Bardy Diagnostics, Inc. v. Hill-Rom, Inc. and Barcelona Merger Sub, Inc.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

BARDY DIAGNOSTICS, INC., a )
Delaware corporation, )
)
Plaintiff/ )
Counterclaim Defendant, )
)
v. ) C.A. No. 2021-0175-JRS
)
HILL-ROM, INC., an Indiana corporation, )
and BARCELONA MERGER SUB, INC., )
a Delaware corporation, )
)
Defendants/ )
Counterclaim Plaintiffs. )

MEMORANDUM OPINION

Date Submitted: June 4, 2021
Date Decided: July 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 Goodrich & Rosati P.C.,
Wilmington, Delaware 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. Pittenger, Esquire, T. Brad Davey, Esquire, Matthew 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 Matthew Bush, Esquire of King & Spalding LLP,
New York, New York, Attorneys for Defendants/Counterclaim Plaintiffs Hill-Rom,
Inc. and Barcelona Merger Sub, Inc.

SLIGHTS, Vice Chancellor
 Hill-Rom, Inc. (“Hillrom”) and its merger subsidiary, Barcelona Merger Sub,

Inc. (“Merger Sub”), committed in an 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 closing, 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, Hillrom gave notice to Bardy that it

would not close the Merger. According to Hillrom, it was excused from closing

because, between signing and closing, Bardy suffered a Material Adverse

Effect (“MAE”) as defined in the Agreement. This litigation followed.

The usual refrain from sellers in “busted deal” cases is that the buyer

developed an acute case of “buyer’s remorse” after signing and then sought to exploit

contractual exits to avoid closing.2 The court often joins the “buyer’s remorse”

chorus when it sees evidence that the buyer actually worked, 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., 2021 WL 1714202, at *12 (Del. Ch.
Apr. 30, 2021) (noting the buyer suffered from “buyer’s remorse”); Hexion Specialty
Chems., Inc. v. Hunstman Corp., 965 A.2d 715, 721–36 (Del. Ch. 2008) (same).

1
indolence or sabotage, 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 startup 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 Holter device, or “LTH”) called the Carnation Ambulatory Monitor (“CAM”)

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 the cloud (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 than comparable 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 record showed the acquirer
“set on a course of conduct predestined to derail Debt Financing and 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 curated a contrived insolvency opinion
based on overly pessimistic inputs to dissuade lenders from financing the acquisition).

2
 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 Centers 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 Category 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 prices 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 rates attached to the

temporary CPT codes assigned to the CAM patch 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 to set a permanent national rate for the CAM

patch’s CPT codes, and both expected the rate to be higher than the rate Novitas had

3
previously set. The designation of a national rate for extended AECG devices was

viewed as a positive development for those operating in the AECG space, not only

because the reimbursement rate was likely to increase but also because the

permanent CPT codes would signal to prescribing physicians that the devices had

matured into the “standard of care” for the diagnosis of cardiac arrythmias.

To the surprise of Hillrom, Bardy and others in the AECG space, CMS elected

not to set the anticipated higher reimbursement rates, or any reimbursement rate, for

the CAM patch’s CPT codes, delegating 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 reimbursements for the CAM patch at historic rates.

Novitas had not yet issued its decision on pricing when, in early January 2021,

Hillrom signed the Agreement to acquire Bardy. To shift the risk of any decline in

revenue attributable to lower reimbursement rates 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

an MAE clause, which excused Hillrom from its obligation to close if the Company

experienced an MAE, as defined in the 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 for

4
New Jersey (the sites of Bardy’s two IDTFs). Novitas’ drastic reduction in Medicare

reimbursement 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 eyes 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 Novitas on the error of its ways.

Novitas did not act with dispatch, however, and Hillrom’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 close, Hillrom informed Bardy that

it believed an MAE had occurred, thereby excusing its obligation to close. 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. Hillrom

counterclaimed alleging that an MAE had occurred or, in the alternative, the purpose

of the Agreement had been frustrated.

