ement rates under Medicare are set for specific CPT codes tied to particular services. CMS, an arm of the federal Department of Health and Human Services, develops and administers Medicare’s reimbursement policy, overseeing the adoption and pricing of CPT codes for medical services. 46 CMS sets prices informed by its “Triple Aim,” which seeks to promote: (1) the health of each individual patient beneficiary ; (2) health for populations, including managing healthcare disparities ; and (3) lower costs. 47 T o better a chieve t hese goals ,

44 See Tr. 159:5

– 13 (Querry); JX 631 at 39

– 40 (estimating iRhythm derives 96% of its revenue from its AECG patch product).
45 See Tr. 511:22

– 512:7 (Frank) (noting ex tended AECGs constitute “a very small part” of BioTelemetry’ s business); id. at 159:14

– 160:3 (Querry) (listing modalities offered by BioTelemetry and Preventice) ; see also id. at 32:21

– 33:6 (Bardy) (explaining MCOTs are not interchangeable with extended AE CGs)

. 46 JX 635 at 5

– 9 (describing what CPT codes are and how they are developed).
47 Tr. 313:12

– 314:15 (Renbaum).15 CMS is moving toward a “forward

- looking preventative care approach” 48 focused on doing “the right thing for the right patient at the right time.” 49 In certain situations, CMS assigns Temporary Category III CPT codes to new services and then delegates pricing authority to local MACs. 50 From a device

maker’s perspective, t here is no practical difference between a MAC

- set price and a CMS

- set price: a MAC’s price bears the full weight of CMS’s authority and it is illegal to bill a Medicare p atient above the rate set by an authorized MAC. 51 When a service with a temporary C PT code is more widely utilized, stakeholders typically petition the CPT Editorial Panel to set permanent Category I codes , signaling to physicians that a service has beco me part of the “standard of care” that can be billed at predictable reimbursement rat es for Medicare patients. 52 When a Category I code is proposed , the American Medical Association’s Resource

Based Relative Value Scale Update Committee (the “ RUC ”), workin g with CMS, develops a pricing recommendation after a detailed review of costs, incl uding

48 (Kohler) Dep. 119:23

– 120:15; see also Tr. 626:18

– 22 (Kohler).
49 Tr. 320:13

– 18 (Renbaum).
50 Id. at 625:10

– 12 (Kohler); JX 635 at 5

– 9.
51 42 U

. S

. C

. § 1395w

- 22; Tr. 169:6

– 170:1, 171:18

– 172:3 (Querry); id. at 311:5

– 12 (Renbaum).
52 Tr. 303:20

– 304:5 (Renbaum); id. at 116:7

– 117:3 (LaViolette); id. at 160:9

– 23 (Querry); JX 635 at 6

– 10.16 equipment, supply and clinical labor. 53 CMS can choose to accept the RUC’s recommendation, adjust pricing based on its own analysis or delegate pricing to MACs. 54 T hough MAC prices are functionally equivalent to CMS prices, the process es by which these entit ies determine their final prices could not be more different

. MACs are regarded by industry participants as “black box es ”

— they do not explain their reasoning whe n they set rates and can change their rates at any time. 55 CMS’s
rate

- setting process, by contrast, is transparent and “iterative,” building upon prior analyses and input from stakeholders. 56 W hile CMS does not disclose the matters it is consider ing while it studies a proposed rule, 57 it does explain its reason ing at the

53 Tr. 310:7

– 302:1 (Renbaum); JX 635 at 9.
54 JX 635 ¶ 18.
55 Tr. 371:20

- 372:11 (Renbaum); id. at 634:14

– 636:1 (Kohler); id. at 241 :5

– 22 (Querry); JX 632 ¶ 25 (Hillrom’s expert explaining “the processes by which the MACs determine pricing are comparatively less transparent” and “the price set by any o ne MAC may not be as intellectually defensible from a valuation perspective as the ra tes set by CMS, whose standard, methodical rate

- setting process” is more transparent); JX 671 at 2.
56 Tr. 312:9

– 313:11, 350:17

– 24, 360:3

– 362:7 (Renbaum); JX 671 at 6

– 7.
57 Tr. 360:3

– 363:9 (Renbaum); see also id. a t 639:3

– 24 (Kohler) (describing the “big bla nk” in the timeline between a RUC recommendation and CMS proposed rule during which t here are “questions back and forth” between CMS and stakeholders that “[w]e don’t see” because “[i]t’s not public information”).17 time the rule is publish ed

. 58 This contrast in processes is well known to everyone involved with Medicare reimbursement. 59 E. Hillrom Explores an Acqui sition of Bardy Hillrom had long wanted t o enter the ACM space and viewed the extended AECG se gment in particular as an “expanding category” with significant growth potential. 60 In 2019, Hillrom engaged a consultant , Health Advances LLC, to perform market research and to evaluate a potential stra tegic transaction in the ACM
space. 61 In January 2020, Bardy investor and board member , Paul LaViolette , discussed Bardy ’s business with Hillrom CEO , John Groetelaars. 62 Following this discussion, Hillrom determined that Bardy ’s “differentiated technolog y” would complement Hillrom’s existing short

- term Holter business, 63 making i t a “good

58 Tr. 640:1

– 24 (Kohler).
59 Id. at 363:3

– 9 (Renbaum).
60 Id. at 521:11

– 522:22 (Frank); JX 110 at 4 (Hillrom strategic assessment highlighting “High Growth Segment” in the “What We Like” row); (Blanchard) Dep. 24:7

– 1 0.
61 Tr. 509:18

- 512:1 (Frank); JX 23; JX 28 at 4, 7; JX 48; ( Blanchard ) Dep. 66:9

– 20; (Kucheman) Dep. 40:7

- 10.
62 PTO ¶ 22; Tr. 95:17

– 20 (LaViolette).
63 JX 365 at 3, 9; Tr. 489:11

– 22 (Frank); JX 366 at 2 (describing strategic rationale for the Merger); (Kuc heman) Dep. 18:5

– 22, 42:13

– 23, 83:18

– 84:8 (explaining Bardy “would help to diversify the preexisting diagnostic cardiovascular product line . . .”) ; (Blanchard)18 strategic fit” for an acquisition. 64 Hillrom also viewed Bardy ’s ICM (in development) as “ha[v ing ] the potential to revolutionize disease treatment and early diagnosis.” 65 Although Bardy was not for sale, b oth sides grew increasingly interest ed in a transaction as discussions progressed. 66 Of course, Hillrom knew Bardy was a typical venture

- backed startup in the sense that it was focused in the near term on growth, not pro fitability

. Indeed, Hillrom knew that: Bardy had never turned a profit ; it was projected to incur significant losses in 2021 ; and the acquisition was not projected to be accretive until FY 2023 at the earliest

. 67 Since its inception, Bardy ’s management ha s been laser

focused on aggressively increasing revenue, expanding infrastructure and personnel,

Dep. 43:3

– 44:10; see also JX 149 at 15, 21 (internal Hillrom document explaining strategic rati onale for the Merger ) ; JX 63 at 8 (same)

. 64 (McClanahan) Dep. 20:13

– 21:14; (Roehrich) Dep. 28:6

– 24; see also JX 109 at 5 (internal Hillrom investment memorandum explaining strategic rationale of the Merger) ; JX 157 at 3

– 5, 31 (same) ; JX 173 at 3, 16 (same)

. 65 JX 340 (internal email from Groetelaars stating , “[t]he ICM is the type of bold i nnovation that this company needs a little more of an d it is necessary that we acquire it and then support the development and commercialization of it.”); see also Tr. 609:12

– 611:8 (Groetelaars) (acknowledging the email)

. 66 PTO ¶ 23; Tr. 109:8

– 18 (LaViolet te); id. at 509:8

– 11 (Frank).
67 JX 365 at 19; Tr. 490 :13

– 22 (Frank); see also JX 41 at 41 (internal Hillrom presentation acknowledging Bardy’s financial profile entails near

- term losses) ; Tr. 62:11

– 15 (Bardy) (explaining that Bardy has never turned a profi t) ; id. at 102:9

– 103:19 (LaViolette) (same) ; id. at 1 53:4

– 11 (Querry) (same)

.19 and developing new technologies. 68 Their efforts have paid dividends ; Bardy ’s revenue has grown exponentially, from $1.4 million in 2017 to over $26 million in 2020. 69 This revenue expansion has been fueled by a compounded annual growth rate of 243% from 2018 through 2020, with enrollments (i.e., demand ) for CAM patches in creasing 91% in 2020. 70 Hillrom further appreciated that Bardy ’s future profitability was , in significant part, dependent on Medicare rates for extended AECG devices, and that prices for devices such as Bardy ’s were subject to change due to the anticipa ted shift to Category I CPT codes. 71 But Hillrom viewed the risk of a significant change in Medicare reimbursement rates as low and , given Bardy ’s dynamic growth , Hillrom believed it “could absorb” Bardy ’s short

- term lack of profits because the Company would serve as “a platform for [future] growth

. ” 72

68 Tr. 153:12

– 154:1 (Querry); id. at 102:11

– 22 (LaViolette).
69 Tr. 150:15

– 23 (Querry).
70 Id. at 151:4

– 20 (Querry).
71 See Tr. 512:15

– 516:3 (Frank) (acknowledging that a change in M edicare reimbursement rates for LTH devices would hav e impact Bardy more than Biotel emetry ); JX 48 at 10

– 11 ( observing that the “[s]ustained attractiveness” of an ACM acquisition was contingent on “Category I shift ha[ving] minimal LTH reimbursement reduct ions”). Hillrom recognized in public disclosures tha t its own business faced “significant uncertainty” from, among other things, “changes in Medicare, Medicaid, and other governmental medical program reimbursements[.]” JX 8 at 7

– 8; Tr. 583:15

– 24 (Groetel aars).
72 (Blanchard) Dep. 93:6

– 94:4, 143:10

– 144:10.20 F. CMS Issues its Proposed Fee Schedule The CPT Editorial Panel of the AMA recommended Category I codes for extended AECG monitoring effective in January 2021. 73 The RUC subsequently met to approve a pricing recommendation for the codes , 74 but it did not receive invoices for use in its cost build

- up bec ause IDTFs generally bill directly to Medicare rather than selling patches to physicians. 75 Thus, when the RU C ultimately recommended an increase in Medicare reimbursement to $438.94 per patch, it had relied not on actual costs but on the weighted mean of payment for these services to CMS, which it viewed as a “reasonable proxy.” 76 On August 4, 2020, CMS publish ed its proposed physician fee schedule for 2021, which proposed adopting permanent “Category I” codes for long

- term AECG monitors, including separat e codes for 2

- to

- 7 day tests and 7

- to

- 14 day tests (the “Proposed Fee Schedule”)

. 77 It also proposed national rates for the diagnostic component of those two codes of $451.24 and $ 4 63.92, respectively, for the territory

73 JX 635 at 10

– 12.
74 Tr. 302:10

– 303:1, 304:13

– 305:6 (Renbaum); JX 13 at 41.
75 Tr. 303:20

– 304:12 (Renbaum); JX 13 at 40

– 41; see also Tr. 185:19

– 188:3 (Querry) (describing Bardy ’s effort to come up with a s imilar cost build

- up using Bardy ’s invoices for direc t sales as “confirmatory” of historical rates); JX 498.
76 Tr. 306:8

– 307:6 (Renbaum); JX 13 at 41

– 42; JX 70 at 2

– 3.
77 JX 70.21 that encompassed Bardy ’s New Jersey IDTF

. 78 CMS noted, however, that it had not received traditional invoices for the devices t o support its cost analysis and would “continu[e] to gather more data to come to a final decision

. ” 79 G. Hillrom Conducts Diligence into Bardy Approximately three

- weeks following the release of CMS’s published fee schedule, o n August 25, 2020, executives fro m Hillrom and Bardy met again to discuss a potential acquisition. 80 Dur ing the meeting , and again in a subsequent September presentation, Bardy laid out its financial model for 2021

– 2025, which incorporated increased revenue and gross margins based on CMS ’s proposed rates. 81 Bardy also saw an “[o]pportunity to reset commercial rates higher commensurate with [the proposed rise in] new Medicare rates.” 82 Following prelim inary due diligence, o n September 1, 2020, Hillrom submitted an initial offer to acquire Bardy for $400 million. 83 On September 24, 2020, Hillrom sweetened the offer when it submitted a non

- binding initial indication

78 PTO ¶ 28; JX 93 at 8.
79 Tr. 307:1

– 308:17 (Renbaum); JX 70 at 2

– 3.
80 PTO ¶ 25.
81 JX 95 at 8, 76

– 85; JX 153 at 4.
82 JX 153 at 15, 30.
83 PTO ¶ 25; Tr. 112:1

– 24 (LaViolette); JX 111.22 of interest (“IOI”) to acquire Bardy fo r $450 million plus potential earnouts. 84 Bardy accepted Hillrom’s IOI and the parties proceeded with more rigorous due diligence. 85 By all accounts, t he due diligence process was “extensive [and] disciplined

. ” 86 Hillrom prepared various financial models, all of which contemplated dilution in the
two years post

- acquisition. 87 Though Hillrom identified BioTelemetry, iRhythm and Preventice as points of comparison against Bardy , 88 it focused on iRhyt hm as Bardy ’s closest comparable and carefully evaluated iRhyt hm’s public disclosures, stock price and other metrics during due diligence. 89

84 JX 137 at 7.
85 PTO ¶ 26.
86 (Blanchard) Dep. 164:12

- 16; see also Tr. 167:23

– 168:11 ( Querry ) (describing at a high level what Hillrom’s diligence process en tailed)

. 87 ( McClanahan ) Dep. 50:3

- 23 ( “Q. Do you recall seeing any models of an acquisition of Bardy by Hill

- Rom where the year 1 or 10 year zero return was positive? A. Not that I recall. Q. Approximately how many different models of a potential acqui si tion of Bardy by Hill

- Rom did you look at over the entire course of the M&A p rocess? A. Quite a few. I can ’ t recall a specific number, though. . . . Q. More than 20; is that a fair estimate? A. That could be.” ) ; JX 108; JX 123; JX 157 at 3, 17

– 23; JX 1 73 at 19

– 24.
88 JX 365 at 12.
89 See JX 157 at 22 (focusing on iRhythm’s profit & loss history and forecast comparable); JX 337 at 28 (Board deck singling out for comparison iRhythm ’s revenue multiple); JX 272 at 3 (M&A Committee member tying deal element to iRhythm’s share price); JX 367 at 14 (1/11/2021 Hillrom Board approval deck noting iRhythm trading multiple); (Roehrich) Dep. 45:6

– 12 ( noting that Hillrom “looked at what iRhythm, as another company in t his space, had put out publicly”), 91:14

– 92:7 ( exp laining Hillrom based its views on pricing23 Among H illrom’s key goals in due diligence was to “ validat e ” whether the reimbursement rates in the Proposed Fee Schedule would be finalized or “meaningfully impacted” through t he comment period. 90 Hillrom tasked its in

- house reimbursement expert, Kari Roehrich, with leading an “entire workstream dedicated to reimbursement for [ Bardy ].” 91 Beyond Hillrom’s own in

- house expertise, Roehrich and her team reviewed analyst reports, mon i tored public comments , relied on the advice of their outside advisors at King & Spalding and Health Advances and received input from healthcare consultant , David Parr. 92 On October 5, 2020, Muller Consulting & Data Analytics submitted a comment to the Pro posed Fee Schedule that advocated for reimbursement rates of $66.25 for the 2

- t o - 7 day code and $8.66 for the 7

- to

- 14 day code. 93 Following this

changes in part on “everything we had . . . read from iRhythm analysts”); (Blanchard) Dep. 277:13

– 19; (McClanahan) Dep. 98:4

– 99:6 (noting that Hillrom looked speci fically at iRhythm’s growth rates and margin expec tation when they were assessing the future value of Bardy ).
90 See JX 110 at 5 (listing as a point “requir[ing] validation” that “[r]eimbursement rate changes for [extended AECG] announced in August of 2020 are not meaningfully impacted through the ‘comment period’ and are stable in 2021 and beyond”); see also Tr. 168:8

– 11 (Querry) (confirming that there were questions about reimbursement during “[a]lmost . . . every interaction with the Hillrom team”).
91 JX 141 at 2; JX 169 ; see also Tr. 527:12

– 17 (Frank) ( acknowledging Hillrom had internal and external experts evaluating reimbursement rates)

. 92 Tr. 527:18

– 528:19, 533:7

– 12 (Frank); id. at 581:12

– 582:9, 600:5

– 601:1 (Groetelaars); JX 169; JX 197 (Parr email to Hillrom); JX 246.
93 Tr. 529:1

– 15 (Frank); id. at 5 93:15

– 595:11 (Groetelaars); JX 150 at 3; JX 170.24 announcement, Parr warned Hillrom that historical Novitas “pa yment is at risk” and “[p]rojections built off one or two outlier payors [Novitas and Palmetto] are a huge red flag.” 94 Even though t his was not the first warning regarding reimbursement
rates Hillrom received from its outside advisors, 95 Hillrom chose to view the risk differently

. 96 Ultimately, Roe hrich’s investigation culminated in a report where she recommend ed that, because “CMS has yet to finalize the 2021 Physician Fee Schedule,” Hillrom should wait to “close/sign[] [the Merger until] after the publication of the Fee Schedule to eliminate any n egative impacts to CMS pricing (and therefore valuation).” 97 The recommendation for delay was intended to “give

94 JX 197 at 1

– 2; (Roehrich) Dep. 85:18

– 92:7.
95 See JX 51 at 109 (Health Advances identifying in May 2020 risk that reimbursement for extended AECG could “swi tch[] to Category I with a significant reduction i n value (>20

- 30%). ” (emphasis added) ) ; see also JX 165 at 11 (Health Advances report stating on reimbursement changes: “Anticipate modest (~5

- 10%) declines in LTH revenue, but feedback is divergent on impac t and exact details are still uncertain”).
96 See T r. 529:1

– 19 (Frank) (characterizing Muller Report as an outlier); see also (Roehrich) Dep. 85:18

- 92:7 (discussing Parr’s view as detailed in JX 197 , and noting that the Hillrom team was “generally intereste d” in Parr’s opinion but concluded any pricing cha nge would be “modest”). Following the December CMS decision, Parr again warned that because Novitas was the “highest priced MAC contractor, there may be risk that their pricing moves more to the mid

- range once [] codes are permanent.” Tr. 533:7

– 534:21 (F rank); JX 246. Hillrom’s management again dismissed these concerns; in deed , as Frank testified, having heard Parr’s warnings, Hillrom declined to hire him as a permanent advisor

. Tr. 478:5

– 9, 536:14

– 537:7 (Frank).
97 JX 205 at 8, 70; see also JX 249 at 7, 65 (identifying as the first item among the Merger’s “[k]ey weaknesses and threats / issues” in Hillrom’s 11/18/20 diligence recap : “CMS has25 [Hillrom] certainty as to what CMS national pricing would look like for the new CPT codes.” 98 Hillrom decided to follow that recommendation and to wait for CMS’s final fee schedule before executing any agreement. 99 H. CMS Announces Its Final Rule but Defers to MAC Pricing On Decemb er 1, 2020, as Hillrom’s diligence was ongoing, CMS issued the 2021 Final Fee Schedule, in which it adopted permanent Category I codes for extended AECG patches but delegated pricing for those codes to the regional MACs “for CY 2021” with a stated intent to return to the decision in future rulemaking