On April 10, 2021, Novitas increased the January Novitas Rate by nearly three

times, to roughly $133 (the “April Novitas Rate”), still less than half of the historic

rate. Bardy remains optimistic that either Novitas or CMS will increase

4
“Everyone has a plan until they get punched in the mouth.” Mike Tyson.

5
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 profit. Thus, by Hillrom’s lights,

Bardy is either conjuring litigation-driven optimism or is unknowingly dancing in

quicksand. Either way, Hillrom remains adamant that the April Novitas Rate was

and is an MAE.

The matter was tried over the course of three days. 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 Novitas or CMS restored

reimbursement rates to historic levels. Rather than work to skuttle the deal, Hillrom

encouraged Bardy’s efforts to convince Novitas to change its mind. When that did

not happen, Hillrom invoked contractual exits in good faith.

Of course, the fact Hillrom did not act in bad faith does not mean it has

properly refused to close on the basis of the Agreement. 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 Novitas Rate. Even 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-out

6
for events that disproportionately affect Bardy relative to similarly situated

companies operating in the same industries, the preponderance of the evidence

reveals the April Novitas Rate did not disproportionately 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 on the deal price, but its claim for indemnification under the

Agreement fails. My reasoning follows.

I. BACKGROUND

The trial record comprises 824 trial exhibits, 5 live testimony from six fact and

five expert witnesses, 6 deposition testimony from 13 fact and five expert witnesses7

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) (“PTO”) ¶¶ 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. __.”

7
 A. The Parties

Plaintiff, Bardy, is a Delaware corporation 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 Chicago, Illinois.10 Defendant, Merger 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 cardiac monitoring

(“ACM”). 12 For 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 (Bardy); see also JX 62 at 7 (providing a picture of Dr. Bardy’s wife
captioned “[t]he reason the company was founded”).

8
 Bardy currently manufactures and markets a single product called the CAM

patch, which belongs to a category of ACM products sometimes referred to as long-

term ambulatory electrocardiogram (AECG) or long-term Holter (LTH) devices.14

Bardy’s CAM patch is a single-use, bandage-size patch designed 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 IDTFs by trained ECG technicians who create a proprietary

report for review by the patient’s physician. 17

Bardy’s CAM patch is, by all accounts, exceptional.18 Two separate head-to-

head studies published in the American Heart Journal conclude that the CAM patch

detects arrhythmias with accuracy superior to both traditional Holter monitors 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 Dr. 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).

9
competitor, iRhythm Technologies, Inc. (“iRhythm”), called the “Zio XT” patch.19

AECG monitors like the CAM patch are also more patient-friendly, comfortable and

inconspicuous than traditional Holter monitors.20 Bardy has fortified its competitive

moat with intellectual property; indeed, the CAM patch incorporates technology

covered by 80 patents—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 current 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); see 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
Tr. 29:5–31:11 (Bardy); id. at 105:5–20 (LaViolette); JX 62 at 42; JX 194.

10
patch.25 Bardy is also developing next-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 monitoring technologies at [its] disposal.”26

For now, the CAM patch comprises 100% of Bardy’s revenue. 27 That revenue

is principally derived from either of two models: “split billing” 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 the “professional component,” the physician bills the

insurer for the application of the patch and the interpretation of Bardy’s report. 30 In

the “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 technical fees).

11
Medicare reimburses Bardy at the rate that has historically been set by Novitas.32

In 2020, the Novitas reimbursement rate was $365 per patch. Over 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 negotiation with each payor.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 customary” 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 billing model accounted for roughly two-thirds of Bardy’s

revenue. 37 Because 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.

12
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

components.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 three

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. 235:1–237:15 (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 looked at iRhythm’s growth rates and
margin expectation when it was assessing Bardy’s value).

13
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 patients than those who will benefit from

extended AECG monitors. 45

D. Overview of the ACM Medicare Reimbursement Landscape

As mentioned, reimbursement 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 To better achieve these 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 extended 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 AECGs).
46
JX 635 at 5–9 (describing what CPT codes are and how they are developed).
47
Tr. 313:12–314:15 (Renbaum).

14
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, there 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 patient above the rate set by an authorized MAC.51

When a service with a temporary CPT 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 become part of the “standard of

care” that can be billed at predictable reimbursement rates 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”), working with CMS,

develops a pricing recommendation after a detailed review of costs, including

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.

15
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

Though MAC prices are functionally equivalent to CMS prices, the processes

by which these entities determine their final prices could not be more different.

MACs are regarded by industry participants as “black boxes”—they do not explain

their reasoning when 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 While CMS does not disclose the matters it

is considering while it studies a proposed rule,57 it does explain its reasoning 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 one MAC may not be
as intellectually defensible from a valuation perspective as the rates 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. at 639:3–24 (Kohler) (describing the
“big blank” in the timeline between a RUC recommendation and CMS proposed rule
during which there are “questions back and forth” between CMS and stakeholders that
“[w]e don’t see” because “[i]t’s not public information”).

16
time the rule is published.58 This contrast in processes is well known to everyone

involved with Medicare reimbursement. 59

E. Hillrom Explores an Acquisition of Bardy

Hillrom had long wanted to enter the ACM space and viewed the extended

AECG segment 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 strategic 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 technology” would

complement Hillrom’s existing short-term Holter business,63 making it 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. 24:7–10.
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); (Kucheman) Dep. 18:5–22, 42:13–23, 83:18–84:8 (explaining Bardy “would help
to diversify the preexisting diagnostic cardiovascular product line . . .”); (Blanchard)

17
strategic fit” for an acquisition.64 Hillrom also viewed Bardy’s ICM

(in development) as “ha[ving] the potential to revolutionize disease treatment and

early diagnosis.”65 Although Bardy was not for sale, both sides grew increasingly

interested 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 profitability. 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 has 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
rationale 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 innovation
that this company needs a little more of and 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 (LaViolette); 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 profit); id. at 102:9–103:19 (LaViolette) (same);
id. at 153:4–11 (Querry) (same).

18
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 increasing 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 anticipated 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 Medicare reimbursement
rates for LTH devices would have impact Bardy more than Biotelemetry); 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 reductions”). Hillrom recognized
in public disclosures that 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 (Groetelaars).
72
(Blanchard) Dep. 93:6–94:4, 143:10–144:10.

19
 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 because IDTFs generally bill directly to Medicare

rather than selling patches to physicians. 75 Thus, when the RUC 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 published its proposed physician fee schedule for

2021, which proposed adopting permanent “Category I” codes for long-term AECG

monitors, including separate 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 $463.92, 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 similar cost build-up using Bardy’s invoices
for direct 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.

20
that encompassed Bardy’s New Jersey IDTF. 78 CMS noted, however, that it had not

received traditional invoices for the devices to 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, on August 25, 2020, executives from Hillrom and Bardy met again to

discuss a potential acquisition. 80 During 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 preliminary due diligence, on 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.

21
of interest (“IOI”) to acquire Bardy for $450 million plus potential earnouts. 84 Bardy

accepted Hillrom’s IOI and the parties proceeded with more rigorous due

diligence.85

By all accounts, the 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 iRhythm as

Bardy’s closest comparable and carefully evaluated iRhythm’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 entailed).
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 acquisition of Bardy
by Hill-Rom did you look at over the entire course of the M&A process? 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 173 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 this
space, had put out publicly”), 91:14–92:7 (explaining Hillrom based its views on pricing

22
 Among Hillrom’s key goals in due diligence was to “validate” whether the

reimbursement rates in the Proposed Fee Schedule would be finalized or

“meaningfully impacted” through the 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, monitored 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 Proposed Fee Schedule that advocated for reimbursement rates of

$66.25 for the 2-to-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 specifically at
iRhythm’s growth rates and margin expectation 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 593:15–595:11 (Groetelaars); JX 150 at 3; JX 170.