. 100 CMS explained that its defe rral was motivated by its desire to collect further data reflecting cost information for the patch devices. 101 The upshot was that , for the

yet to finalize the 2021 Physician Fee Schedule . . . . Recomme nding deal close / signatures after the publicatio n of the Fee Schedule to eliminate any negative impacts to CMS pricing (and therefore valuation)”); JX 195 at 2 (identifying “[r]eduction in CMS proposed rates in final CMS Fee Schedule for 2021” as a “Key Risk” and recommending “Final closing after public ation of CMS Fee Schedule for 2021” as potential “[m]itigation”).
98 (Roehrich) Dep. 112:1

– 113:2; see also Tr. 538:23

– 539:8 (Frank) (agreeing that Roehrich’s recommendation to wait for certainty on CMS pricing was grounded in her fear that there could be a reduction in CMS’s proposed rates in the final CMS schedule for 2021); (Blanchard) Dep. 181:6

– 15.
99 Tr. 472:2

– 5 (Frank).
100 PTO ¶ 28; JX 349; JX 350 at 3; Tr . 308:18

– 311:4 (Renbaum); JX 233; JX 357 at 8.
101 Tr. 337:24

– 338:17 (Renbaum).26 time being, Novitas would remain responsible for setting the prevailing reimbursement rates for the CAM patch’s CPT codes

. 102 In the wak e of the prolonged uncertainty pro voked by CMS’s decision, 103 Hillrom went back to the drawing board with its internal and external reimbursement experts to evaluate likely outcomes of a Novitas

- set rate. 104 Given Novitas ’ historically stable pricing for long

- term AECG tests , Hillrom conclude d the most likely scenario was that Novitas would revert ( or “crosswalk” ) to the 2020 Category III rates. 105 B ased on that expectation, Bardy refreshed its September forecast by using the 2020 rates, which resulted in estimated revenue of $57 million for 20 21 and $89 million for 2022 (declines of $7 million and $11 million , respectively). 106 Both before and after the announcement of the 2021 Fi nal Fee

102 PTO ¶¶ 15

– 16, 32.
103 Tr. 117:4

– 118:18 (LaViolette); JX 278 at 2; see also Tr. at 477:18

– 478:4 (Frank) (acknowledging pricing had been kicked back out to the MACs); id. at 597:11

- 600:3 (Groetelaars) ( “ Q: Nothing was certain until the rates were published; right? A: That’s corr ect.”).
104 Tr. 531:20

– 532:3 (Frank); id. at 581:12

– 18 (Gro etelaars) (agreeing Hillrom “had the advice of outside experts and consultants to understand the various mechanics and the decision dates that were to occur around reimbursement”); JX 246; JX 392; JX 434.
105 Tr. 597:19

- 598:16 (Groetelaars); JX 254 at 29. The Bardy team agreed that Hillrom’s assumption of stable rates was “reasonable.” Tr. at 129:14

– 24 (LaViolette); id. at 170:14

– 171:17 , 209:2

– 10, 210:5

– 8 (Querry) ; id. at 67:24

– 68:3 (Bardy) (stating he “did not see any risk in December of 2020 that reimbur sement rates would decrease in 2021.”)

. 106 Tr. 172:4

– 174:6 (Querry); JX 254 at 36

– 37.27 Schedule, Bardy was careful not to represent that Novitas would set any particular rate, as both parties agre ed that the price ultimately set by Novitas or CMS was “unknowable” ex ante
. 107 I. Hillrom Renegotiates the Merger Days after the December an nouncement of the 2021 Final Fee Schedule , Hillrom terminated the IOI so that it could renegotiate the deal’s financia l terms

. 108 The “most material” reason for renegotiating was CMS ’s refusal to adopt a national Medicare reimbursement rate , introducing risk that the CAM patch would

107 See Tr. 171:8

– 11 (Querry) (“No, I didn’t [represent to anyone what the rates would be]. I mean, we couldn’t. It was really unknowable at that point in time.”); id. at 58 6:4

– 7 (Groetelaars) (agreeing no representation was made before or in the Agreement as to Novitas rates); JX 254 at 27

– 33.
108 See JX 275 (email to Bardy setting out revised proposal for the Merger fol lowing CMS’s December announcement). Remainder of Page Intentionally Left Blank28 be priced below the level proposed (but never adopted) by CMS

. 109 Hillrom wanted to shi ft more economic risk to Bardy to address that po ssible outcome

. 110 The mecha nism by which Hillrom shifted that risk was to propose a different
earnout. 111 Lower reimbursement rates would lower Bardy ’s revenue. Hillrom thus proposed , and the parties ultimat ely agreed, that (i) Hillrom would pay a lower up

front purchase price of $375 million (down from $450 million ); and (ii) Hillrom would pay contingent e arnout consideration linked to estimated CAM patch revenue for 2021 and 2022, structured as follows: 112

109 Tr. 601:11

– 17 (Gro etelaars); see also id. at 607:15

– 608:6 (Groetelaars) (acknowledging that, in JX 296, Groetelaars wrote to the Hillrom board of directors after CMS’s December announcement and explained that, in ligh t of the announcement, Hillrom would need to renegotiate the Merger’s financial terms); id. at 117:4

– 18, 119:13

– 122:13, 145:10

– 20 (LaViolette) (“The December outcome . . . allowed for some of the uncertainty from ear lier in the year to persist. And so Hil lrom approached us and said they were uncomfortable with that level of uncertainty. They were not willing to, as a result, stand behind the terms of the agreed LOI and wanted to change them ”) ; JX 234; JX 296 at 3; ( Blanchard) Dep. 214:19

– 215:15 (explainin g CMS decision was the “perfect . . . door opener” for Hillrom to renegotiate: “[o]h, by the way, look what I found on due diligence”).

110 Tr. 118:14

– 18 (LaViolette); see also id. at 482:7

– 14 (Frank) (“In my view, we adjusted down the upfront payment of th e consideration commensurate with [] the fact that rates were back in the MAC jurisdictions or the MAC sort of setting.”).
111 See PTO ¶ 29; Tr. 118:14

– 18 (LaViolette); JX 418 at 1 (Hillrom CEO Groetelaars identifying the earnout as a risk

- sharing tool that limited Hillrom’s downside after Novitas announced a reimbursement rate decrease for Medicare patients)

. 112 PTO ¶ 30; Tr. 175:14

– 176:15 (Querry); JX 317 at 2

– 3; JX 254; JX 37 6 § 1.14.29 Earnout Level (% of Revenue ) 2021 Revenu e Targets 2022 Revenue Targets 50% <$45 million < $70 million 100% ≥ $45 million ≥ $70 million 150%(2021)/125%(2022) ≥ $57 million ≥ $89 million If Bardy hit its projected revenue targets ($57 million and $89 m illion), then Hillrom would pay to Bardy ’s stockholders 100% of the revenue for those two years and pay a 50% and 25% premium to those revenues, respectively. If Bardy missed its revenue targets by a modes t amount (no more than $12 million and $19 million in 2021 and 2022, respectively) , then Hillrom would still pay 100% of the revenue
to Bardy ’s stockholders but no premium

. Thus , Hillrom had no expectation of retaining any revenue for those years if Bardy grew as (or slightly slowe r than) expected . Conv ersely, if Bardy missed those revenue targets by a significant amount for whatever reason (including a change in reimbursement rates), Hillrom would pay only 50% of the revenue for those years. 113 While Hillrom priced into the deal s ome risk that Novitas wo uld decreas e Medicare reimbursement rates, 114 it nevertheless viewed a change in reimbursement rates as unlikely. On January 11, 2021 , for example, in a presentation to Hillrom’s B oard seeking approval of the Agreement , Hillrom’s deal team did not include

113 Tr. 176:2

– 15 (Querry).
114 See JX 418 at 1 (Hillrom CEO Groetelaars ackno wledging that the earnout shifted onto Bardy risk of lower Medicare reimbursement rates).30 a mong the “key risks” a lower reimbursement rate

. 115 Nor did Hillrom’s financial models incorporate a significant decrease in Medicare reimbursement rates. 116 In any event, even assuming a Novitas rate reversion to $365, Hillrom’s Board was advised that Bardy was not expected to be value accretive until FY 2023 , and Hillrom did not expect positive returns on invested capital in the first two years of owning Bardy

. 117 The presentation to Hillrom’s B oard also referenced iRh ythm’s trading multiple (and no other co mpanies) as a “relevant data point” to consider in evaluating Bardy ’s valuation. 118 With this data in hand, Hillrom’s B oard decided to forge ahead with the Merger prior to Novitas’ announcement of Medicare’s reimbursement rate

.

115 JX 365 at 17 ; see also id. at 14 (“Price anticipated to remain close to / at current rates.”); Tr. 612:1

– 17 (Groetelaars) (s tating that the risk was considered “ret ired,” meaning “nothing to be concerned about.”); but see JX 337 at 26 (identifying “[s]trong reimbursement” as among the “[k]ey assumptions” of Hillrom’s financial model); JX 197 at 1

– 2 (warning Hillrom that histori cal Novitas “payment is at risk” and “[p ]rojections built off one or two outlier payors [including Novitas] are a huge red flag.”).
116 Tr. 489:4

– 10 (Frank); JX 365 at 19; see also Tr. 172:4

– 23 (Querry); (explaining Bardy’s projections also did not incorporate a significant decrease in Medicare re imbursement rates); JX 254 at 38.
117 Tr. 519:4

– 16 (Frank); JX 335 at 5; JX 356 at 3; JX 123 at 11; JX 337 at 29; JX 313 at 7; ( McClanahan ) Dep. 144:9

- 145:5 ( explaining Hillrom did no t present ROIC for first two years in JX 313 at 7 because Hillrom “knew it would be negative”), 168:12

– 17 ( acknowledging acquisition would be EPS dilutive for first three years).
118 (McClanahan) Dep. 165:11

– 166:5; JX 337 at 28 (singling out iRhythm’s tradin g multiple in slide titled “Valuation Considerations”).31 J. Hillrom and Bardy Sign the A greement On January 15, 2021, the parties executed the Agreement, which set the price of Hillrom’s acquisition of Bardy at $375 million plus potential earnouts. 119 The Agreement does not contain any representations or warranties covering reimbursement rate s or Bardy ’s projected revenue. 120 It also contains broad integration and “non

- reliance” language. 121 Relevant here, the Agreement conditioned Hillrom’s obligation to consummate the Merger on ( a ) the non

- occurrence of a Company MAE; ( b ) the truthfulness of Bardy ’s representations and warranties (the “Bring

- D own Condition”) ; and (c) Bardy ’s compliance with certain covenants contained in the Agreement . The applicable provisions of the Agreement are discussed below. The MAE Clause Under the Agreement, Hillro m is not obligated to close and can terminate the Agreement if a “Company Material Adverse Effect” has occurred. 122 As is common,

119 JX 378.
120 Tr. 58 6:4

– 7 (Groetelaars); see generally JX 376 art. 2.
121 JX 376 § 2.32; Tr. 586:8

– 588:2 (Groetelaars).
122 JX 376 §§ 2.7, 5.1(c), 6.1(b). Specifically, Bardy represented in Section 2.7 of the Agreement that “[s]ince December 31, 2019, there has been no Company M aterial Adverse Effect.” Id. § 2.7.32 t he Agreement def ines a “Company Material Adverse Event” in three parts

. 123 The “definition starts with a general statement of w hat constitutes a n MAE ,” then “carves out certain types of events that otherwise could give rise to a n MAE ,” and then creates “exceptions to the carve

- outs.” 124 The base MAE is defined as “any fact, event, circumstance , change, effect or condition that, i nd ividually or in the aggregate, has had, or would reasonably be expected to have a material adverse effect on . . . the Business of the Acquired Companies, taken as a whole.” 125 The Agreement defined Bardy ’s “Business” to

mean its : C ollective [] engage [men t]

. . . in the design, development, manufacture, production, assembly, marketing, promotion, distribution, sale, clinical use and other commercialization activities involving certain currently

marketed and in

- development cardiac digital health, diagnostic , d ata management and remote patient monitoring devices (including ambulatory cardiac monitors), technologies and services (including independent diagnostic testing, interpretation and cardiac monitoring services). 126 The Agreement lists several carve - outs fr om the definition of a Company MAE. Relevant here, the Agreement carves out: (1) “any condition or change in

123 Akorn , Inc. v. Fresenius Kabi AG , 2018 WL 4719347, at *51 (Del. Ch. Oct. 1, 2018) , aff’d , 198 A.3d 724 (Del. 201 8).
124 Id

. 125 JX 376 at 88.
126 Id. at 5.33 economic conditions generally affecting the economy or the industries or markets in which the Acquired Companies operate” and (2) “any chan ge in a ny Law (including any COVID

- 19 Measures and any Health Care Law) or GAAP or any interpretation thereof.” 127 The Agreement then provide s for an exception to those carve

- outs
. Specifically, the Agreement states that a carved

- out event can nonetheless constit ute an MAE “to the extent such matter has a materially disproportionate impact on the Acquired Companies as compared to other similarly situated companies operating in the same industries or locations, as applicable, as the Business.” 128 The Bri ng - Down C ondition and the Covenants In Section 5.1(a), the Agreement provides that, as a condition precedent to Hillrom’s obligation to close, certain representations and warranties “must have been true and correct . . . as of the date of this Agreement a nd must b e true and correct as of the Closing Date . . . except . . . as would not have a Company Material Adverse Effect.” 129 Section 5.1(b) of the Agreement further provides that, as a condition pr ecedent to Hillrom’s obligation to close, Bardy “must hav e performe d and complied with in all material respects the covenants and obligations under this

127 Id. at 88

– 89.
128 Id. at 89.
129 Id. § 5.1(a).34 Agreement required to be performed or c o mplied with by it prior to Closing.” 130 Finally, Section 5.1(c) of the Agreement contains a stand

- alone closing conditio n that “No Company Material Adverse Effect shall have occurred.” 131 The Termination Clause Under Section 6.1(b), the Agreement may be terminated “upon a material breach of any representation, warranty, covenant, or obligation ” that Bardy “ set forth in this Agreement such that the conditions set forth in Section 5.1(a)

or Section 5.1(b) are incapable of being satisfied and, if such breach is curable, such breach is not cured prior to the expiration of twenty (20) days following [ Bardy ’s] receipt of written notice there of from [Hillrom].” 132 Otherwise, Hillrom was obligated to close within thr ee business days after the closing conditions were satisf ied

. 133 The Remedies Provisions In Section 9.11 of the Agreement, the parties agreed that specific performance was not excl usive of an award of damages in the event of a breach of the

130 Id. § 5.1(b).
131 Id. § 5.1(c).
132 Id. § 6.1(b).
133 Id. §§ 1.3, 4.3(a).35 Agreement. 134 In Section 7.3, the parties further agreed that , after closing , Hillrom would “indemnify, defend and hold harmless the Equityholders

. . . from, and will reimburse the Equityholder I ndemnified Parties for, all Adverse Consequences suffered or incurred by the Equityholder Indemnified Parties, to the extent arising out of or related to a breach or non

- fulfillment by Parent or Merger Sub[.]” 135 “Adverse consequence” is defined to include any “expense, loss, liability, Tax or other damages” and “reasonable an d out

- of

- pocket legal and other professional fees, costs, [and] other dispute resolution expenses[.]” 136 K. Hillrom Refuses to Close After Novitas Announces New Rates On January 29, 2021, t wo weeks after the Agreement was signed, Novitas announced pricing for the new CPT codes applicable to extended AECG monitoring : $ 42.68 for Texas and $49.70 for New Jersey (the January Novitas Rate)

. 137 Given Novitas’ historically st eady $365 per patch rei mbursement rate for the category, the drastic rate cut was devastating news

. Under Bardy ’s split

- billing model, Bardy could not profitabl y serve Medicare patients at the January Novitas R ate. 138

134 Id. § 9.11.
135 Id. § 7.3.
136 Id. at 81.
137 PTO ¶ 32.
138 Tr. 69:24

– 70:3 (Bardy).36 Dr. Bardy described the new rates as “[m]ass murder of the el derly,” 139 and the parties on both sides were “shocked” by Novitas’ pricing decision. 140 Initial feelings of shell shock gave way to disbelief: Bardy , Hillrom and other industry participants concluded that Novitas must have made a mistake. 141 With this premise i n mind, Bardy , iRhythm, BioTelemetry and Preventice launched an intense effort to educate Novitas on how appropriately to value long

- term AECG patches. 142 Hillrom, for its part, supported the effort and made available to Bard y , at Hillrom’s expense, the for mer medical director of Novitas to provide insight on effective messaging

. 143 As o ne Bardy employee put it, the meetings with Novitas represented Bardy ’s “one shot” to persuade Novitas that its drastically reduced proposed r ates were unjustified and unsusta inable

. 144

139 Id. at 50:4

– 17 ( Bardy).
140 Id. at 566:21 (Groetelaars); id. at 492:21 (Frank); id. at 139:3

– 140:4 (LaViolette); id. at 264:9

– 12 ( Burke); JX 412 at 1 (then

- Bardy CEO Kevin Hykes reacting to the news with a single word: “Stunning”) ; JX 526 at 9 (observing that the January No vitas Rate “activated the immune system of the [extended AECG industry” ).
141 Tr. 177:15

– 178:14 (Querry); id. at 492:18

– 493:11 (Frank); id. at 566:19

– 567:2 (Groetelaars) ; see also JX 526 at 9 (observing that the January Novitas Rate “activated the immune system of the [extended AECG industry.” ).
142 PTO ¶ 33; Tr. 73:23

– 77:7 (Bardy).
143 Tr. 217:8

– 13, 231:21

– 24 (Querry ).
144 (Hykes) Dep. 253:11

– 15.37 While the January Novitas Rate rattled Hillrom, its CEO , Groetelaars , took solace in the fact that Hillrom had insisted on a risk

- shifting earnout in the signed Agreement, commenting in an internal email : “Good thing our deal has a risk share ele ment in it and that our ASP is not as high

. . . less downside risk.” 145 Others on his team were less sanguine. Hillrom’s Chief Financial Officer responded to the announcement of the January Novitas Rate (on the day of) by observing, “seems like an MAE to m e.” 146 Hillrom pro mptly engage d outside counsel to evaluate its options under the Agreement. 147 Notwithstanding the uncertainty prompted by the January Novitas R ate , previously announced acquisitions of Bardy com petitors proceeded apace to clos ing

. Withou t any indication that Novitas would adjust the January Novitas Rate, Philips closed its acquisition of BioTelem et ry (originally signed on December 18, 2020) and Boston Scientific closed its acquisition of Prevent ice (signed on January 21, 2021). 148 Hillrom came to view the announcement of the January Novitas Rate differently. O n February 21, 2021, Hillrom notified Bardy that the January Novitas

145 JX 418 at 1; see also Tr. 567:5

– 568:11 (Groetelaars) (explaining his reaction to the news as one grounded in his understanding that the earnout was a “risk

- sharing mechanism”).
146 JX 421.
147 JX 449 at 2.
148 JX 725; JX 726; JX 72 7; JX 728.38 Rate constitute d an MAE under the Agreement , which relieved Hillrom of its obligation to close the Merger

. 149 Exact ly one week later, o n February 28, 2021, Bardy initiated this lawsuit. 150 On April 10, 2021, nearly two months after its initial decision and hav ing met with the leading extended AECG device makers , Novitas announced revised reimbursement rate s in New Jers ey of $ 120.49 and $133.47 , and in Texas of $103.44 and $114.57 (the “ April Novitas Rate”)

. 151 These adjusted rates represent a nearly three

- fold increase from the rates set in the January Novitas Rate , but still mark a 63.5% decrease from Novitas’ 2020 rate of $365. L. Bardy Negotiates with Commercial Payors Following the Novitas Announcements Meanwhile, Bardy engaged with commercial payors to set rates for the new Category I codes. 152 Because commercial payors “deal with thousands of different providers,” t hey typically “are not aware of the policy changes” affecting particular devices and rely upon provide r s like Bardy to alert them to changes and amend

149 JX 562.
150 D.I. 1.
151 PTO ¶ 38; JX 520 at 5

– 22; JX 546.
152 Tr. 245:17

– 22, 252:7

– 13 (Burke).39 contracts as necessary. 153 With one exception, 154 all of Bardy ’s contracted payors have agreed to new rates for the Category I codes in line with their 2020 rates. 155 The likely exp lanation for t he apparent stab ility of Bardy ’s commercial pricing , notwithstanding lower Medicare rates , is that commercial payors focus first and foremost on the value of the service when negotiating price

. 156

153 Id. at 252:14

– 23, 285:7

– 286:1 (Burke).
154 One commercial payor, Cigna, has sought to use the January Novitas Rate and an assignment clause in its existin g contract as leverage to negotiate for significantly lower reimburs ement. Tr. 256:11

– 14 (Burke); id. at 158:7

– 14 (Querry); JX 555; JX 704. Bardy ’s seasoned Vice President of Payor Relations, Dan Burke, testified credibly that: Cigna (his former employer ) had always been a “challenging” payor for Bardy ; its 2020 rates we re significantly below average ; he did not expect Cigna to terminate its contract ; Cigna had not invoked the 60

- day termination process but instead sought to further engage to reach adequa te terms; Cigna’s communications were typical “posturing” ; and Cigna was “fishing” for lower rates with all of the extended AECG providers. Tr. 246:11

– 247:18, 253:18

– 254:4, 256:4

– 10, 257:3

– 258:20, 259:5

– 261:22 (Burke).
155 Tr. 252:24

– 25 5 : 2 (Burke); JX 704; JX 627; JX 497; JX 558 ; JX 620 . iRhythm has likewise maintained similar pricing levels with commercial payors notwithstanding the Medicare rate decrease. JX 665 at 8

– 9 (iRhythm investor call April 12, 2021).
156 Tr. 250:1

– 16, 253:6

– 9, 261:23

– 262:9 (Burke) (explaining that, as a proxy for value, commercial pay ors look to (1) what providers rendering the same service are paying in

network and (2) what their spend is with the device provider as an out

- of

- network provider) ; see also id. at 251:1

– 19 (Burke) (ass erting Medicare rates are not a factor in negotiations with commercial payors) ; id. at 156:21

– 157:12 (Querry) (same) ; id. at 320:19

– 321:20 (Renbaum) (explaining commercial insurers are “focused on themselves and each other,” not Medicare, when negotiating rates)

.40 Once rate negotiations are finalized , commercial payors are “unlikely” to amend contracts until there is another CPT coding change. 157 For that reason, Bardy does not expect any of its commercial payors to renegotiate their contrac ts within the next 12 months. 158 M. Bardy ’s Growth Continues Despite the turbulence introduced by the Novitas r ate reductions and this ensuing litigation, Bardy has continued to grow , setting new records for CAM enrollment and new CAM orders

. 159 In Q1 2021, CA M enrollments increased 13% over Q4 2020 and 85% year

- over - year, while CAM orders increased 12 % over Q4 2020 and 89% year

- over - year. 160 In April 2021, Bardy performed even better,

157 Tr. 285:7

– 286:1 (Burke); id. at 320:19

– 321:2 0 (Renbaum) (“[O]nce they negotiate contracts and have them signed, they’re just

— they’re done. They put them away and they move on. They’re working on hundreds, maybe thousands, of contracts all year lo ng. So once they’re done with [] straightforward one or two CPT code contracts, they’re happy to put those away and move on with their jobs.”).
158 Tr. 285:19

– 286:1 (Burke).
159 Tr. 202:7

– 203:5 (Querry) (“[O]ur focus as a business is on growth

. . . . This is where we are today in our business. We’re in this gr owth phase.”); id. at 190:23

– 191:23 (Querry); JX 702 at 3

– 5.
160 Tr. 190:23

– 191:23 (Querry); JX 702 at 3

– 5 ( Bardy Q1 financial update).41 exceeding 21,000 orders in a month for the first time ever. 161 These numbers a re on target with Bardy ’s September 2020 forecast provided to Hillrom pre

- M erger. 162 Notwithstanding this growth, Bardy ’s revenue declined approximately 11% in Q1 2021 compared to Q4 2020 because of the rate change , although that revenue was still up 56% ov er Q1 2020

. 163 Bardy expects its growth to continue, and its unit economics with res pect to Medicare beneficiaries remain s profitable

. 164 N. Industry Participants Continue to Engage with Novitas and CMS Dissatisfied with Novitas’ current rates, industry partici pants in extended AECG monitoring continue to press for upward pricing revisions. iRhythm has stated publicly that it is continuing a “multi

- pronged approach to activating the specialty physician societies, including the AMA, the ACC and HRS, our individu al physician custo mers and patients to directly engage decision

- making authorities in the clinical importance of long

- term continuous ECG monitoring.” 165 iRhythm’s strategy included meeting with CMS in mid

- March to discuss pricing

161 Tr. 192:8

– 15 (Querry).
162 Id. at 195:14

– 19, 197:1

– 12 (Querry).
163 Id

. at 192:18

– 193:11 (Querry).
164 Id. at 189:12

– 21 (Querr y).
165 JX 646 at 6.42 methodologies, including t hose that were us ed by the RUC and other alternatives. 166 And more “meetings are being scheduled [and] have been scheduled” to speak with “multiple constituents both among the MACs as well as with CM S ” in the coming months. 167 iRhythm expects to have an init ial indication of whether CMS will set national rates for 2022 when CMS publishes its proposed rule in July or August this
year . 168 For its part, Bardy has engaged with a decisionmaker at Novitas, Dr. Andrew Bloschichak , to discuss the medical, public healt h and related economic challenges that extended AECG monitoring solve, including the benefits of the CAM patch specifically. 169 Bardy believes that rates for long

- term AECG monitoring will continue to change to better reflect its clinical and economic value

. 170

166 Id. at 8.
167 JX 823 at 14 ; see also Tr. 832:17

– 833:5 (Noether) ( recounting iRhythm ’s public announcement that it was pursuing “three different mechanisms to attempt to secure higher reimbursement for the LHM”).
168 JX 823 at 5.
169 Tr. 51:20

– 52:2, 56:7

– 57:23 (Bardy); JX 716; JX 717.
170 Tr. 51:20

– 52:2, 56:7

– 57:23 (Bardy).43 O. Procedural History As noted, Plaintiff filed its Complaint on February 28, 2021, seeking specific performance of the Agreement. 171 Defendants answered and counterclaimed for declaratory judgment on April 6, 2 021

. 172 After pretrial briefing, 173 a three

- day trial was held from May 5 through 8

. 174 The parties simultaneously submitted o pening
p ost

- trial briefs on May 19, 2021 , 175 and replie s on May 27, 2021

. 176 The Court heard closing argument s on J une 4, 2021, after which the matter was deemed submitted for de cision. 177 II. ANALYSIS Bardy asserts Hillrom ’s failure to close the Merger breached the Agreement ; Hillrom counterclaims for a declaratory judgment that it s obligation to close is

171 D.I. 1.
172 D.I. 52.
173 D.I. 65

– 66.
174 D.I. 85

– 87.
175 D.I. 82 (Hillrom Post

- Trial Opening Br.) (“ Defs.’ Post

- Trial Opening Br. ”); D.I. 83 ( Bardy ’s Opening Post

- Trial Br.) (“ Pl.’s Post

- Trial Opening Br. ”).
176 D.I. 90 (Hillrom Post

- Trial Reply Br.) (“ Defs.’ Post

- Trial Reply Br.”); D.I. 91 (“Pl.’s Post

- Trial Reply Br.”).
177 D.I. 98 (“Post

- Trial Oral Arg.”)

.44 excused

. Hillr om offers two separate but related grounds to justify its
nonper formance , one contractual and one grounded in our common law

. 178 First, in its showcase argument, Hillrom asserts that the January Novitas Rate and April Novitas Rate both constituted an MAE under the Agreement. Though the Agreement’s MAE contains carve

- ou ts for events generally affecting the market and change s in “L aw ,” Hillrom asserts neither carve - out applies and, even if they did, the MAE’s disproportionate

- impact excep tion to th ose carve - outs renders the Novitas r ate decrease an MAE nonetheless

. Secon d , Hillrom invokes the frustration of purpose doctrine , which “provides an escape for an acquirer if the target experiences a catastrophe during the executory period.” 179 According to Hillrom , the frustration of purpose doctrine operates to excuse its oblig ation to close here because the value of Bardy is so diminished that the Merger’s essential purpose

— “ to acquire something of value”

— is frustrated. Both of Hillrom’s theories turn on the Court finding as fact that Bardy ’s business has suffered materially . But Hillrom’s MAE argument, unlike its

178 I note that Hillrom di d not brief and so waiv ed its counterclaims that Bardy breached covenants and representations in the Agreement (i) by improperly holding Medicare claims without seeking reimbursement ; and (ii) in connection with its ongoing discussions with one commercial payor regarding its con tracted reimbursement rate for the CAM patch. Emerald P’rs v. Berlin , 726 A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are deemed waived.”).
179 Akorn , 2018 WL 4719347, at *57 (internal quotations omitted).45 frustration of purpose argument, is predicated , as a practi cal matter , on the Court’s acceptance of its proffered interpretation of the bargained

- for language contained in the Agreement

. “The primary goal of con tract interpretation is to attempt to fulfill, to the extent possible, the reasonable shared expectat ions of the parties at the time they contracted.” 180 “If, on its face, the contract is unambiguous, extrinsic evidence may not be used to interpret the inte nt of the parties, to vary the terms of the contract or to create an ambiguity.” 181 Because it happens so often, this court barely takes notice when parties to a contract agree th at the contract is unambiguous but di sagree in litigation as to what the purpo rtedly unambiguous language actually mean s . “Of course, dissensus regarding a cont ract’s meaning among its signatories does not an ambiguous agreement make; ‘a contract is ambiguous only when the provisions in controversy are reasonably or fairly suscepti ble of different interpretations or may have two or more different meanings.’” 182

180 Comrie v. Enterasys N etworks, Inc. , 837 A.2d 1, 13 (Del. Ch. 2003) (internal quotations omitted).
181 S’holder Representative Servs. LLC v. Gilead Scis., Inc. , 2017 WL 1015621, at *16 (Del. Ch. Mar. 15, 2017) (internal quotations omitted).
182 Pearl City Elevator, Inc. v. Gieseke , 2021 WL 1099230, at *9 (Del. Ch. Mar. 23, 2021) (quoting Rhone

- Poulenc Basic Chems. Co. v. Am. Motorist Ins. Co. , 616 A.2d 1192, 1196 (Del. 1992)) ; see also Greenstar IH Rep, LLC v. Tutor Perini Corp ., 2019 WL 6525206, at *9 (Del. Ch. Dec. 4, 2019) (holdi ng that a “contract is unambiguous when the46 When undertaking to construe a contract, our Supreme Court has instructed that the trial court must consider “[t]he basic business relationship between [the] parties” so that it can “give sensible life” to the a greement
. 183 Accordingly, I begin the analysi s by review ing the context in which the parties negotiated the Agreement before turning to the contractual language. “With the Agreement’s commercial
contex t in hand, and min dful that my understanding of the parties’ contractual relationship cannot overwr ite an unambiguous contract,” 184 I then proceed to analyze whether the Novitas r ate adjustments constitute an MAE as defined

. A. The Basic Business Relationship Between These Parti es Both parties agree that Hillrom’s interest in Bardy was sparked by the Company ’s growth prospects and its best

- in

- class LTH device , the economics of which depended in significant part on the rate at which Medicare priced its product. 185 The parties also agree that Hillrom , as a sophisticated healthcare

agreement’s ordinary meaning leaves no room for uncertainty, and the plain, common, and ordinary meaning of the words . . . lends itself to only one reasonable interpretation.” ).
183 See Chi

. Bridge & Iron Co. v. Westinghouse Elec. Co. LLC , 166 A.3d 912, 926

– 27 (Del. 2017).
184 Pearl City , 2021 WL 1099230, at *9.
185 JX 365 at 3, 9; Tr. 489:11

– 22 (Frank); JX 366 at 2 (describing strategic rationale for Merger); JX 51 at 24 ( presentation to Hillrom ’s board explaining B ardy had developed a “[b]est in class device”); JX 204 at 3 (Hillrom’s Dr. Johannes de Bie remarking , “I have little doubt that the [ Bardy ] solution (CAM+IDTF) is currently the clinically best solution for [extended AECG] for the diagn osis of infrequent ar rhythmias and that it is not easy to47 oper ator, knew that the price

- setting process for devices with in the same CPT code s as the CAM patch was underway during the Merger negotiations and that the methodology by which Novitas arrived at its pri cing determination was opaque , rendering it “not [] as intellectually defensible from a valuation perspective as the rates set by CMS.” 186 Th e parties dispute, however, whether and to what extent the y intended to allocate the risk of Novitas making a downwa rd adjustment to the reimbursement rate for the relevant CPT codes within the Agreement

. As an initial matter , Hillrom argue s the Court should not concern itself with how the parties allocat ed risk in the contract because that allocation is “irrelevant” when interpreting an MAE clause

. 187 Hillrom quot es Vice Chancellor Laster in Akorn , Inc. v. Fresenius Kabi AG for the proposition that such inquir ies “would replace the enforcement of a bargained

- for contractual provision with a tort

- like

c oncept of assumpt ion of risk, where the outcome would turn not on the contractual language, but on an ex

- post sifting of what the buyer learned or could have learned

copy”); see also (Blanchard) Dep. 46:3

– 11 ( noting that Dr. de Bie is Hillrom’s “chief scientist expert, ECG person”); Tr. 36:11

– 38:14, 84:19

– 24 (Bardy) (agreeing with Dr. de Bie’s assessment); id. a t 104:2

– 17 (LaViolett e) (same).
186 JX 632 ¶ 25 (Expert Report of Charlotte L. Kohler, submitted on behalf of Hillrom) ; accord JX 671 ¶ 2 (Rebuttal Expert Report of Adi Renbaum, agreeing with Kohler that Novitas’ methodology is not as “intellectually defensi ble” as CMS’s ).
187 See Defs.’ Post

- Trial Opening Br. at 48.48 in due diligence.” 188 While Hillrom quotes Akorn accurately, it misses Vice Chancellor Las ter’s point. The seller in Akorn was urging the court to discount the buyer’s MAE claim because the buyer knew, or should have known, of the events giving rise to the MAE through its due diligence. The court correctly rejected that argument. 189 The court then explained tha t “[t]he proper way to allocate risks in a contract is through bargaining between parties.” 190 In the very first sentences of Chicago Bridge , Chief Justice Strine wrote on behalf of our Supreme Court: “In giving sensible lif e to a real

- world contract, cou rts must read the specific provisions of the contract in light of the entire contract. That is true in all commercial contexts, but especially so when the contract at issue involves a definitive acquisition agreement address ing the sale of an entire busin ess.” 191 That language is unequivocal. Here, it demands that the Agreement’s

188 Akorn , 2018 WL 4719347, at *60.
189 See id. (rejecting a general MAE clause regime that would result in widespread “ex

- post sifting of what the buyer learned or could have learned in due diligence” ).
190 Id. (quoting Wal

- Mart Stores, Inc. v. AIG Life Ins. Co. , 872 A.2d 611, 624 (Del. Ch. 2005) , aff’d in part, rev’d in part on other grounds , 901 A.2d 106 (Del. 2006)).
191 Chi

. Bridge , 166 A.3d at 913

– 14; see also GMG Cap. Invs ., LLC v. Athenian Venture P’rs I, L.P. , 36 A.3d 776, 778 (Del. 2012) (“‘In upholding the intentions of the parties, a court must construe the agreement as a whole, giving effect to all provisions therein.’ The meaning inferred from a particular provision cannot control the meaning of the entire agreeme nt if such an inference conflicts with the agreement ’ s overall scheme or plan.” (quoting E.I. du Pont de Nemours and Co., Inc. v. Shell Oil Co. , 498 A.2d 1108, 1113 (Del. 1985))).49 MAE provision should not be read , as Hillrom suggests, in isolation

. Rather , the Court must situate the MAE provision within the broader contractu al scheme and commercial context

. L ike man, under Delaware law, no contractual provision is “ an island , entire of itself

. ” 192 According to Hillrom, e ven if the Court chooses to consider the Agreement’s risk allocation scheme , it is clear the parties did not intend to allocate the risk of a Medicare reimbursement rate reduction because neither party perceived there to be any such risk

. Hillrom emphasizes that none of the MAE’s carve

- outs “include
any language whatsoever mentioning reimburs ement rates,” making it “fantastical to believe th at these sophisticated parties intended to carve out significant changes in reimbursement rates from the Company MAE definition.” 193 T he preponderance of the evidence supports Hillrom’s contention that , at the time of signing, neither party viewed the risk of a Medicare price shift comparable to the January Novitas Rate as substantial

. A January 11, 2021 presentation to Hillrom’s B oard seeking approval of the Agreement listed seven “key risks,” and

192 See John Donne, Devotions Upon Emergent Occasions , Meditation XVII 575 (He nry Alford ed., 1839) (1624) (“ No man is an island, entire of itself; every man is a piece of the continent, a part of the main; if a clod be washed away by the sea, Europe is the less, as well as if a promo ntory were, as well as if a manor of thy friend's or of thine own were; any man's death diminishes me, because I am involved in mankind, and therefore never send to know for whom the bell tolls; it tolls for thee. ”)

. 193 Defs.’ Post

- Trial Opening Br. at 2 ( emphasis in original).50 lower re imbursement rates was not among them. 194 W itnesses o n both sides testified to their shock and dismay at Novitas’ sudden , dramatic shift in reimbursement rate pricing

. 195 The parties’ surprise makes sense given that Novitas had for eight years pric ed the CAM patch ’s CPT code s consistently at around $365 in th e relevant regions

. That does not mean, however, that the se sophisticated parties decided to ignore entirely th e risk of a Medicare rate adjustment in the Agreement

. In this regard, Hillrom’s story t hat “no one ever contemplated a rate decrease” simply d oes not square with the preponderance of the evidence

. 196 Hillrom had no fewer than five internal and external advisors reviewing reimbursement issues , 197 s ome of whom warned that , because Novitas was the highest

- priced MAC contractor , “[p]rojections built off one or two outlier payors [including Novitas] are a huge red flag” and may be subject to material change. 198