23
announcement, Parr warned Hillrom that historical Novitas “payment is at risk” and

“[p]rojections built off one or two outlier payors [Novitas and Palmetto] are a huge

red flag.”94 Even though this was not the first warning regarding reimbursement

rates Hillrom received from its outside advisors,95 Hillrom chose to view the risk

differently. 96

Ultimately, Roehrich’s investigation culminated in a report where she

recommended 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 negative 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 “switch[] to Category I with a significant reduction in 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 impact and exact details are still uncertain”).
96
See Tr. 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 interested” in Parr’s opinion but concluded any pricing
change 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
(Frank); JX 246. Hillrom’s management again dismissed these concerns; indeed, 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 has

24
[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 December 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 deferral 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 . . . . Recommending deal close / signatures
after the publication 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 publication 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).

25
time being, Novitas would remain responsible for setting the prevailing

reimbursement rates for the CAM patch’s CPT codes.102

In the wake of the prolonged uncertainty provoked 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 concluded the most

likely scenario was that Novitas would revert (or “crosswalk”) to the 2020

Category III rates.105 Based on that expectation, Bardy refreshed its September

forecast by using the 2020 rates, which resulted in estimated revenue of $57 million

for 2021 and $89 million for 2022 (declines of $7 million and $11 million,

respectively).106 Both before and after the announcement of the 2021 Final 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
correct.”).
104
Tr. 531:20–532:3 (Frank); id. at 581:12–18 (Groetelaars) (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 reimbursement rates would decrease in 2021.”).
106
Tr. 172:4–174:6 (Querry); JX 254 at 36–37.

26
Schedule, Bardy was careful not to represent that Novitas would set any particular

rate, as both parties agreed that the price ultimately set by Novitas or CMS was

“unknowable” ex ante. 107

I. Hillrom Renegotiates the Merger

Days after the December announcement of the 2021 Final Fee Schedule,

Hillrom terminated the IOI so that it could renegotiate the deal’s financial 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

Remainder of Page Intentionally Left Blank

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 586:4–7
(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 following CMS’s
December announcement).

27
be priced below the level proposed (but never adopted) by CMS.109 Hillrom wanted

to shift more economic risk to Bardy to address that possible outcome. 110

The mechanism 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 ultimately 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 earnout consideration linked to estimated CAM patch revenue

for 2021 and 2022, structured as follows: 112

109
Tr. 601:11–17 (Groetelaars); 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 light 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 earlier
in the year to persist. And so Hillrom 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 (explaining 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 the 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 376 § 1.14.

28
 Earnout Level 2021 Revenue Targets 2022 Revenue Targets
(% of Revenue)
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 million), 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 modest 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 slower than)

expected. Conversely, 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 some risk that Novitas would decrease

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

Board 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 acknowledging that the earnout shifted onto
Bardy risk of lower Medicare reimbursement rates).

29
among 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 Board also referenced iRhythm’s

trading multiple (and no other companies) as a “relevant data point” to consider in

evaluating Bardy’s valuation.118 With this data in hand, Hillrom’s Board 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) (stating that the risk was considered “retired,” 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 historical 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 reimbursement
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 not 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 trading
multiple in slide titled “Valuation Considerations”).

30
 J. Hillrom and Bardy Sign the Agreement

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 rates 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-Down

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, Hillrom 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. 586:4–7 (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 Material Adverse
Effect.” Id. § 2.7.

31
the Agreement defines a “Company Material Adverse Event” in three parts.123

The “definition starts with a general statement of what constitutes an MAE,” then

“carves out certain types of events that otherwise could give rise to an 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, individually 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:

Collective[] engage[ment] . . . 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, data
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 from 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. 2018).
124
Id.
125
JX 376 at 88.
126
Id. at 5.