194 JX 365 at 17.
195 (Burke ) Dep. 154:10 (testifying that the January Novitas Rate was “unfathomable”); Tr. 68:7

– 10 (Bardy) (stating he was in “disbelief” over Novitas’ sudden rate shift); JX 412 at 1 (then

- Bardy CEO Kevin Hykes react ing with a single word: “Stunning”); Tr. 492:21 ( Frank) (stating the January Novitas Rate “was a shock”); id. at 566:21 (Groetelaars) (“I was really shocked.”).
196 Defs.’ Post

- Trial Opening Br. at 3 (emphasis added)

. 197 Tr. 531:20

– 532:3 (Frank); id. at 581:1 2

– 18 (Groetelaars) (agreeing Hillrom “had the adv ice of outside experts and consultants to understand the various mechanics and the decision dates that were to occur around reimbursement”); JX 392; JX 434.
198 JX 197 at 1

– 2 ( advising Hillrom that the “[Novitas reimbursement rate] is at risk in my opinion . . . .”); see also JX 150 at 1, 12

– 14 (Muller report submitted to CMS proposing51 It was also no secret that the methodology by which MACs such as Novitas ca lculate reimbursement rates is notoriously murky , making pricing pred ictions less reliable. 199 Indeed, Bardy ’s CFO , Mark Querry , testified credibly that he received questions from Hillrom about reimbursement during “[a] lmost

. . . every interaction with th e Hillrom team” throughout due diligence. 200 And yet, Hillrom went forw ard with signing the Agreement even after CMS declined to set a national rate because it lacked specific device cost information

— cost information to which Hillrom had access both before and after the CMS d ecision was announced in December 2020. 201

Medicare reimbursement rates between $60 and $100 for the CAM patch’s CPT codes); (R oe hrich) Dep. 85:18

– 92:7 ( acknowledging Hillrom was aware of the Muller Report and received Parr’s warning concerning reimbursement rates, and further stating that Hillrom was aware other MACs paid in the range of $45 to $60, though Hillrom attributed that to low claim volume). As noted, this was not the first such warning Hillrom received from its outside advisors. See JX 51 at 109 (Health Advances identifying in May 2020 the risk that reimbursement for extended AECG could “switch[] to Category I with a significant reduction in v alue (>20

- 30%). ” (emphasis added)); see also JX 165 at 11 (Health Advances report stating with respect to reimbursement changes: “Anticipate modest (~5

- 10%) declines in LTH revenue, but feedback is divergent on impact and exact details are still uncertain” ).
199 Tr. 371:20

- 372:11 (Renbaum); id. at 634:14

– 636:1 (Kohler); id

. at 241:5

– 22 (Querry); JX 671 at 2.
200 Tr. 168:8

– 11 (Querry).
201 See, e.g. , JX 391 (Hillrom DCF setting out CAM patch cost) ; JX 173 at 22; JX 153 (Bardy financial model provided to Hillrom); Tr. 167:23

– 268:7 (Querry) (describing Hillrom’s diligence as req uiring “a lot of discussions around the topic of reimbursement, the topic of revenue forecasting, and the topic of cost, and cost of sales in particular. ”).52 Hillrom’s contention that the parties ignored the risk of a reimbursement rate reduction (notwithstanding advisors’ warnings) is also belied by the Agreement’s plain text. Specifically , the Agreement contains an earnout provision pegged to revenue targets
. 202 Under this scheme, l ower Medicare reimbursement rates for the CAM patch lowers Bardy ’s revenue, which in turn lowers t he price Hillrom would ultimately pay to Bardy sto ckholders under the Agreement’s earnout

. 203 Hillrom understood this . Indeed, u pon announcemen t of the January Novitas Rate , Hillrom’s CEO , John Groetelaars , immediately remarked internally, “Good thing our deal has a risk share element to it [through the earnout] and that our ASP is not as high

. . . less downside risk.” 204 Groetelaars’ kneejerk re action to the January Novitas R ate

— appreciation of H illrom’s foresight in negotiating the earnout

— contradicts Hillrom ’s argument that a material downward adjustm ent of the CAM patch’s Medicare reimbursement rate was so beyond the pale that neither side bot hered to allocate that risk beyond the MAE

. 205

202 JX 37 6 § 1.14.
203 See id.
204 JX 418 at 1; Tr. 567:5

– 568:8 (Groetelaars).
205 Hillrom’s Frank testifie d at trial that, had Hillrom “wanted to offload risk on the Medicare purchase price” through the earnout, it “would have structured the earnout to say ex actly that.” Tr. 481:22

– 482:2 (Frank). But, as explained, the earnout’s revenue

- based payout did func tion to offload risk on to Bardy should the proposed Medicare rate adjustments stick. It is perfectly rational for the parties to have allocated that ris k through53 Of course, the fact the parties allocated the risk of a Medicare rate adjustment through an earnout provision does not mean the adjustment cannot also trigger an MAE when it comes to fruition. Thus, while Bard y ’s proffered “big picture” provide s a more accurate depiction of the parties’ contemporaneous understanding of the Agreement (and the ris k allocation memorialized therein), any resolution of
t he MAE dispute u ltimately must be grounded in the language of t he contract itself. 206 To be sure, full appreciation of how the parties understood the commercial context of the Agreement, and how that i nformed their contract design , does lead to some understanding of why the MAE provision did not expressly address fluct uations in Medicare r eimbursement rates
. But, in the final analysis, “Delaware has long adhered, and continues to adhere, to the objecti ve theory of contracts.” 207 “While [our courts] have recognized that contracts should be read in full and situated in th e commercial context between the parties, the background facts cannot be used

earnouts built on contingent revenue milestones; Bardy ’s revenue projections were dependent i n significant part on Medicare’s reimbursement rate. See JX 440 at 3 (Hillrom’s internal DCF valuation after Novitas’ rate change); JX 613 at 26, 28 ( Bardy’s projections based on lower Medicare rates).
206 For example, the earnout would adjust Hillrom’s pur chase price if an event affecting Bardy only reduced its revenue to zero indefinitely, but no party can reasonably dispute the occurrence of an MAE in that event (provided, of course, that such an event was covered by the MAE’s contractual language).
207 S olomon v. Fairway Cap., LLC , 2019 WL 1058096, at *9 & n.89 (Del. Ch. Mar. 6, 2019) (citing Eagle Indus., Inc. v. DeVilbiss Health Care, Inc. , 702 A.2d 1228, 1232

– 33 (Del. 1987)).54 to alter the language chosen by the parties within the fou r corners of their agreement.” 208 Accordingly, “ [a] s is the Delaware way, I turn to the words the parties agreed to in th eir contract as the best evidence of their intent.” 209 B. The April Novitas Rate Does Not Constitute an MAE The parties agree that, under the Agreement, Hillrom would have no obligation to close and may terminate the Agreement in the event of a Company MAE

. 210 The parties vigorously dispute, however, whether an MAE has actually occurred. To review, the Agreement’s MAE reads in relevant part : “Company Material Adverse Effect” means any fact, event, circumstance, change, effect or condition that, individually or in the aggregate, has had, or would reasonably be expected to have a material ad verse effect on . . . the Business of the Acquired Companies, taken as a whole; provided , however , that . . . none of the following, alone or in combination, will constitute, or will be considered in determining whether there has occurred, and no event, ci rcumstance, change, effect or condition resulting from or arising out of any of the following, alone or in combination, will constitute, a Company Material Adverse Effect:

. . . (ii) any condition or change in economic conditions generally affecting the economy or the industries or markets in which the Acquired Companies operate (including increases in the cost of products,

208 Town of Cheswold v. Cent. Del. Bus. Park , 188 A.3d 810, 820 (Del. 2018) (in ternal quotations and footnote omitted).
209 Pearl City , 2021 WL 1099230, at *12.
210 JX 376 §§ 2.7, 5.1(a), 5.1(c), 6.1(b).55 supplies, materials or other goods purchased from th ird party suppliers); . . . (v) any change in any Law (including any COVID

- 19 M easures and any Health Care Law) or GAAP or any interpretation thereof; provided , that, with respect to a matter described in any of the foregoing clauses (ii)

- (vii), any su ch fact, event, circumstance, change, effect or condition may be taken into accou nt in determining whether or not there has been a Company Material Adverse Effect to the extent such matter has a materially disproportionate impact on the Acquired Companies as compared to other similarly situated companies operating in the same industrie s or locations, as applicable, as the Business. 211 This provision, like “ [t] he typical MAE clause [,] allocates general market or industry risk to the buyer, and company

- speci fic risks to the seller.” 212 “From a drafting perspective, the MAE provision acc omplishes this by placing the general risk of an MAE on the seller, then using [carve

- outs] to reallocate specific categories of risk to the buyer.” 213 “The principal purpose of carve outs from the definition of material adverse events or changes seems to be to remove systemic or industry risk from the MA [E] condition, as well as risks that are known by both parties at the time of the agreement.” 214 “A standard exclusion from the b uyer’s acceptance of general

211 Id. at 8 8

– 8 9 (emphasis in or iginal) (formatting added).
212 Y. Carson Zhou, Essay, Material Adverse Effects as Buyer

– Friendly Standard , 91 N.Y.U. L. Rev. Online 171, 173 (2016) [hereinafter Zhou, Material Adverse Effects ].
213 Akorn , 2018 WL 4719347, at *49.
214 Id. at *49 n.531 (quoting A lbert Choi & George Triantis, Strategic Vagueness in Contract Design: The Case of Corporate Acquisitions , 119 Yale L.J. 848, 867 (2010)).56 market or industry risk returns the ris k to the seller when the seller’s business is uniquely affected.” 215 When seeking to avoid closing by invoking an MAE clause , the buyer bears the initial “burden to prove the Seller suffere d an effect that was material and adverse.” 216 Upon carrying that b urden , the burden then shifts to the seller (or target)

“ to prove that the source of the effect fell within [a carve

- out].” 217 If the target carries that burden, then the buyer must prove, un der the operative MAE provision , that the target’s “performance w as disproportionate to [similarly situated companies operating in its industry] , bringing the case within an exclusion” to the carve

- outs. 218 Bardy raises at the threshold a textual argument t hat the April Novitas Rate is not an “event” that affects the “Business” as defined in the Agreement. I take up that issue first before considering whether, in fact, an MAE “has, or would reasonably be expected to have , ” occurred. 219

215 Id. at *49.
216 AB Stable VIII LLC v. Maps Hotels & Resorts One LLC , 2020 WL 7024929, at *51 (Del. Ch. Nov. 30, 2020) ; see also Snow Phipps , 2021 WL 1714202, at *29 (explaining the party claiming an MAE “b[ears] the initia l, heavy burden of proving that an event had or would reasonably be expected to have a material adverse effect on [the target]”).
217 AB Stable , 2020 WL 7024929, at *51; Snow Phipps , 2021 WL 1714202, at *29.
218 Akorn , 2018 WL 4719347, at *59 n.619 ; JX 376 at 8 8

– 89.
219 JX 376 at 88

– 89.57 The April Novitas Rate Wa s an “Event” Impacting Bardy ’s “Business” Under the Agreement, a general MAE occurs where “any fact, event, circumstance, change, effect or condition that, individually or in the aggregate, has had, or would reasonably be expected to have a material a dve rse effect on . . . the Business of the Acquired Companies.” 220 In this regard, when defining the “Business,” the parties stipulated that Bardy and its subsidiary : are collectively engage d . . . in the design, development, manufacture, production, assemb ly , marketing, promotion, distribution, sale, clinical use and other commercialization activities involving certain currently

marketed and in

- development cardiac digital health, diagnostic, data management and remote patient monitoring devices (including a mb ulatory cardiac monitors), technologies and services (including independent diagnostic testing, interpretation and cardiac monitoring services)

. 221 Bardy makes two arguments as to why the Novitas rate adjustments did not affect its “Business” as contempl ated in the Agreement. First , it quotes then

- Vice Chancellor Strine in In re IBP, Inc. Shareholders Litigation to argue that the Novitas rate adjustments were not “event s ” under the Agreement beca use an MAE “is best read as a backstop protecting the acqui ror from the occurrence of unknown events , ” and the risk of a change in reimbursement rates was not “unknown” at the time the

220 Id.
221 Id. at 5.58 parties signed the Agreement. 222 On this point, Bardy ’s attempt to rend er the Agreement’s language dead letter by pointing in the a bstract to the theoretical underpinnings of the typical MAE regime cannot be countenanced

. With rare exception, Delaware law requires courts to enforce contracts as written. 223 As previously dis cussed , in Akorn , the seller argued that an event could not
q ualify as an MAE because it was discoverable during diligence. 224 Vice Chancellor Laster expressly rejected that argument, stating : [the party] goes too far by transforming “ unknown events ” into “ known or potentially contemplated risks. ”

. . . The IBP dec ision interpreted a b road MAE clause that did not contain lengthy lists of exceptions and exclusions, and then

- Vice Chancellor Strine did not suggest that he was prescribing a standard that would govern all MAE clauses , regardless of what the parties speci fically bargained for in the contract. 225

222 Pl.’s Post

- Trial Opening Br. at 40 ( quoting In re IBP, Inc. S’holders Litig., 789 A.2d 14, 68 (Del. Ch. June 15, 2001) as corrected (Del. Ch. June 18, 2001) (emphasis added) )

. 223 See, e.g. , Abry P’rs V L.P. v. F & W Acq

. LLC , 891 A.2d 1032 (Del. Ch. 2006) (Strine, V.C.) (holding Delaware policy will not abide by a contractual limita tion of a remedy where the fraudster intentionally misrepresents a fact embodied in a contract).
224 Akorn , 2018 WL 4719347, at *60.
225 Id. A s Professor Robert Miller points out, then

- Vice Chancellor Strine’s full quote in IBP is better understood when place d into its proper context. Robert T. Miller, Material Adverse Effect Clauses and the COVID

- 19 Pandemic , 7 n.30 (Univ. Iowa Coll. L. Legal Stud. Rsch. Paper, No. 2020

- 21, 2020) [hereinafter Miller, COVID

- 19 ] ; see AB Stable , 2020 WL 7024929, at *56

– 57 & n.204

– 06 (Del. Ch. Nov. 30, 2020) (citing favorably to Professor Miller’s COVID

- 19 article). The full quote in IBP reads: “Merger cont racts are heavily negotiated and cover a large number of specific risks explicitly. As a r esult, even where a Material Adverse Effect condition is as broadly written as the one in the Agreement , that provision is best read as a backstop protecting the acqu iror from the occurrence of unknown events that substantially threaten the overall earning s potential of the target in a durationally

- significant manner.” IBP , 789 A.2d at 68. The second sentence59 Here, as in Akorn , the parties structured the MAE definition to incorporate carve outs and exceptions to allocate risk. The parties could have written the MAE to include only “ un known fact s , event s , circumstance s , change s , effect s or condition s ”; they did not. Instead, they chose to adopt a broadly

- worded general MAE and qualify that language with a list of carve

- outs.

“ It is not the court's role to rewrite the contract between sophisticated market participants , allocating the risk of an agreement after the fact, to suit the court ’ s sense of equity or fairness.” 226 The Agreement allows no room for Bardy ’s argument that an “event” under the Agreement’s MAE can only be an unanticipated event

. That construction, th erefore, is rejected. Second , Bardy asserts that , by confining an MAE to changes only to Bardy ’s “Business ,” the parties intended that only those events that affected the nature of

in the quote is clearly intended to be read in contrast to the first, pitting “unknown events” against “specific risks.” A more precisely framed co ntrast with “specific risks” would be “unspecified risks or events,” which is language more consistent with what then

- Vice Chancellor Strine described as a “backstop” provision. Miller, COVID

- 19 , at 7 n.30.
226 Wal

–

Mart Stores , 872 A.2d at 624; see also D eLucca v. KKAT Mgmt., L.L.C. , 2006 WL 224058, at *2 (Del. Ch. Jan. 23, 2006) (Strine, V.C.) (“[I]t is not the job of a court to relieve sophisticated parties of the b urdens of contracts they wish they had drafted differently but in fact did not. Rather, it is the court ’ s job to enforce the clear terms of contracts.”); Allied Cap. Corp. v. GC

– Sun Hldgs. , L.P. , 910 A.2d 1020, 1030 (Del. Ch. 2006) (Strine, V.C.) (explaini ng that Delaware courts “will not distort or twist contract language” because , in doing so, “ the reliability of written contracts is undermined, thus diminishing the wealth

- creating potential of voluntary agreements”).60 Bardy ’s operations could qualify as MAEs

. Unlike the agreements in leading Delaware MAE cases

— which define a material adverse effect by reference to “the business, financial condit ion , or results of operations of the Company and its Subsidiaries, taken as a whole” 227

— the parties’ chosen definition of Bardy ’s “Business” makes no re ference to the Company’s financial condition but instead focuses on the Company’s operations

. According to Bardy , b ecause changes to reimbursement rates affect only Bardy ’s revenue and not its operations , th os e changes cannot constitute an MAE because the y do not affect Bardy ’s “ B usiness” as define d

. Hillrom responds that the Novitas r ate decrease s affect the Company’s “sale s ,” “marketing,” and “other commercialization activities” for ambulatory cardiac monitors and associated devices. Accordingly, says Hillrom, the rate decreases affect the Compa ny’s operations. The term “MAE Objects” was coined to describe the “object that must be materially adversely changed in order to result in a [MAE] under the agreement.” 228

227 See AB Stable , 2020 WL 7024929, a t *62 (emphasis added) ; Akorn , 2018 WL 4719347, at *56 (same); Hexion , 965 A.2d at 737 (same); see also Snow Phipps , 2021 WL 1714202, at *28 (MAE definition included “the financial condition, business, properties or results of operations of the Group Compa nies, taken as a whole.”); IB P , 789 A.2d at 65 (MAE definition included “the condition (financial or otherwise), business, assets, liabilities or results of operations of [IBP] and [its] Subsidiaries taken as whole.”).

228 Robert T. Miller, Canceling the De al: Two Models of Material Adverse Change Clauses in Business Combination Agreements , 31 Cardozo L. Rev. 99, 11 5 (2009); see also AB Stable , 2020 WL 7024929, at *62 & n.128

– 30 (recognizing Miller’s “MAE Objects”61 This list is carefully crafted by the deal parties , 229 and in this case , the MAE O bjects identified in the Agreement apparently differ from th ose most frequently found in agreements containing MAE clause s . 230 As a matter of contract construction, the Court must respect the parties’ bargain by giv ing meaning to the precise words they have chosen for their agreement. 231 With that said, there are some commonly employed MAE Objects that simply cannot be construed i n isolation ; for example, it is difficult to conceive how a negative “result of operation s, assets, or liabilities” could not affect the separate MAE Object concerning an “adverse change in financial condition

. ” 232

term as “useful” and concluding the MAE defi nition’s omission of the term “prospects” was “generally favorable to the seller.”).
229 See Snow Phipps , 2021 WL 1714202, at *28 n.370 (citing Lou R. Kling & Eileen T. Nugent, Negotiated Acquisitions of Companies, Subsidiaries and Divisions § 11.04[9] (2020 ed.)).
230 See Mill er, Canceling the Deal , 31 Cardozo L. Rev. at 116 (documenting the frequency with which MA E Objects appear in a sample of contract MA E definitions )

. Based on Miller’s sample, t he terms that most frequently appear , in order, are “business ,” “financial condition,” “results of operations,” “assets,” “liabilities,” “properties,” “condition (other than financial),” “operations” and “prospects”; none of those terms appear in the Agreement’s definition of Business. Id.
231 Solomon , 2019 WL 105809 6, at *9.
232 See Miller, Canceling the Deal , 31 Cardozo L. Rev. at 116; see also Hexion , 965 A .2d at 741 (“It is a maxim of contract law that

. . . a contract should be read so as not to render any term meaningless.”); Pasternak v. Glazer , 1996 WL 549960 , a t *3 (Del. Ch. Sept. 24, 1996) (“An interpretation of a contract that renders one or more terms redundant is not preferred over a construction that gives effect to each of the agreement's terms

. ”) ; but see U.S. West, Inc. v. Time Warner Inc. , 1996 WL 30 744 5, at *15 (Del. Ch. June 6, 1996)62 In this case, it is not reasonable to co nstrue the definition of “Business , ” and its identified MAE Objects, so narrowly that it w ould remove a sudden and dramatic decrease in what Bardy can charge for its services from the reach of the Agreement’s MAE clause. Per the Agreement, the “ Business ” is “collectively engaged” in the

e numerated MAE Objects , including “commercialization acti vities.” “Engage” is defined in Black’s Law Dictionary to mean “to employ or involve oneself; to take part in; to embark on.” 233 A vernacular definition of “ c ommerci alize” is “to manage on a business basis for profit; to develop commerce in; to exploit for profit; to debase in quality for more profit.” 234 Bardy ’s “engage[ment]” in “commercialization activities,” then, is dependent in part on its revenue and its profit margin on CAM patch sales

. The Novitas r ate decrease, therefore , affect s the Company’s “Bu siness” under a plain reading of that term’s definition.

(“While redundancy is sought to be avoided in interpreting contracts, this principle of construction does not go so far as to counsel the creation of contract meaning for which there is little or no support in order to avo id redundancy.”).
233 Engage , Black’s Law Dictionary (11th ed.); accord Engage , Cambridge English Dictionary , https://dictionary.cambridge.org/dictionary/english/engage (last visited June 22, 2021) (“to become involved, or have contact, with someone or so met hing”).
234 Commercialization , Merriam

- Webster, https://www.merriam

- webster.com /dictionary/ commercialization (last visited June 22, 2021); accord Commercialization , Cambridge English Dictionary , https://dictionary.cambridge.org/dictionary/ english/ comme rcialization (last visited June 22, 2021) (“the organization of something in a way intended to make a profit”).63 This reading is supported by other provisions of the Agreement . Specifically, the Agreement carves out from an “ event ” otherwise qualifying as an MAE : the failure of the Company to meet any estim ate of revenues, earnings or other financial projections, performance measures or operating statistics (provided that the facts and circumstances underlying any such failure not otherwise excluded from this definition of Company Material Adverse Effect wil l be considered in determining whether there has occurred a Company Material Adverse Effect) . . . . 235 T his carve - out wou ld be superfluous had the parties intended to exclude any non operations related events affect ing Bardy ’s defined “Business” from the g eneral MAE in the first instance , contrary to principles of contract construction well

- settled under Delaware law

. 236 Pla ced in proper context, then, Bardy ’s proposed construction of “Business” is unreasonable

.
***** Having determined the Novitas r ate de crease w as an “event” affecting Bardy ’s “Business , ” the question remains wh ether the rate decrease w as also an MAE under the Agreement . I endeavor to answer that question n ext.

235 JX 376 at 8 8 ; see also Robert T. Miller, What Do Exceptions in MAE Definitions Exc ept? , B US
. L. T ODAY (May 20, 2021) https://businesslawtoday .org/2021/05/what

- do

exceptions

- in

- mae - definitions

- except/#_ftnref3 ( cautioning courts to interpret MAE exceptions by reference to the actual MAE event, as opposed to the knock

- on effects of those events).
236 See NAMA Hldgs., LLC v. World Mkt. Ctr. Venture, LLC , 948 A.2d 411, 419 (Del. Ch. 2007), aff ’ d , 945 A.2d 594 (Del. 2008) (“Contractual interpretation operates under the assumption that the parties never include superfluous verbiage in their agreement, and that each word should be given meaning and effec t by the court.”).64 T he Novitas Rate Decrease W as Not an MAE Under the Agreement ’s MAE provision , Hillrom ’s burden was to prove that the Novitas r ate decrease was a “fact, event, circumstance, change, effect or condition that . . . has had, or would reasonably be expected to have a material adverse effect” on the Business. 237 “There is no ‘bright

- line test’ for evaluating whether an event has caused a material adverse effect. ” 238 Rather, “[t] o assess whether a financial decline has had or would reasonably be expected to have a sufficiently material effect, this court will loo k to ‘whether there has been an adverse change in the target’s business that is consequential to the company’s long

- term earnings power over a commercially reasonable period.’” 239 A bsent evidence to the contrary, “ a corporate acquirer may be assumed to be
p urchasing the target as part o f a long

- term strategy.” 240 Because neither party attempt ed to proffer contrary evidence here , a “ material adverse effect” under the Agreement must be understood from “ the longer

- term perspective of a reasonable

237 JX 376 at 8 8

. 238 Snow Phipps , 2021 WL 1714202, at *30 (quoting Channel Medsystems v. Boston Scientific Corp. , 2019 WL 6896462, at *34 (Del. Ch. Dec. 18, 2019)).
239 Akorn , 201 8 WL 4718347, at *52 (quoting Hexion , 965 A.2d at 738).
240 Hexio n , 965 A.2d at 738.65 acquiror

. ” 241 To prove the materiality of the April Novitas Rate , the refore, Hillrom was obliged to prove that the event “substantially threaten[s] the overall earnings potential of the target in a durationally

- significant manner , ” as opposed to causing only a “short

- te rm hiccup in earnings.” 242 Dist illed to prima facie elements, in order to prevail on its claim that it was excused from closing by the occurrence of an MAE , H illrom was obliged to prove by a preponderance of the evidence that (1) the April Novitas Rate ’s effect o n Bardy ’s “earnings pote ntial , ” at the time Hillrom invoked the MAE clause , would

“ reasonably be expected ” to constitute an MAE ; and (2) the April Novitas Rate , at the time Hill rom invoked the MAE clause , would “ reasonably be expected ” to endure for a “durationally significant ” p eriod . Given that the MAE in this case is a government

- set price, Hillrom ’s burden on the second element was to prove that it reasonably expected neither Novitas nor CMS would readjust Medicare reimbursement rates for the relevant CPT codes any time soon

. 243

241 IBP , 789 A.2d at 68; Frontier Oil v. Holly Corp. , 2005 WL 1039027, at *34 (Del. Ch. Apr. 29, 2005); Hexion , 965 A.2d at 738; Akorn , 2018 WL 4719347, at *53; Channel Medsys tems , 2019 WL 6896462, at *34.
242 IBP , 789 A.2d at 68; Channel M edsystems , 2019 WL 6896462, at *24; Akorn , 2018 WL 4719347, at *53.
243 By necessity, the party seeking to prove an MAE has occurred must convince the court (by a preponderance of evidence) to se e the future the way it sees the future in order to demonstrate durational significance. Not an easy task . . . ever. As explained below, when future outcomes rest in the hands of unpredictable actors, the burden to prove durational66 For the sake of advancing the analysis, I will assume that Hillrom has proven the April Novitas R ate (as the current prevailing rate ) would reasonably be expected to have a material adverse effect on Bardy at the time it refused to close the Merger

. 244 Even with that ground ceded , Hillrom failed credibly to advance its claim of durational significance because the preponderance of the evidence does not

significance becomes nearly insurmountable. Such is the state of the evidentiary re cord confronting Hillrom.
244 I note that both parties submitted expert evidence regarding the impact of the April Novitas Rate on Bardy’s value. Both expert analyses were flawed. Hillrom’s e xpert, Lucy Allen, did not create her own valuation model but i nstead worked off Hillrom’s internal models to arrive at a discounted cash flow (“DCF”) valuation of Bardy at less than zero. JX 631. Even assuming DCF is the proper methodology to value a startup like Bardy (a point the parties dispute), Allen’s conclus ion that Bardy is worth less than nothing is incredible on its face. The evidence o f record uniformly shows the CAM patch is an e xceptional, patent

- protected product. See JX 204 at 3 (Hillrom’s Dr. Johannes de Bie, remarking that “I have little doubt tha t the [ Bardy ] solution (CAM+IDTF) is currently the clinically best solution for [extended AECG] for the diagnosis of infrequent ar rhythmias and that it is not easy to copy.”); Tr. 36:11

– 38:14, 84:19

– 24 (Bardy) (agreeing with Dr. de Bie’s assessment). And Bardy employee , Querry , testified credibly that the CAM patch continues to have profitable unit economics for Medicare patients. Tr. 189:12

– 21 (Querry). In the shadow of this testimony, as is often the case when one swings for the fences, Allen failed to make contact altogether. Bardy ’s expert, William Jeffers, included in his valuation expected synergies resulting from the Merger when, under the MAE’s plain language, the target should be valued as a standalone entity. See JX 376 at 8 8 (defining an MAE by asking whether it “would reasonably be expected to have a material adverse effect on . . . the Business of the Acquired Compani es , taken as a whole,” as opposed to the combined company. (emphasis added)); see also Akorn , 2018 WL 4719347, at *56 (examini ng substantively identical language and concluding that “the plain language of the definition of an MAE makes clear that any MAE m ust be evaluated on a standalone basis”); Tr. 406:9

– 16 (Jeffers) (admitting that he had “not analyzed whether [the] rates have had or would have a material impact on Bardy as a stand

- alone business.”). By expanding his focus beyond the target, Jeffers, li ke Allen, failed to deliver useful evidence.67 support the contention th at neither Novitas nor CMS will increase the April Novitas Rate with in a comme rcially reasonable period.

a. Hillrom Failed to Prove the April Novita s Rate Will Endure for a Commercially Reasonable Period As noted, to establish an MAE ’s durational significance, the party invoking the MAE clause m ust prove by a preponderance of the e vidence that the target suffered a material adverse effect for a “com mercially reasonable period,” as judged from the perspective of a “ reasonable acquiror. ” 245 Our c ourts have observed that “one would expect [ a ] commercially reasonable period to be measure d in years rather than months

. ” 246 While that general guidance is useful, our courts have stopped short of prescribing specific time period s when assessing “durational significan ce ,” and for good reason . Like most matters of law that exist in the realm

o f “reasonableness,” the determinatio n of what is a “commercial ly reasonable period ” is contextual and necessarily fact intensive . It will turn on the target company’s unique characteristics and the broader business dynamics in which the target operates
.

245 IBP , 789 A.2d at 68.
246 Frontier Oil , 2005 WL 1039027, at *34; Hexion , 965 A .2d at 738; Akorn , 2018 WL 4719347, at *53; Channel Medsystems , 2019 WL 6896462, at *25.68 W he n Hillrom acquired Bardy , it understood the Company to be a startup in

a medical device segment where rapid growth was prioritiz ed over profits

. 247 Indeed, p rior to any reimbursement rate change by Novitas, Hillrom’s internal projections uniformly estimated Bardy would not likely turn a profit before FY 2023. 248 While a decrease in reimbursement rates means slim mer margins and an increase d burn rate , Hillrom does not argue that a meaningful rate reversion back to historic (or near historic) levels by FY 2023 would constitute an MAE from the perspective of a reasonable acquiror

. 249 Instead , Hillrom rests its durational significance argument on two factual pre dicates : (1) the new reimbursement rate will
not be revisited by Novitas or CMS until 2026, at the earlie st, and (2) even if the rate

247 JX 110 at 4 (8/31/2020 Hillrom investment memorandum on Bardy highlighting “High Growth Segment” in the “What We Like” column , while flagging in the “What We Don’t L ike” column “Financial profile

– High growth top line with significant losses through 2021 ”).
248 JX 365 at 19; Tr. 490:13

– 22 (Frank) ; ( McClanahan ) Dep. 50:3

- 23 ( “Q. Do you recall seeing any models of an acquisition of Bardy by Hill

- Rom where the year 1 or 1 0 year zero return was positive? A. Not that I recall. Q. Approximately how many differen t models of a potential acquisition of Bardy by Hill

- Rom did you look at over the entire course of the M&A 15 process? A. Quite a few. I can ’ t recall a specific numb er, though. . . . Q. More than 20; is that a fair estimate? A. That could be.” ) ; JX 108; JX 123; JX 157 at 3, 17

– 23; JX 173 at 19

– 24.
249 See Defs.’ Opening Br. at 45 (arguing that an MAE would occur if the rate were to rebound to $250 in two years); see a lso JX 665 ¶ 29 (Hillrom expert rebuttal report modeling a CY 2023 rate adjustment up to $300 to support her conclusion that an MAE had occurred ).69 were to be revised before then , there is no evidence it would be restored to historic levels. 250 Using Hillrom as a proxy for a “reasonable acquiror,” its own internal models did not project Bardy to be profitable until FY 2023

. 251 In other word s, Hillrom was prepared to own and operate the Company for t hree years without returns. It has also acknowledged that five or more years is “durationally significant

. ” 252 With these markers in mind, it is reasonable to peg a two

- year lag ( conservatively) between the April Novitas Rate and a revised reimbursement rate to historic (or near historic) rates as a commercially reasonable period , meaning that Bardy can operate under the April Novitas Rate for two years without suffering an MAE

. 253 The question remains whether there is evidence that either Novitas or CMS will revise the April Novitas Rate within the next two year s . On this point, b oth

250 Hillrom maintains that Bardy is on the brink of insolvency and will need to secure new financing by August or September 2021. Defs .’ Post

- Trial Opening Br. at 39. But Bardy has always relied on outside cash infusions to operate given its status as a growth company that is not cash

- flow positive. The record indicates that Bardy continues to grow and have acce ss to capital, as eviden ced by its rece ntly completed $15 million debt financing. Tr. 203:1

– 207:16 (Querry).
251 JX 365 at 19; Tr. 490:13

– 22 (Frank).
252 See Defs.’ Post

- Trial Opening Br. at 39

– 45; Defs.’ Post

- Trial Reply Br. at 1, 19.
253 Th is conclusion is fu rther buttressed by Bard y ’s continued growth notwithstanding the lowered Medicare reimbursement rates. See Tr. 190:23

– 192:8

– 15, 195:14

– 19, 197:1

– 12 (Querry) (describing Bardy’s growth post

- April Novitas Rate) ; JX 702 at 3

– 5 ( Bardy’s Q1 2021 financial upda te).70 parties retained experts offering diametrically opposed views regarding the durability of the Ap ril Novitas Rate

. Hillrom’s expert, Charlotte Kohler, opined that CMS would not establish a national fee schedule for the CAM patch’s CPT codes anytime soon . 254 She further opined that Novitas is unlikely to revisit , much less materially increase , its r ate decisions any time “within the foreseeable future.” 255 Even if either CMS or Novitas were to intervene sooner , Kohler says, the rates would not meaningfully change. 256 Kohler’s testimony was not persuasive on several fronts. First, Kohler admits she has no firsthand experience with CMS rulemaking. 257 Rather, her background is in consulting on various unrelated healthcare

- related matters, including reimbursement complian ce. 258 The practical implications of her lack of relevant experience were on full display w hen she stated definitively in her initial report that

254 JX 632 ¶ 15. According to Kohler, CMS will not deviate from its preset rate schedule at least until the RUC meets again in October 2024 to consider pricing. See Tr. 668:23

– 24 (Kohler) (opining that CMS would not “see any burning need to go outside the n ormal process” ); id. at 347:6

– 23 (Renbaum) (noting that the RUC is scheduled to review the relevant CPT codes in October 2024)

. 255 JX 632 ¶ 15; Tr. 623:11

– 17, 668:17

– 24 (Kohler).
256 JX 632 ¶ 15.
257 Tr. 623:11

– 17, 668:17

– 24 (Kohler).
258 See JX 640; JX 632 ¶¶ 1

– 8.71 Novitas would not adjust the January Novitas Rate only to be told months later that Novitas did just that when it announced the upwardly

- adjusted April Novitas Rate

. 259 Second, Kohler’s testimony that CM S would see no “burning need” for a rate revision sits in tension with Hillrom’s proffered justification for refusing to close the Merger , namely that the April Nov itas Rate has cast Bardy into an existential crisis. 260 While the potential ruin of only one socially valuable company may not provide sufficient impetus to spur CMS into action, the impact of the rate increase was felt throughout the LTH cardiac monitoring industry . Indeed, iRhythm, an indisputably comparable market participant , initially announ ced that it would no longer serve Medicare patients in reaction to the April Novitas R ate before reversing that decision during trial. 261 iRhythm’s stock price has fallen by 68% since the January Novitas Rate was first announced. 262 The parties do not disput e that LTH

259 See JX 632 ¶¶ 15, 62 (Kohler stating she believed it unlikely Novitas would take further action after the January Novitas Rate and that CMS would ultimately price reimbursement for the CAM patch’s CPT code at approximately $60).
260 See Defs.’ Pos t

- Tria l Opening Br. at 69 (“[T]he April Novitas Rate caused Bardy ’s value to drop into the negative . That means that it would be economically irrational to continue operating the business, such that the transaction would make little sense.” (emphasis in or iginal)).
261 JX 646 at 5, 9.
262 JX 631 ¶ 35. Hillrom argues that the further drop in iRhythm’s stock price following the announcement of the April Novitas Rate indicates the market’s belief that the April Novitas Rate will have a significant, long

- term ef fect on iRhythm’s business

. Defs.’ Post

- Trial Opening Br. at 38. That may be true, but reimbursement rates are72 is a rapidly growing healthcare category holding significant promise for patients

— something CMS cares deeply about. 263 And LTHs “are not commodities where they are all the same”; device differences can “lead to false diagnoses or inadequate diagn oses and miscategorize heart rhythm disorders,” creating “a large public health problem, [that is] [] costly as well.” 264 The preponderance of the record evidence thus demonstrates that the re is an urgent need for a revision of the April Novitas Rate

. That Kohler refused to acknowledge , much less meaningfully account for, this need diminished her credibility. Finally, Kohler admits that Novitas allows no visibility into its rate

- setting
pr ocess and that it follows “no rules” as it determines when and at wh at amounts to set reimbursement rates. 265 Yet this did not stop Kohler from stating rather
undeniably driven in significant part by proprietary information concerning the cost of certain inputs to extended AECG devices

. P ublic mark et s have little insight into those costs and are reacting to a price set by a MAC with notoriously opaque pricing methodologies that, judging by the quickly revised January Novitas Rate, are also prone to err or . That the parties agreed expert testimony on t his topic was justified is further indication that repricing analysis is complex and technical. Taken together, these considerations lead me to place little weight on the market’s sentiment on future Medicare reimbursement rate adjustments as measured b y fluctuations in iRhythm’s stock price.
263 JX 335 at 12; Tr. 522:2

– 5 (Frank) (acknowledging that extended AECG is a high

growth category); id. at 313:17

– 314:15 (Renbaum).
264 Tr. 22:16

– 23:18 (Bardy).
265 Id. at 622:21

– 623:21, 634:14

– 635:16 (Kohler); see also J X 632 ¶ 25 (Kohler stating in her report that “[t]he processes by which the MACs determine pricing are comparatively less transparent than the process used by CMS. The MACs do not publish proposed rates and invite public comment, for example. There are a ls o no published rules for how often73 definitively that Novitas would not revisit the April Novitas Rate any time soon. 266 The lack of meaningful factual foundation for this bodement makes it no more usef ul than a Zoltar