32
economic conditions generally affecting the economy or the industries or markets in

which the Acquired Companies operate” and (2) “any change in any Law (including

any COVID-19 Measures and any Health Care Law) or GAAP or any interpretation

thereof.” 127

The Agreement then provides for an exception to those carve-outs.

Specifically, the Agreement states that a carved-out event can nonetheless constitute

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 Bring-Down Condition 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 and must be 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 precedent to Hillrom’s obligation to close, Bardy “must have performed

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).

33
Agreement required to be performed or complied with by it prior to Closing.”130

Finally, Section 5.1(c) of the Agreement contains a stand-alone closing condition

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 thereof from [Hillrom].” 132 Otherwise, Hillrom was

obligated to close within three business days after the closing conditions were

satisfied.133

The Remedies Provisions

In Section 9.11 of the Agreement, the parties agreed that specific performance

was not exclusive 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).

34
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 Indemnified 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 and 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, two 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 steady $365 per patch reimbursement rate for the category, the

drastic rate cut was devastating news. Under Bardy’s split-billing model, Bardy

could not profitably serve Medicare patients at the January Novitas Rate.138

134
Id. § 9.11.
135
Id. § 7.3.
136
Id. at 81.
137
PTO ¶ 32.
138
Tr. 69:24–70:3 (Bardy).

35
Dr. Bardy described the new rates as “[m]ass murder of the elderly,”139 and the

parties on both sides were “shocked” by Novitas’ pricing decision.140

Initial feelings of shellshock gave way to disbelief: Bardy, Hillrom and other

industry participants concluded that Novitas must have made a mistake. 141 With this

premise in 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 Bardy, at Hillrom’s

expense, the former medical director of Novitas to provide insight on effective

messaging.143 As one Bardy employee put it, the meetings with Novitas represented

Bardy’s “one shot” to persuade Novitas that its drastically reduced proposed rates

were unjustified and unsustainable. 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 Novitas 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.

36
 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

element 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 me.”146 Hillrom promptly engaged outside counsel to evaluate its options

under the Agreement.147

Notwithstanding the uncertainty prompted by the January Novitas Rate,

previously announced acquisitions of Bardy competitors proceeded apace to closing.

Without any indication that Novitas would adjust the January Novitas Rate, Philips

closed its acquisition of BioTelemetry (originally signed on December 18, 2020) and

Boston Scientific closed its acquisition of Preventice (signed on January 21,

2021). 148 Hillrom came to view the announcement of the January Novitas Rate

differently. On 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 727; JX 728.

37
Rate constituted an MAE under the Agreement, which relieved Hillrom of its

obligation to close the Merger. 149 Exactly one week later, on February 28, 2021,

Bardy initiated this lawsuit.150

On April 10, 2021, nearly two months after its initial decision and having met

with the leading extended AECG device makers, Novitas announced revised

reimbursement rates in New Jersey 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,” they typically “are not aware of the policy changes” affecting particular

devices and rely upon providers 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).

38
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 explanation for the apparent stability 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 existing contract as leverage to negotiate for significantly lower
reimbursement. 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
were 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 adequate 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. 252:24–255:2 (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 payors 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) (asserting 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).

39
 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 contracts within

the next 12 months. 158

M. Bardy’s Growth Continues

Despite the turbulence introduced by the Novitas rate reductions and this

ensuing litigation, Bardy has continued to grow, setting new records for CAM

enrollment and new CAM orders.159 In Q1 2021, CAM 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 320:19–321:20 (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 long.
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 growth 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).