- told fortune. Bardy ’s expert , Adi Renbaum , opined that Novitas or CMS will likely revisit setting a national reimbursement rate during the upcoming 2021 rulemaking c ycle and, at the latest, by 2023. 267 In contrast to Kohler, Renbaum’s o pinion was informed by her extensive experience engaging with both CMS and the MACs on health policy and pricing new codes

. 268 She correctly predicted the January Novitas R ates would be revised in short order after they were announced

. 269 And she predicts

no w that the April Novitas Rate will be revised again (if not by Novitas, then by CMS) for three principal reasons

. 270 First , CMS ’s decision to “crosswalk” a price of $4 00+ and subsequently delegate to the MACs temporary pricing authority pending submission o f further

- if ever

- MACs must review the pricing they have set . . . . For these reasons, the price set by any one MAC may not be as intellectually defensible from a valuation perspective as the rates set by CMS ” ).
266 JX 632 ¶ 1 5; Tr. 623:11

– 17, 668:17

– 24 (Kohler).
267 JX 635 at 3.
268 See Tr. 293:24

– 298:15, 315:10

– 316:12 (Renbaum); JX 635 ¶¶ 5

– 8 (detailing Renbaum’s experience).
269 Tr. 299:11

– 17 (Renbaum).
270 See id. at 300:5

– 301:4 (Renbaum).74 information signals that CMS w ill take up the issue again soon

. 271 In this regard, Renbaum found significant tha t, in its final rule, CMS stated it had deferred its pricing decision “for 2021,” indicating that CMS would defer for that year only. 272 Second, Renbaum opines that it is unlikely CMS will ignore the “significant” number of Medicare claims for this service

. 273 As noted, u nder CMS’s “triple aim,” its decision

- making process is guided by : (1) the health of each individual patient; (2) the h ealth of the population, including managing healthcare dispariti es and other problems; and (3) costs. 274 With these “aims” in mind, CMS is focused on facilitating patient access to new, promising therapies and diagnostic modalities

. 275 As already discussed , the preponderance of the evidence demonstrates that the April Novitas Rate has threatened patient access to LTH devices like the CAM patch

271 Id. at 307:13

– 308:17 (Renbaum) (explaini ng CMS’s decision to cross

- walk makes “clear they’re continuing to gather more data to come to a final decision. And so this is an interim . . . decision they made . . . . [T]hey’re working on this, and they’re going to work on it until it’s reso lved.”).
272 Id. at 309:6

– 310:10, 311:20

– 312:8 (Renbaum); JX 350 at 3.
273 Tr. 300:3

– 18 (Renbaum) (“I believe in 2018, the Medicare claims volume was over about 150,000 for the year of utilization of this service, which is significant. And so it’s on Medicar e’s radar to address, and that’s part of why the CPT codes were created in the first place.”).
274 Id. at 313:19

– 23 (Renbaum).
275 Id. at 313:7

– 13 (Renbaum).75 by challenging the commercial viability of devices in that category

. 276 Given the dynamic growth in demand for LTH dev ice s, Renbaum believes “this is not something [CMS] can take [its] eye off and just say we’ll deal with it . . . in the future sometime. This is something that’s in front of [CMS], and I expect that they’re going to be discussing it in the [next] proposed rule.” 277 Third, and relatedly, the April Novitas Rate has r eceived considerable attention, not only from affected industry players but also from clinicians who are concerned about their ability to continue to provide this service to patients in need

. 278 iR hythm , for example, has stated publicly that the April Novitas Rate remains “below [its] cost to deliver the service” and it is continuing a “multi

- pronged approach to activating the specialty physician societies, including the AMA, the ACC and HRS, our in dividual physician customers and patients to directly engage decision

- making authorities in the clinical importance of long

- term continuous ECG

276 See JX 646 at 5, 9 (iRhythm CEO stating after announcement of the April Novitas Rate: “Now that the rates th at have been posted are as low as they are, obviously, we’re not going to be able to serve in that segment.”); but see JX 823 at 5

– 6 (iRhythm announcing it would reenter the M edicare market, though it was continuing to engage with Novitas and believed its pricing model for the service flawed). I note that iRhythm’s reentry into the market after its prior announcement th at it could not serve Medicare patients at the April Novit as Rate could be interpreted to mean iRhythm is confident prices will be revised upwards soon.
277 Tr. 314:7

– 15 (Renbaum).
278 Id. at 300:5

– 301:4, 312:9

– 313:11 (Renbaum).76 monitoring.” 279 Renbaum believes that public pressure, combined with the category’s i ncreasing i mportance to pati ents, makes it lik ely that the current MAC rates will not endure. Renbaum ’s testimony was credible and her conclusion

— that either CMS or Novitas will intervene within two years to course

- correct the CAM patch’s reimbursement rate

— is reasonable. While Hi llrom argues Novit as is unlikely to change the April Novitas Rate because , in the past , it has maintained its pricing decisions for extended periods , recent history proves Novitas is both agile and susceptible to mispricing CPT codes . Indeed, Novitas’ rec ently erratic pric ing behavior “is indicative of the nuances in the evolution of payment policy; it is not a static process and has flexibility to change when warranted.” 280 In unprecedented times , history makes for a poor guide

. Novitas’ recently erratic pricing behavior thus limits the utility of its historical pricing habits when predicting whether it will

re - revise its rates

.

279 JX 646 at 5

– 6.
280 JX 671 ¶¶ 4

– 5. The April Novitas Rate was even further removed from t he RUC’s pricing recommendation to CMS of $440. See JX 70 at 2; Tr. 307:2

– 10 (Re nbaum). Another methodology employed to estimate the extended ECG’s supply price yielded a value of $416.85, while a series of invoices submitted by stakeholders suggested a price of $595. JX 70 at 2.77 Hillrom also makes much of the fact that the April Novitas Rate was the product of a considered , months

- long pr ocess with indust ry input

. 281 According to Hillrom, Novitas’ announcement of the April Novitas Rate after it gathered data and input from the industry means the CAM patch’s new pricing is the new normal. To be sure, the April Novitas Rate is the disappointing end

- result of a full court press by LTH device makers . One witness even testified that the meetings with Novitas that occurr ed between the January Novitas Rate and the April Novitas Rate were Bardy ’s “one shot” to persuade the MAC to raise i ts rates. 282 But th at sentim ent came in the midst of crisis : by all accounts, the January Novitas Rate was clearly a “mistake” that drastically underpriced extended AECG monitors. 283 That mistake made the need for a pricing readjustment urgent and Novitas responded quickly . B ut its “ black box” decision

- making process makes it extremely difficult to predict what next steps are probable. Given this dynamic, it is just as likely as not that Novitas’ decision to more

- than

- double prices with the April Novitas Rate was simply a band

- aid to stop the bleeding as it further considers how properly to price

281 Defs.’ Post

- Trial Opening Br. at 42

– 43.
282 (Hykes) D ep. 253:11

– 15.
283 Tr. 177:15

– 178:14 (Querry); id. at 492:18

– 493:11 (Frank); id. at 566:19

– 567:2 (Groetelaars).78 the relevant CPT codes. 284 Indeed, Novitas continues to engage with industry participants, including iRhythm, to discuss the appropriate pricing for exten ded AECG devices. 285 If Novitas believe d it had already considered all relevant evidence and had made a final, informed decision, then there would be no reason for it to continue engag ing in these discussions

. Hillrom has likewise failed to carr y its burd en to prove that CMS will not intervene in the near future . In August 2020, CMS indicated that the reimbursement rate for extended AECGs like the CAM patch would increase to between $ 400

284 See JX 823 at 4 (iRhythm CEO stating on Q1 2021 earnings call that “[t]hrough our conversations [with Novitas], we have learned that Novitas use d a valuation methodology based on assumed cost inputs. Unlike our experience with NICE in the UK or with our commercial payers i n the UK, [as] well with our commercial payers, the overall impact on health care costs was not directly considered in this an alysis.”); see also JX 632 ¶ 25 (Hillrom expert explaining that the MAC pricing process was “not [] as intellectually defensible from a valuation perspective as the rates set by CMS.”).
285 JX 823 at 3, 5

– 6 (“Since Novitas published updated rates on April 10 this year, we have had discussions with them to better understand their analysis and to propose an alternative costing method. The mod el we have shared with them has been successfully applied in other areas of the CMS physician fee schedule and we believ e is a more appropriate methodology for establishing rates for the long

- term continuous ECG Category I codes

. Novitas has been open to discussing this approach.”); Tr. 832:17

– 833:5 (Noether) (iRhythm said it was pursuing “three different mechanisms to att empt to secure higher reimbursement for the LHM”).79 and $465

. 286 Sophisticated industry players, including Hillrom, believed that outcome to be reasonable

— even likely

— and counted on its occurrence. 287 In a surprise move, CMS delegated its pricing authority to the MACs on an interim basis as CMS collect ed more data. H illrom does not dispute (indeed, its lawsuit is premised on the fact) that the April Novitas Rat e ’s significant departure from Novitas’ historical reimbursement rate s has created turbulence in a growing market serving an increasing number of patients. Tho ugh Hillrom channels its

e xpert to argue CMS will not act without a RUC recommendation (not sche duled to occur before October 2024 ) , it argues in the next breath that Bardy and the industry ha ve been decimated by the change in reimbursement rates

. 288 Its p osition simply does not square with evidence of the extended AECGs’ rapid segment growth and CMS’ s public health mission; indeed, the entire reason CMS considered moving extended AECGs’ CPT codes into Category I is because it viewed these devices as offering important diagnostic support for its beneficiaries

. 289 In the face of CMS’s

286 PTO ¶ 28; JX 93 at 8.
287 See JX 195 at 2. Both parties assumed in their models the ~$464 national rate, and had to revise those assumptions once CMS declined to adopt its proposed fee schedule. Tr. 172: 4

– 23 (Querry); JX 254 at 38; Tr. 489:4

– 10 (Frank); JX 365 at 19.
288 See Defs.’ Post

- Trial Opening Br. at 33

– 40.
289 JX 635 at 5

– 9 (explai ning why a CPT code would move from Category III to Category I) ; Tr. 300:5

– 18 (Renbaum) (same)

.80 well

- documented “tr iple aim , ” and Renbaum’s credible testimony on how that agency operates, Hillrom has failed to carry its burden to prove that it reasonably expected CMS would not prioritize the CAM patch’s CPT codes and revisit the April Novitas Rate with in the next two y ears . Having found that the preponderance of the evidence does not support Hillrom’s contention that neither CMS nor Novitas will revisit the April N ovitas Rate within a commercially reasonable period, the question remains whether these regulators are l ikely to revise the reimbursement rate meaningfully upward such that an MAE would not reasonably be expected to have occurred

. Hillrom says no; Bardy s ays yes and, more to the point, Bardy says Hillrom has not proven otherwise. Here again, Bardy has the better of the evidence

. b. Hillrom Failed to Prove the April Novitas Rate Will N ot B e Meaningfully R evised Upwards Hillrom asserts that CMS pricing is dictated by cost of goods sold

. 290 CMS deferred setting a national price because it did not have adequa te information on the direct cost of the CAM patch itself. 291 Because Bardy can turn a profit at the

290 Defs.’ Post

- Trial Open ing Br. at 40

– 41.
291 PTO ¶ 28; JX 3 50 at 3

.81 April Novitas Rate , Hil lrom reasons syllogistically that the CAM patch ’ s unit economics confirm that the April Novitas Rate is here to stay

. 292 Hillrom’s cyn icism regarding the regulators’ inclination to revisit and increase the April Novitas Rate is striking when set against it s position prior to the announcement of the January Novitas Rate

— informed by Hillrom ’s extensive diligence on reimbursement rates and knowledge of the CAM patch’s cost
structure

— that a downward revision to the historic reimbursement rate was unlikely and unjustifiable

. 293 Though Novitas ’ black box methodology makes its pricing decisions difficult to predict , CMS’s pricing methodology was then , and is now , relatively transparent. 294 Neither party argues there has been any change in how CMS prices a device and, as a sophisticated healthcare operator with a team of experts dedicated to analyzing reimbursement risks , Hillrom well underst ands th e way in which CMS determines the price of a device. 295

292 See Defs.’ Post

- Trial Opening Br. at 43; Defs.’ Post

- Trial Reply Br. at 1 (citing Tr. 657:13

– 658:1 (Kohler)).
293 See JX 141 at 2 (stating Hillrom has “an entire workstream dedicated to [investigating] reimburseme nt for [ Bardy ]”); JX 391 (including CAM patch margins in Hillrom DCF); JX 170 (Groetelaars agreeing there is “little merit to t he argument” iRhythm’s AECG “should be valued solely based on direct inputs”).
294 See JX 632 ¶¶ 25, 31

– 36; JX 635 ¶ 30.
295 See JX 1 10 at 5 (listing as a point “requir[ing] validation” that “[r]eimbursement rate changes for [extended AECG] announced in August of 2020 are not meaningfully impacted through the ‘comment period’ and are stable in 2021 and beyond”); see also Tr. 168:8

– 1182 Based on its “extensive, disciplined” diligence, 296 Hillrom decided that the rationale justifying the CAM patch’s then

- current pricing was sound

. 297 For example, Hillrom stated internally in October 202 0 that the extended AECG device : is a service and a device and must therefore be reimbursed as a complete package. Using CMS’ own words, the organization develops [ relative pricing for CPT codes ] by “ considering the direct and indirect practice resources involved in furnishing each servi ce, ” with (a) direct expenses including things like clinical labor, medical supplies, and equipment, and (b) indirect expenses covering items like labor and office expenses. 298
(Q uerry) (confirming that there were questions about reimbursement during “[a]lmost . . . every interaction with the Hillrom team ”). As noted, Hillrom’s team included outside advisors. Tr. 527:18

– 528:19, 533:7

– 12 (Frank); id. at 581:12

– 582:9, 600:5

– 601:1 (G roetelaars); JX 169; JX 197; JX 246 (reiterating Parr’s view that “CMS is sometimes hesitant about new categories if not enough invoices were submitted or [sic] from a br o ad group of suppliers, as they do not want the few invoices presented to CMS to be fo r a list p r ice and then find out later that discounts are being offered in the market and they are ‘overpaying’”).
296 (Blanchard ) Dep. 164:12

- 16; see also Tr. 167:23

– 168:11 ( Querry ) (describing Hillrom’s extensive diligence process)

. 297 It is undisputed that all sides saw no justification for reimbursement rates below $365, and were shocked upon announcement of the January Novitas R ate. Tr. 50:4

– 17, 67:24

– 68:3 (Bardy) (seeing little risk in December 2020 that reimbursement rates would decrease in 2021, and e xpressing shock at Novitas’ price revision); JX 253 (Bardy presentation to Hillrom days after CMS announced its final fee sched ule stating “[w]e do not expect MAC rates to decline, nor do most analysts.”); JX 218 at 1; JX 365 at 17 (January presentation to Hillrom’s board not identifying reimbursement as among “key risks”); see also Tr. 566:21 (Groetelaars) (expressing surprise at the January Novitas Rate) ; id. at 492:21 (Frank) (same) ; id. at 139:3

– 140:4 (LaViolette) (same) ; id. at 264:9

– 12 (Burke) (same) ; JX 412 at 1 (then

- Bardy CEO Kevin Hykes reacting to the news with a single word: “Stunning”)

. 298 JX 170 at 2

– 3.83 Hillrom ’s CEO , Groetelaars , agreed with this assessment , stating , “[i]t is hig hly unusual for reimbursement to change materially from [CMS ’s ] proposal to [CMS’s] final [rate] . I’m not even aware of an instance where a significant change has occurred in the past.” 299 Hillrom’s pr e - litigation character ization of CMS pricing as more h olistic jibes with Renbaum’s credible testimony that CMS accounts in its pricing for such things as “health outcomes of the different services.” 300 Now in litigation, Hillrom disclaim s that view , contend ing that CMS’s
propo sed rate is irrelevant and the April Novitas Rate has reset future pricing expectations indefinitely

. That argument runs contrary to CMS’s indisputably “iterative” rate

- setting process , which builds on (rather than abandons) past analys e s. 301 T here is no r eason to believe that Novitas’ cryptic process , which evidently yields mistaken outcomes , would meaningfully affect CMS’s independent review of the relevant CPT codes. And while Novitas’ historically stable $365 rate

w as somewhat of an outlier among other MACs, that did not prevent CMS from

299 Id. at 1.
300 Tr. 344:23

– 345:1 (Renbaum). I note that Hillrom did not address whether the costs for research and development of a product (as opposed to simply costs of goods sold) factor into CMS’s assessment.
301 JX 671 ¶ 11; Tr. 312:11

– 24 (Renbaum).84 “ crosswalking ” a rate significantly higher than even Novitas’ rate in its proposed rule. 302 In sum, Hillrom assessed the case for a $400+ reimbursement rate on a CAM patch to be strong pre

- signing, and it of fers no reaso n to believe the ground supporting that case has shifted in the interim . The only change to which Hillrom points is the April Novitas Rate . But the way in which Novitas arrived at that rate is unclear; it revised the rate once in dramatic fa shion and con tinues to engage in conversations concerning flaws in its pricing methodology

. 303 Nothing about Bardy ’s fundamental business or the strength of its technology has change d

. Indeed , it continues to grow apace notwithstanding the challenges brought on by the April Novitas Rate and this litigation. 304 After careful consideration, I am satisfied t he

302 See JX 197. Though some advisors warned Hillrom that the CAM patch’s CPT codes may be revised significantly downwards, the preponderance of the evidence supports Hillrom’s assessment that these reports were “outliers” and the rationale for higher, historical prices were sound. Tr. 529:1

– 19 (Frank) (vi ewing Muller Report as outlier); (Roehrich) Dep. 85:18

– 92:7 (discussing JX 197, Hillrom’s team w as “generally interested” in Parr’s opinion but concluded any pricing change would be “modest”); JX 251 at 3 (12/4/2020 Bardy presentation to Hillrom expressing that it did not expect MAC rates to decline, a view shared by most analysts); Tr. 479:2

– 13 (Fra nk) (agreeing that Hillrom did not anticipate a dramatic pricing change).
303 See JX 823 at 3, 5

– 6; Tr. 832:17

– 833:5 (Noether)

. 304 Tr. 190:23

– 191:23, 202:7

– 203:5 (Querry); JX 702 at 3

– 5 ( Bardy Q1 2021 update showing continued growth in enrollments and unit orders).85 record supports the assumptions underlying Bardy ’s pro forma model calculating the clinical value of its service to justify t he hist oric $365 Novitas rate or above

. 305 Returning to Hillrom’s burden, i t is insufficient to show the effect of the April Novitas Rate might be durationally significant, as “a mere risk of an MAE cannot be enough.” 306 Because Hillrom has failed to prove that i t reasonably would have expected tha t CMS would not meaningfully increase the current Medicare reimbursement rates for the relevant CPT codes, it has likewise failed to prove that
t he current state of those rates constitute s an MAE

.
***** For reasons explained, Hillrom has failed to carry its burden to prov e that an event had or would reasonably be expected to have an effect sufficiently material and adverse to qualify as an MAE at the time it refused to close the Merger . The analysis, the refore, could end here. For the sake of completene ss, however, I take up the remaining links of the analytical chain and conclude that they too require a Plaintiff’s verdict

.

305 See Tr. 186:5

– 188:3 (Querry) (explaining pro forma model calculating value of the clinical service as a stand

- in ) ; JX 498.
306 Akorn , 2018 WL 4719347, at *65; see also Snow Phipps , 2021 WL 1714202, at *30 (same).86 The April Novitas Rate is a “Health Care Law” Carved Out F rom an MAE Per the Agreement, “any change in any Law (including

. . . any Health Care Law)

. . . or any interpretation thereof” cannot, alone or in combination, constitute an MAE

. 307 The Agreement defines “Law” as “any” regulation or rule issued by “any” Governmental Bod y, including “any authorized contractor engaged by any governmental, legislative, executive or judicial agency

. . . or regulatory body

. ” 308 This exception squarely encompasses changes in the Medicare reimbursement rates set by Novitas. 309 CMS is a federa l agency within the federal Department of Health and Huma n Services

— a cabinet

- level executive branch agency . Among CMS’ s regulatory functions is the issuing of Physician Fee Schedules and other payment regulations. 310 These responsibilities are prescribed by federal statute and clearly listed under the “Regulatio ns and Policies” section of the CMS website. 311 Medical device s uppliers

307 JX 376 at 88

– 89.
308 Id. at 95, 98

. 309 To reiterate, Bardy bears the burden of proving this exception applies by a preponderance of the evidence. See AB Stable , 2020 WL 7024929, at *51

. 310 Pl.’ s Post

- Trial Opening Br. at 52
311 42 U.S.C. §1395w

– 4(b)(1); Medicare Fee

- For Service Payment Regu lations (2018), https://www.cms.gov/regulations

- and

- guidance/regulations

- and

- policies/medicare

- fee

for

- service

- payment

- regulations (last visited June 4, 2021)

.87 like Bardy are obligated to adhere to these rates; failure to do so is referred to as

“ balance billing ” or “surprise billing” and is generally forbidden under federal law for Medicare

- participating providers and suppliers. 312 The parties do not meaningfully disagree that a ny schedule of fees set by CMS that governs payments to doctors or ot her suppliers for Medicare services, while colloquially referred to as “rates” or “prices , ” are reg ulations or rules as contemplated by the Agreement

. 313 Here, the Medicare reimbursement rates in question are not presently set directly by CMS. Rather, the y are determined by Novitas in its capacity as a MAC , which operates as CMS’s authorized contractor (hence the moniker “Medicare Administrative Contractor”)

. 314 Hillrom correctly highlights that the Social Security Act considers the promulgation of fee sch edules by the Secretary of the Department of Health and Human Services as “regulation[s] , ” but it is mistaken in assuming that this classification is limited to situations where CMS itself sets the rate.

312 42 U

. S

. C

. § 1395 cc(a)(1)(A).
313 Tr. 310:16

– 311:8 ( Renbaum ) ; id. at 668:6

– 16 ( Kohler ) ; id. at 1 69:6

– 170:1 ( Querr y )

. 314 42 U.S.C. A. §1395kk

- 1 (granting authority to MACs for payment functions, including the “[d]etermination of payment amounts”); Patwardhan v. United States , 2014 WL 1093049, at *1 (C.D. Cal. Mar. 18, 2014) (“CMS delegates certain funct ions to its [MACs], including determining the amount of the payments to be made to provide[r]s as required by the Medicare statute.”)

.88 CMS regularly delegate s the setting of reimbursement rates, among other functions, to MACs. 315 Indeed, Hillrom acknowledges that CMS has never set a nati onal rate for the CPT codes applicable to the CAM patch ; Novitas has always determined the amount to be paid to Bardy in the r egions where it operates

. 316 Bardy could not ignore MAC pricing or seek to negotiate higher reimbursement rates from Medicare any m ore or less than it could ignore or negotiate CMS pricing ; the price is the price. 317 As an “authorized contractor engaged by ” CMS, Novitas acts unilaterally on behalf of , and with the full authority vested in , CMS. 318 Because reimbursement rates are regula tions when set by CMS , it follows that the rates set by MACs , as CMS’s “authorized contractors, ” 319 must also be classified as such. Accordingly, Bardy has proven that Novitas’ reimbursement rate revisions in

315 See Tr. 310:16

– 311:8 ( Renbaum ).
316 Defs.’ Post

- Trial Opening Br. at 17

. 317 Tr. 311:9

– 12 (Renbaum).
318 42 U.S.C. §1395w

– 4 (b)(1) (requ iring Fee Schedules to be established “by regulation”); JX 349 (CMS Decision in Federal Register); Tr. 310:16

– 311:8 ( Renbaum ) ; see also 42 U.S.C.A. §1395kk

- 1 (granting authority to MACs for payment functions, including the “[d]etermination of p ayment amounts”); P atwardhan , 2014 WL 1093049, at *1 ( describing the nature of CMS’s delegation authority vis

- à

- vis MACs).
319 JX 376 at 88

– 89

.89 January and April 2021 fall under the Agreement’ s MAE exception for changes of L aw . 320 The April Novitas Rate Did No t Have a “Disproportionate Impa ct” on Bardy Even if an event otherwise constituting an MAE is contractually carved out by the parties, the Agreement provides that any such event may nevert heless qualify

as an MAE “to the extent such matter has a materially disproportionate impact on [ Bardy ] as compared to other similarly situated companies operating in the same industries or locations, as applicable, as [ Bardy ]. ” 321 Hillrom bears the burden to prove that the April Novitas Rate had a “materially disproportionate impact” on Bardy

. 322 Thinking, again, in terms of prima facie elements, in order to prove that the “materially disproportionate impact” exception applies, Hillrom was obliged to

320 I note that Bardy also has a strong argument under another carve

- out to the MAE, namely that a Company MAE canno t be based on an event “generally affecting the economy or the industries or markets in which [ Bardy ] operate[s].” JX 378 at 89. On its face, a change to the Medicare reimbursement rate for a particular CPT code would appear not to discriminate agai nst a ny particular company, but rather would cut across the “market” for extended AECG devices. The parties, of course, dispute how broadly (or narrowly) the “market” should be defined. I need not adjudicate this dispute in this context , however, as I ha ve co ncluded that the change

- in

- Law carve

- out , without an applicable exception, defeats Hillrom’s MAE claim

. 321 Pl.’s Post

- Trial Opening Br. at 38.
322 PTO ¶ 91 ; IBP , 789 A.2d at 6 8

.90 prove ( 1) the universe of “similarly situated” compan ies “operating in the same industries or locations” as Bardy , and (2) that Bardy , as compared to those bus inesses “similarly situated,” suffered a “materially disproportionate impact” from the April Novitas Rat e . I address each element in turn.

a. iRhythm is the Only Company “Similarly Situated” to Bardy The MAE clause limits the universe of companies by which to assess the proportionality of an event’s impact to “similarly situated companies operating in the sa me industries or locations . . . . ” 323 This language differs from language interpreted in other Delaware MAE cases, wh ere the carve - out exceptions
conte mplat e d disproportionate impact on “comparable entities operating in the [same] industry . . . .” 324 Here again, w ell

- settled canons of contract interpretation require that the Court give effect to every word in the contract in order to avoid “surplusage

. ” 325 The additional qualifier

— “similarly situated”

— bounds the

323 JX 376 at 89 (providing that exclu sions can be “taken into account ” only “to the extent that such matter has a materially disproportionate impact on [ Bardy ] as compared to other similarly situated companies operating in the same industries or locations, as applicable, as [ Bardy ]” (emphasis adde d))

. 324 Snow Phipps , 2021 WL 1714202, at *35; see also Akorn , 2018 WL 4719347, at *51 ( construing disproportionate impact exception that provided : “to the extent such effect, change, event or occurrence has a disproportionate adverse affect [sic] on the Company and its Subsidiaries, taken as a whole, as compared to other participants in the industry in which the Company and its Subsidiaries operate . . . .”).
325 GRT, Inc. v. Marathon GTF Tech., Ltd. , 2012 WL 2356489, at *4 (Del. Ch. June 21, 2012)

.91 universe of such companies to a subset “operat ing in the same industries or locations .” Thus, I must determine what makes a company “similarly situated” before turning to whether Ba rdy was “disproportionately impacted” by the April Novitas Rate as compared to others in “the same industr ies .” Hillrom argues that a company is “similarly situated” if it competes with Bardy for the same customers in the ambulatory cardiology market. 326 It identified two potential groups as “similarly situated” to Bardy : leading ambulatory cardiology players (i.e., iRhythm , BioTelemetry and Preventice) and a larger set of purportedly peer companies comprising other clinical diagnostic providers with more limited share. 327 Bardy counters that a company is “similarly situated” only if it is a

“ close comparator ” to the Company , which, by Bardy ’s lights, leaves only iRhythm. 328 T he Agreement does not provide a ny criteria by which to assess whether a company is “ similar ly situated ” to Bardy

. Of course, the similarity of a company’s

326 Defs.’ Post

- Trial Opening Br. at 61.
327 Id. I note that Hillrom urges the Court to follow the approach taken in Akorn to identify

“ similarly situated companies,” but fails to acknowledge that the provision at issue in Akorn used substantively broader language to define the universe of comparators. See Akorn , 2018 WL 4 719347, at *51, *58 (reviewing an MAE disproportionate

- impact exclusion where the universe of comparators was defined as “other participants in the industry in which [the seller] operate[s]”).
328 Pl.’s Post

- Trial Opening Br. at 56.92 situation is factually relative by design; u nde r a plain reading of the MAE exception, the words “similarly situated” reference company characteristics related to the

“ matter ” the exception is addressing

. 329 In my view, b ecause the rate changes at issue affect specific categories of product s in the ambu latory cardiology monitoring market, a comparator company’s relevant characteristics include operational scale (i.e., revenue), developmental maturity and , most importantly, product portfolio (i.e., relative product mix and sophistication). 330 Neither par ty disputes that iRhythm is “similarly situated” for purposes of interpreting the disproport ionate impact exception

. 331 I agree. iRhythm is the only other market player that , like Bardy , derives the vast majority of its revenue from a single product

— its LT H device (the Zio XT patch). 332 Further, l ike Bardy , iRhythm has yet to turn a profit , sign aling it also currently prioritiz es growth over profitability. 333 While iRhythm is publicly traded , Bardy maintains healthy access

329 JX 376 at 89

. 330 See Gen esco, Inc. v. The Finish Line, Inc. , 2007 WL 4698244 (Tenn. Ch. Dec. 27, 2007 ) ( holding that inclusion of “similarly situated” language should prompt the court to consider issues of relative product mix in deciding which companies were similarly situated)

. 331 See Pl.’s Post

- Trial Opening Br. at 56; Defs.’ Post

- Trial Reply Br. at 3, 28.
332 JX 631 at 39

– 40 (estimating iRhythm derives 96% of its revenue from its patch product) ; Defs.’ Post

- T rial Reply Br. at 30. While it also sells MCOT ser vices, these account for a negligible portion of its current revenue.
333 Tr. 204:8

– 205:13 (Querry); id. at 442:22

– 24 (Jeffers).93 to capital to fuel its expansion

. 334 The only substantive distinction between iRhythm and Bardy is o perational scale : iRhythm’s revenue is more than nine times greater than Bardy ’s

. 335 Even still, iRhythm’s product mix has left it similarly dependent

on (and affected by) the April Novitas Rate

. 336 BioTelemetry and Preventice , by contrast , rely predominantly on MCOT device s for their revenue , with only 9% and 15% of their annual revenue coming from LTH devices, respectively

. 337 What LT H devices they do sell, they source from third parties. 338 W he re the “matter” or “event” alleged to be an MAE is a change in a specific product’s Medicare reimbursement rates tied to particular products and related services , product mix is patently the most important factor in determining a comparator firm’s “ situati onal ” position relative to Bardy

. 339 Preventice ’s

334 Tr. 203:22

– 207:16 (Querry).
335 Defs.’ Post

- Trial Reply Br. at 30.
336 See JX 6 65 ¶ 10 (showing iRhythm stock price dropping by 68 % since January following announcement of the April Novitas Rate).
337 Id. at 48 ; JX 636 ¶ 64

. 338 JX 636 at 5

– 6.
339 Hillrom implicitly recognizes this when it used only iRhythm ’s revenue multiples to value Bar dy . JX 365 at 20 ; see also (McClanahan) Dep. 98:14

– 99:6 (noting that Hillrom specifically looked at iRhythm’s growth rates and margin projections when assessing the future value of Bardy ).94 significantly lesser reliance on LTH relative to Bardy and iRhythm (15% compared to 100% and 96%, respectively) weighs heavily against finding that Preventice is “similarly situated

. ” 340 The same holds true f or BioTelemetry. 341 Hillrom proffers the comp osition of the consortium loosely formed to advocate for a revision of the January Novitas rate

— BioTelemetry , Preventice , Bardy and iRhythm

— as evidence of companies “similarly situated.” In the same vein, Hillro m points to its pre

- litigation B oard documents to show that it considered BioTelemetry and Preventice as competitive with Bardy and iRhythm at the time of the Merger. 342 But Hillrom’s arguments show merely that each of these companies compete for customers and have a s hared interest in getting paid as much as the market will bear for their products and services. 343 The Agreement’s MAE clause, however, did
not delimit the reach of its “disproportionate impact” exception to companies

340 Hillrom also maintains that Preventice is more like Bardy than i Rhythm because it is privately

- held with revenue nu mbers closer to iRhythm than Bardy

. Defs.’ Post

- Trial Opening Br. at 30. But Preventice’s revenue drivers are fundamentally different, and the company operates at break

- even, indicating its exposure to f luctuations in LTH Medicare rates is limited based not only on its product mix but also on its stage of corporate maturation.
341 See JX 636 ¶ 64 (noting that LTH comprises ⁓10% of BioTelemetry sales); JX 665 at 48 (same)

. 342 Defs.’ Post

- Trial Opening Br. at 29

– 30.
343 JX 665 (showing BioTelemetry and Preventice trace between 9% to 15% of their revenue from LT

- ECG and are thus market play ers with skin in the game).95 operating in the same “mar ket

. ” Rather, it required an assessment of whether the impact caused by “such matter” was “materially disproportionate” relative to

“ similarly situated companies operating in the same industries .” 344 In my view, that language calls for a more granular par s ing of a company’s situation than mere participation in the LTH market

. Indeed, t he market assessments highlighted by Hillrom demonstrate how Bardy differed from BioTelemetry and Preventice in salient ways , including its reputation as a best

- in

- class “pu re player” that fields only LT H technology, its relative financial im maturity and its small size. 345 Companies seeking to make a strategic acquisition within a market inevitably survey multiple potential tar gets, each of which often bring meaningfully diffe rent qualities and synergies to the table. That Hillrom also assessed the potential of other players with marginal skin in the LTH game does not render them “similarly situated” as contemplated by the Agre ement’s exception to the MAE carve

- out s . I acknow ledge that, at first glance, there might appear to be circularity in a reading of “similarly situated” that limits the disproportionate impact exception to companies that share a similar product mix with th e target and, therefore, might be

344 JX 376 at 8 8

– 8 9

. 345 JX 51 at 24 (present ation to Hillrom’s board describing Bardy as having a “[b]est in class device”).96 expected to suff er similar impacts from external events affecting the featured product(s)

. That figment disappears, however, after more careful observation. As a

one - product c ompany that operat es in a high

- growth, heavil y regulated market, it is not surprising that Bard y bargained for a narrower, more target

- friendly exclusion to the MAE carve

- outs
. 346

***** Having determined that iRhythm is the only “similarly situated” company operating in the same industry as Bardy , I next consider whether it was disproportionately im pacted by the April Novitas Rate relative to iRhythm. b. Bardy Was Not “Disproportionately Impacted” By the April Novitas Rate As noted, a carved

- out event may nevertheless qualify as an MAE “to the extent such matter has a materially disproportionate impac t ” on Bardy

. 347 Before turning to th e evidence on this point, I pause to parse two aspects of the parties’

346 Ch i. Bridge , 166 A.3d at 926

– 27 (holding that, to understand a contract, “[t]he basic business relations hip between [the] parties” be considered so that the court may “give sensible life” to the Agreement). I note that one could easily envision a scenario where iRhythm and Bardy were impacted very differently by the April Novitas Rate, even though both are heavily reliant upon their offerings in the LTH space. For instance, if iRhythm had elected to focus its sales on providers who treat only patients insured by commercial carriers, or to filter its mix so that a greater percentage of revenue was derived fr om higher paying commercial carriers, the impact on Bardy relative to iRhythm would likely be disproportional.
347 JX 376 at 88

– 89.97 chosen contractual phrasing. First , the Agreement provides that the carve

- out’s exception applies “ to the extent ” “such matter” impacts the target di sproportionately. That language , plainly read, indicates that Bardy only agreed to assume the risk of an event where the del ta of its impact on the target ’s business , as compared to others “similarly situated , ” is, itself, material. For example, if the r isk “adversely affects all [similarly situated] companies operating in the seller’s industry, but the average adverse effect is only a 10% diminution in cashflows while the seller ’s cashflows are reduced by 50%, then the question will become whether a 50%

- 10% = 40% reduction in cashflows constitutes a Material Adverse Effect on the company.” 348 Second , the Court must understand what the parties intended by the term “impact.” T he proportionality of an event’s “impact” could be understood by measuring its e ffect on the target relative to other comparables delimited in the MAE . Under that company

- specif ic reading, the “impact” of the April Novitas Rate would be measured holistically by analyzing how the April Novitas Rate affected Bardy ’s business vis

- à

- vis iRhythm . Alternatively, “impact” could be understood by reference to the event itself , requiring an analysis of whether the event ’s effect in absolute terms discriminated against the target as compared to others “similarly situated

. ” From that frame, the April Novitas Rate would “impact” all companies

348 Miller, COVID

- 19 , at 5

– 6 ; see also AB Stable , 2020 WL 7024929, at *56

– 57 & n.204

– 06 (citing favorably to Miller’s COVID

- 1 9 article).98 the same as an across - the

- board cut to reimbursem ent rate s ; in other words, the reduction in the reimbursement rate could not, by definition, be “disproportionate” because all companies selling covered devic es would experience an identical drop in revenue per unit

. While the latter reading of “impact” h as some intuitive appeal given its congruence with the broader theory of MAEs as mechanisms to shift market risk onto the buyer and individual risk onto the s eller, 349 it does not comport with other provisions in the Agreement. 350 Specifically, the Agreement carves out from its definition of MAE events “generally affecting the economy or the industries or markets in which [ Bardy ] operate[s].” 351 If the parties inte nded “impact” to be measured by the absolute effect of the event it self, then the carve

- out for broad market events would be redundant (as, by definition, events “generally affecting” the “markets” would “impact” all players equally ) . Thus, while the Agr eement could have more clearly defined “impact,” when reading the A greement holistically, “impact” must be measured by reference to an event’s relative, overall effect on

349 Akorn , 2018 WL 4719347, at *49 (“The typical MAE clause allocates general market or industry risk to the buyer, and company