40
exceeding 21,000 orders in a month for the first time ever. 161 These numbers are on

target with Bardy’s September 2020 forecast provided to Hillrom pre-Merger. 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% over Q1 2020. 163 Bardy expects its growth to continue, and its unit

economics with respect to Medicare beneficiaries remains profitable. 164

N. Industry Participants Continue to Engage with Novitas and CMS

Dissatisfied with Novitas’ current rates, industry participants 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 individual

physician customers 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 (Querry).
165
JX 646 at 6.

41
methodologies, including those that were used 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 CMS” in the coming

months.167 iRhythm expects to have an initial 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 health 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).

42
 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, 2021. 172 After pretrial briefing, 173 a three-day trial

was held from May 5 through 8.174 The parties simultaneously submitted opening

post-trial briefs on May 19, 2021, 175 and replies on May 27, 2021.176 The Court

heard closing arguments on June 4, 2021, after which the matter was deemed

submitted for decision. 177

II. ANALYSIS

Bardy asserts Hillrom’s failure to close the Merger breached the Agreement;

Hillrom counterclaims for a declaratory judgment that its 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.”).

43
excused. Hillrom offers two separate but related grounds to justify its

nonperformance, 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-outs for events generally affecting the market and

changes in “Law,” Hillrom asserts neither carve-out applies and, even if they did,

the MAE’s disproportionate-impact exception to those carve-outs renders the

Novitas rate decrease an MAE nonetheless.

Second, 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 obligation 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 did not brief and so waived 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 contracted 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).

44
frustration of purpose argument, is predicated, as a practical matter, on the Court’s

acceptance of its proffered interpretation of the bargained-for language contained in

the Agreement.

“The primary goal of contract interpretation is to attempt to fulfill, to the

extent possible, the reasonable shared expectations 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 intent 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 that the contract is unambiguous but disagree in

litigation as to what the purportedly unambiguous language actually means.

“Of course, dissensus regarding a contract’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 susceptible of different interpretations or may

have two or more different meanings.’” 182

180
Comrie v. Enterasys Networks, 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) (holding that a “contract is unambiguous when the

45
 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 agreement. 183 Accordingly, I begin

the analysis by reviewing the context in which the parties negotiated the Agreement

before turning to the contractual language. “With the Agreement’s commercial

context in hand, and mindful that my understanding of the parties’ contractual

relationship cannot overwrite an unambiguous contract,”184 I then proceed to analyze

whether the Novitas rate adjustments constitute an MAE as defined.

A. The Basic Business Relationship Between These Parties

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 Bardy 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 diagnosis of infrequent arrhythmias and that it is not easy to

46
operator, knew that the price-setting process for devices within the same CPT codes

as the CAM patch was underway during the Merger negotiations and that the

methodology by which Novitas arrived at its pricing determination was opaque,

rendering it “not [] as intellectually defensible from a valuation perspective as the

rates set by CMS.” 186 The parties dispute, however, whether and to what extent they

intended to allocate the risk of Novitas making a downward adjustment to the

reimbursement rate for the relevant CPT codes within the Agreement.

As an initial matter, Hillrom argues the Court should not concern itself with

how the parties allocated risk in the contract because that allocation is “irrelevant”

when interpreting an MAE clause. 187 Hillrom quotes Vice Chancellor Laster in

Akorn, Inc. v. Fresenius Kabi AG for the proposition that such inquiries “would

replace the enforcement of a bargained-for contractual provision with a tort-like

concept of assumption 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. at 104:2–17 (LaViolette) (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 defensible” as CMS’s).
187
See Defs.’ Post-Trial Opening Br. at 48.

47
in due diligence.”188 While Hillrom quotes Akorn accurately, it misses

Vice Chancellor Laster’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 that “[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 life to a real-world contract, courts

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 addressing the sale of an entire

business.” 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
agreement 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))).