- specific risks to the seller.” (quoting Zhou, Material Adverse Effects , at 173)).
350 See GMG Cap. Invs. , 36 A.3d at 779 (“In upholding the intentions of the parties, a court must construe the agreement as a whole, giving effect to all provisions therein.”).
351 JX 37 6 at 89.99 other companies . Under this reading, even though the April Novitas Rate applies
equa lly to all companies selling LTH devices under the relevant CPT cod es, its “impact” is “disproportionate” only where one company’s suffering is outsized compared to “other similarly situated companies operating in the same industries or locations” as Bardy

. Not surprisingly, the parties disagree about which financial met ric should serve as the defining benchmark for the analysis

. Bardy focus es on revenue and volume of sales, which it contends are the most relevant factors to a growth

- oriented company like Bardy and form ed the bases for Hillrom’s determination that Bardy was an attractive acquisition target. 352 Hillrom emphasizes profitability and discounted cash flow s ( “ DCF ” ), which it argues are standard benchmarks in any acquisition and metrics that figur ed prominently in Hillrom’s pre - acquisition due diligence of Bardy

. 353 T his court has noted that it is appropriate to consider whether a material adverse effect has occurred broadly by reference to “the overall earnings potential of the target.” 354 Previous decisions have coalesced around EBITDA as the primary ( but by n o means exclusive) financial metric by which to measure the operational

352 See Pl.’s Post

- Trial Opening Br. at 46, 58

– 59; Pl.’s Post

- Trial Reply Br. at 32.
353 See Defs.’ Pos t

- Trial Reply Br. at 13

– 18.
354 IBP , 789 A.2d at 68.100 results of the business. 355 EBITDA, of course, measure s a company’s free cash flow s . 356 And free cash flows, as the source for calculating a firm’s value through a DCF analysis, is reg arded by many as the “gold standard” valuation metric. 357 That metric operates with l ess force , however, when the target is still in startup mode and , like its “similarly situated” comparator, is unprofitable and invest ed heavily in growth. 358 I need not delve further into the most appropriate benchmark ( s ) by which to measure the “operational results of [ Bardy ’s] business,” 359 however, because Hillrom has fail ed to prove that Bardy suffered a dispr oportionate impact relative to

355 See id. at 66

– 67 (reviewing the target’s financial performance by reference to earnings per share and EBIT); Hexion , 965 A.2d at 740 (determining EBITDA “is a better measure of the operational results o f the business” than earnings per share); Akorn , 2018 WL 4719347, at *53

– 57, *62 (placing the m ost weight on EBITDA, while also considering other metrics including revenues, operating income and earnings per share).
356 See Hexion , 965 A.2d at 740.
357 See In re PetSmart, Inc. , 2017 WL 2303599, at *23 (Del. Ch. May 26, 2017) (compiling authority).
358 S ee Aswath Damodaran, Investment Valuation: Tools and Techniques for Determining the Value of Any Asset 17

– 18 ( Wiley, 3d ed. 2012) (“Discounted cash flow valuatio n is based on expected future cash flows and discount rates. Given these estimation requiremen ts, this approach is easiest to use for assets (firms) whose cash flows are currently positive and can be estimated with some reliability for future periods, and where a proxy for risk that can be used to obtain discount rates is available.” ); id . (observi ng that DCF valuations often do not properly account for unutilized assets or patents.) . As noted, iRhythm, the “similarly situated” comparator, is also unprofi table and currently oriented toward growth.
359 Hexion , 965 A.2d at 740

.101 iRhythm by any mea sure . Because of their comparable product mixes and the nearly mirrored percentage of revenue attributable to Medicare reimbursements , one would expect iRhythm and Bardy to be similarly impacted by the Apri l Novitas Rate in terms of revenues, gross profit s and other valuation metrics

. And t he numbers bear this out. T he April Novitas Rate ’s impact on revenue is clearly not disproportional. Bardy and iRhythm attribute 29% and 27% of their revenue to Medicar e reimbursements, respectively. 360 Hillrom’s own expert models show Bardy ’s revenue impact at either

- 22% or

- 63%, depending on whether an impact to non

Medicare payors is included in the calculation. 361 The corresponding figures for iRhythm deviate by only a few percentage points, at

- 16% and

- 60%, respectively. 362

360 JX 668 ¶ 58. I note that Hillrom’s expert, Allen, misstated the proportion of revenue Bardy derives from Medicare. See JX 631 (Allen calculating Bardy ’s portion of revenues attribut able to Medicare to be 36%). Medicare represented approximately 33% of Bardy ’s total units sold in 2020, and its weighted revenue accounted for 44.6% of split bill revenues. See JX 259 (“Phasing Analysis” sheet setting out Bardy ’s payor mix). Hillrom’s DCF model included split bill revenues accounting for approximately 65.9 % of total Bardy revenues for CY 2020. JX 391 (“US Patch Build” sheet setting out Bardy ’s revenue distribution). 44.6% of Split Bill x 65.9% = ⁓ 29% of revenues reimbursed by Medicare. Though Bardy ’s expert advanced this argument in his rebuttal report, Hillrom never meaningfully contests his point on brief or otherwise

. 361 JX 665 at 49

– 50.
362 Id.102 T he April Novitas Rate ’s impact is not disproportional when measured by profitability either

. Hillrom bears the burden of proof here, and yet Bardy and iRhythm’s gross margins are difficult to d iscern from the parties’ competi ng expert analyses . Specifically, it is unclear how iRhythm treats its costs when calculating its gross margin , and whether its treatment is comparable to Bardy ’s

. 363 I t is , therefore, difficult to assess whether the experts ’ granular analysis is actually comparing apples to apples

. 364 On a less granular level, t he record indicates Bardy has competitive, or even superior, margins to iRhythm , as iRhythm ’s first reaction to the April Novitas Rate was to announce that it could no longer profitably serve

363 See JX 668 ¶ 68 (observing that “[c]ompanies ca lculate their cost of sales on a different basis from one another and include or exclude certain expenses and cos ts that are not always obvious. These inclusions and exclusions are not clearly defined in their financial statements. It is particularly mor e complex to determine cost of sales basis for these companies, as they have high technology and services compone nts, so costs and expenses related to labor, compensation, and research and development may or may not be partially or fully included in cost o f sales, according to an individual company’s accounting practices.”).
364 Bardy ’s expert, Jeffers, could not say f or sure whether his gross margins calculations included device costs “beyond just the plastic patch and adhesive tape.” Tr. 425:21

– 426:17 (Jef fers). He further assumed iRhythm’s gross margins for its Medicare business were the same as its overall gross m argins, without support for that assumption. Id. at 426:23

– 427:11, 420:12

– 431:4 (Jeffers). Hillrom’s expert, Allen, based her gross margin nu mbers for iRhythm on public disclosures, but it is unclear whether those numbers are calculated in the same way a s Bardy ’s numbers. See JX 631 ¶ 68; see also JX 668 ¶ ¶ 67

– 68 (Jeffers persuasively critiquing Allen’s methods).103 Medicare patients

. 365 While iRhythm subsequently reconsidered its decision to exit the Medicare market segment , 366 Bardy has never doubted its ability to operate profitably under the April Novitas Rate

. 367 This makes sense since , notwi thst anding iRhythm’s superior economies of scale as a larger company, Bardy runs most of its Medicare claims through IDTFs in New Jersey, where the rates are about 15% higher than in Houston, where iRhythm has its IDTFs. 368 Again, while differences in the

c omp eting products’ profit margins are difficult to discern on this record , the evidence indicates they are a far cry from the 10x deltas held in Akorn to constitute a disproportionate impact

. 369 Finally, on the issue of valuation, Hillrom argues Bardy ’s DC F valuation has “dropped over 100%” to “less than $0 , ” while iRhythm’s stock price declined only 68%. 370 As noted above, however, Allen’s valuation of Bardy as worth less than the

365 JX 646 at 5 ; see also (McCla nahan) Dep. 98:14

– 99:6 (noting that Hillrom specifically looked at iRhythm’s growth rates and margin expectation when it assess ed the future value of Bardy ).
366 JX 823 at 3.
367 Tr. 189:1

– 190:12 (Querry) (confirming Bardy continues to operate profitably and s uggesting iRhythm’s wavering on serving Medicare patients presented an oppor tunity to take increase Bardy ’s market share).
368 Id. at 188:5

– 24 (Querry); JX 668 ¶ 70; JX 589 at 11.
369 Akorn , 2018 WL 4719347, at *58

– 60.
370 Defs.’ Post

- Trial Opening Br

. at 7, 66.104 paper on which t he Agreement was printed is facially incredible given the valu e of Bardy ’s intellectual property, its growth trajectory and its profitable unit economics. Moreover , juxtaposing Hillrom’s DCF valuation with iRhythm’s publicly

- traded stock price compar es ap ples to oranges

— you can do it, but the result yields very diff erent flavors on the pal a t e . 371 Hillrom failed to carry its burden to prove that t he disproportionate

- effect exception applies to disable the applicable MAE carve

- out
. That carve

- out, therefor e, renders Hillrom’s refusal to close a breach of the Agreement

. C. The Purpose of the Agreement is Not Frustrat ed Having failed to prove an MAE , Hillrom is left to fall back on its argument that its obligation to close is excused because the purpose of the Merger has been frustrated. The frustration of purpose doctr ine discharges a contracting party’s obligations when h is “principal purpose is substantia lly frustrated without his fault by the occurrence of any event the non

- occurrence of which was a basic assumption

371 See Hexion , 965 A.2d at 734 (noting differences between both sides’ exper ts’ DCF analyses and their public company/transaction analysis amounting to $6 billion and $700 million, respectively). As previously noted, iRhythm’s fluctuations in market value have been driven largely by popular guesses on whether the April Novitas Ra te is here to stay; because this is a highly technical subject with evidence on record indicating the April Novitas Rate will not endure for a durationally significant period, I re iterate that iRhythm’s stock price, on this record, is not a reliable indica tor of its estimated value. See JX 665 ¶ 10 (documenting correlation between iRhythm’s stock price and the timing of Novitas’ rate announcements).105 on which the contract was made.” 372 “This common law doctrine provides an escape for an acquirer if the target experiences a catastrophe duri ng the executory period.” 373 “It is not enough that the transaction has become less profitable for the affected party or even that he will sustain a loss. The frustrat ion must be so severe that it is not fairly to be regarded as within the risks that he a ssumed under the
contract. ” 374 The purpose of this Merger has not been frustrated. For reasons explained, Hillrom’s contention that the April Novitas Rate renders Bardy less than worthless is not credible

. Hillrom sought to acquire a growth company with clinically superior technology to expand its cardiology offering; Bardy remains exactly that

. While the April Novitas Rate will lower Bardy ’s revenue in the short

- term, the record does not support that this state will remain status quo for long . In any e vent, the parties allocated the risk of a reimbursement rate reduction onto Bardy through the Agreement’s earnout, which helps to offset any short

- term losses Hillrom wi ll suffer as a result of the April Novitas Rate

. For these reasons, Hillrom’s invocati on of the frustration of purpose doctrine fails.

372 Wal

- Mart Stores, Inc. v. AI G Life Ins. Co. , 901 A.2d 106, 113 (Del. 2006) (quoting Restatement (Second) of Contracts § 265 (1981)).
373 Akorn , 2018 WL 4719347, at *57.
374 Restatement (Second) of Contracts § 265 cmt. a.106 D. Remedies Because Hillrom has failed to prove the occurrence of an MAE , its failure to close the Merger on February 25 b reached the Agreement. 375 Bardy claims it is entitled to specific performance and compensatory damages , in addition to prejudgment interest on the deal price

. 376 Hillrom does not dispute that, if a breach is proven , specific performance is warranted. 377 Nor d oes it appear to contest Bar dy ’s claim for prejudgment interest. 378 It does, however, contest Bardy ’s claim for compensatory damages. In support of its damages claim, Bardy points to two clauses in the Agreement

. First, in Section 9.11 of the Agreement, t he parties agreed that spec ific performance

375 JX 376 §§ 1.3, 5.1.
376 Tr. 401:12

– 403:18 (Jeffers); JX 636 at 30

– 3 3 (Bardy’s expert report calculating that Bardy suffered more than $12 million in damages from reduced transaction proceeds, a cash burn of roughly $97,000 per business day, and litigation fees and expenses); Brinkerhoff v. Enb ridge Energy Co. , 159 A.3d 24 2, 262 (Del. 2017) (“ Once liability has been fo und, and the court’s powers shift to the appropriate remedy, the Court of Chancery has broad discretion to craft a remedy to address the wrong.”).
377 See Defs.’ Post

- Trial Reply Br. at 39

– 40 (disputing only Bar dy ’s prayer for damages while implicitly acknowledging its right to specific performance); Emerald P’rs , 726 A.2d at 1224 (“Issues not briefed are deemed waived.”); see also JX 376 § 9.11 (parties waiving any arguments against specific performance in the A gree ment).
378 See Defs.’ Post

- Trial Reply Br. at 39

– 40 (disputing only Bardy’s claim for damages under the Agreement’s indemnification clause); see also Osborne ex rel. v. Kemp , 991 A.2d 1153, 1158 (Del. 2010) (affirming trial court’s award of specific perf orma nce and its order that payment of delayed purchase price include interest).107 was not exclusive of an award of damages. 379 Second, in Section 7.3, the parties agreed that after closing Hillrom would : indemnify, defend and hold harmless the Equityholders . . . from, and will reimburse the E quityholder I ndemnified Pa rties for, all Adverse Consequences suffered or incurred by the Equityholder Indemnified Parties, to the extent arising out of or related to a breach or non

fulfillment by Parent or Merger Sub and, with respect to covenants and ag reements required to be pe rformed after Closing, the Company or Surviving Corporation, of any of their respective covenants or agreements in this Agreement. 380 “Adverse C onsequence” is defined to include any “expense, loss, liability, Tax or other damages” and “reasonable and out

- of

- pocket legal and other professional fees, costs, [and] other dispute resolution expenses[.]” 381 Bardy asserts that, because it will not be made whole by specific performance alone, an award of damages

— in addition to pre

- judgment interest on amounts that should have been paid at the scheduled closing on February 25

— are warranted in this case. Hillrom res ponds that the term “Equityholder” is defined to mean “ a holder of Company Capital Stock, Company Options, Company Warrants or P romised Option Units.” 382 According to Hillrom, that definition does not include Bardy

.

379 JX 376 § 9.11.
380 Id. § 7.3.
381 Id. at 81.
382 Id. at 9 3

.108 Indeed, Bardy does not claim any Equityh older was harmed, but instead argues that “Hillrom has damaged Bardy ” and that “ Bardy suffered more than $12 million in damages.” 383 I agree with Hillrom. Section 7.3 clearly juxtaposes the “Equityholder Indemnified Parties” with “the Company [ Bardy ] or Surviving Corporation”: on the one hand, the Equityholder Indemnified Parties will be reimbursed “to the extent arising out of or r elated to a breach or non

- fulfillment by [Hillrom]” pre

- closing ; on the ot her hand, “with respect to covenants and agreements required to be performed after Closing,” Hillrom would reimburse “the Company [ Bardy ] or Surviving Corporation.” 384 By distinguishi ng Equityholder Indemnified Part i es from Bardy , and spelling out that the latter would only be reimbursed “with respect to covenants and agreements required to be performed after Closing,” the parties unambiguously excluded Bardy from indemnifi cation for a ny pre - closing breaches by Hillrom, including its refusal to consummate t he Merger. While Bardy handwaves the Court in the direction of the supposed legion authority supporting its proposition that, notwithstanding a plain reading of the Agreement ’s text , Bardy qualifies as an Equityholder under the Agreement, it

383 Pl.’s Post

- Trial Opening Br. at 65 (emphasis added).
384 JX 376 § 7.3 (emphasis added). Bardy acknowledges on brief that Section 7.3’s “breach or non - fulfilment” language means “a pre

- closing breach.” Pl.’s Post

- Trial Opening Br. at 65 n.299.109 conspicuously fails to cite a ny authority stating as much. 385 At oral argument, Bardy raised for the first time “t he We Work case from last year ” as an instance where this
court allowed a company t o stand in the stockholders ’ shoes for purposes of pursuing damages. 386 I gather Bardy is referring to this court’s December 14, 2020 decision In re WeWork Litigation , where former

- Chancellor Bouchard held The We Company (“WeWork”) , a commercial real estat e entity, had standing to pursue breach of contract claims against its shareholder, Softbank Group Corp. (“SBG”), under a Master Transactions Agreement (“MTA”) that obligat ed SBG, inter alia , to consummate a tender offer to WeWork’s shareholders

. 387 Althoug h WeWork was not among the tende ring stockholders allegedly trodden up on by SBG’s cold feet, the court nonetheless held WeWork could sue on their behalf for “ essentially three

reasons ” : (1) WeWork was a party to the MTA , and the agreement expressly acknowl edged that the parties were enti tled to sue should the transactions contemplated therein not be consummated consistent with its terms; (2) “injury

- in

fact” is not limited “to those who could show economic harm,” but extends more

385 See Pl.’s Post

- Trial Opening Br. at 64

– 66.
386 Post

- Trial Oral Arg. at 87:23

– 88:3.
387 In re WeWork Litig. , 2020 WL 7343021, at *1

– 2, *5

– 9 (Del. Ch. Dec. 14, 2020). There were a number of “ We Work decisions from last year [2020],” though this appears to be the only viable candidate to advance Bardy’s position.110 broadly to a company that f ailed to receive even the tender offer’s “relatively small benefit” of reduced agency costs (from a larger stockholder on the cap table) and improved employee morale; and (3) structural barriers hardcoded into the MTA would frustrate (or at least disadvant age) stockholders seeking to enf orce the reasonable efforts provision against SGB , and equity abhors a wrong without a remedy

. 388 I confess I do not follow Bardy ’s analogy. The MTA in WeWork expressly designated WeWork as a party that c ould sue for SBG’s b reach, whereas the Agreement expressly juxtaposes Bardy with the Equityholders indemnified for Hillrom’s pre

- closing breaches . While Bardy was no doubt harmed by a delayed closing, that does not mean ipso jure that it is entitled to collec t damages under a contract’s bargained

- for indemnification scheme. An order of prejudgment interest will adequately address harm flowing from the delayed closing, and that is the only compensatory relief Bardy is entitled to receive. 389 III. CONCLUSION Hillrom has failed to ca rry its burden to prove that it is excused from closing on the Merger by the occurrence of an MAE since it has failed to prove the

388 Id. at *8

– 9.
389 See Snow Phipps , 2021 WL 1714202 , at *55

– 56 (citing Osborn v. Kemp , 2009 WL 2586783, at *12 (Del. Ch. Aug. 20, 2009), aff’d , 991 A.2d 1153 (Del. 2010)).111 April Novitas Rate will have a durationally significant material effect on Bardy

. Even if Hillrom had succe ssfully prove n a durationally significant effect, a change in Medicare reimbursement rates was carved out from the MAE definition and Hillrom failed to prove that Bardy was “disproportionately impacted” relative to “similarly situated companies operating i n the same indust ries or locations” as Bardy . The remedy for Hillrom’s breach of contract is specific performance and prejudgment interest. In this regard, Bardy has failed to prove that it is entitled to compensatory damages. For the foregoing reasons , my verdict is f or Bardy on its claim for specific performance of the Agreement and prejudgment interest on the deal price at the statutory rate. 390 Hillrom’s claims for relief are dismissed. Bardy ’s counsel shall file, on notice, a proposed form of fina l judgment within ten (10) days of the date of this opinion.

390 6 Del. C. § 2301(d).