48
MAE provision should not be read, as Hillrom suggests, in isolation. Rather, the

Court must situate the MAE provision within the broader contractual scheme and

commercial context. Like man, under Delaware law, no contractual provision is “an

island, entire of itself.” 192

According to Hillrom, even 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 reimbursement rates,” making it “fantastical

to believe that these sophisticated parties intended to carve out significant changes

in reimbursement rates from the Company MAE definition.”193

The 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 Board seeking approval of the Agreement listed seven “key risks,” and

192
See John Donne, Devotions Upon Emergent Occasions, Meditation XVII 575
(Henry 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 promontory 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).

49
lower reimbursement rates was not among them.194 Witnesses on 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

priced the CAM patch’s CPT codes consistently at around $365 in the relevant

regions. That does not mean, however, that these sophisticated parties decided to

ignore entirely the risk of a Medicare rate adjustment in the Agreement. In this

regard, Hillrom’s story that “no one ever contemplated a rate decrease” simply does

not square with the preponderance of the evidence.196

Hillrom had no fewer than five internal and external advisors reviewing

reimbursement issues, 197 some 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 reacting 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 581:12–18 (Groetelaars) (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 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 proposing

50
It was also no secret that the methodology by which MACs such as Novitas calculate

reimbursement rates is notoriously murky, making pricing predictions 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 the Hillrom team” throughout due diligence.200 And yet, Hillrom went forward

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 decision was announced in December 2020.201

Medicare reimbursement rates between $60 and $100 for the CAM patch’s CPT codes);
(Roehrich) 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 value (>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 requiring “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.”).

51
 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, lower Medicare reimbursement rates for the

CAM patch lowers Bardy’s revenue, which in turn lowers the price Hillrom would

ultimately pay to Bardy stockholders under the Agreement’s earnout.203 Hillrom

understood this. Indeed, upon announcement 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 reaction to the January Novitas Rate—

appreciation of Hillrom’s foresight in negotiating the earnout—contradicts

Hillrom’s argument that a material downward adjustment of the CAM patch’s

Medicare reimbursement rate was so beyond the pale that neither side bothered to

allocate that risk beyond the MAE. 205

202
JX 376 § 1.14.
203
See id.
204
JX 418 at 1; Tr. 567:5–568:8 (Groetelaars).
205
Hillrom’s Frank testified 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
exactly that.” Tr. 481:22–482:2 (Frank). But, as explained, the earnout’s revenue-based
payout did function to offload risk onto Bardy should the proposed Medicare rate
adjustments stick. It is perfectly rational for the parties to have allocated that risk through

52
 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 Bardy’s proffered “big picture”

provides a more accurate depiction of the parties’ contemporaneous understanding

of the Agreement (and the risk allocation memorialized therein), any resolution of

the MAE dispute ultimately must be grounded in the language of the contract

itself. 206 To be sure, full appreciation of how the parties understood the commercial

context of the Agreement, and how that informed their contract design, does lead to

some understanding of why the MAE provision did not expressly address

fluctuations in Medicare reimbursement rates. But, in the final analysis, “Delaware

has long adhered, and continues to adhere, to the objective theory of contracts.”207

“While [our courts] have recognized that contracts should be read in full and situated

in the commercial context between the parties, the background facts cannot be used

earnouts built on contingent revenue milestones; Bardy’s revenue projections were
dependent in 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 purchase 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
Solomon 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)).

53
to alter the language chosen by the parties within the four corners of their

agreement.”208 Accordingly, “[a]s is the Delaware way, I turn to the words the

parties agreed to in their 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
adverse 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, circumstance, 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) (internal
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).

54
 supplies, materials or other goods purchased from third party
suppliers); . . .

(v) any change in any Law (including any COVID-19 Measures 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 such fact, event, circumstance, change, effect or
condition may be taken into account 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
industries 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-specific risks to the seller.”212 “From a

drafting perspective, the MAE provision accomplishes 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 buyer’s acceptance of general

211
Id. at 88–89 (emphasis in original) (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 Albert Choi & George Triantis, Strategic Vagueness in
Contract Design: The Case of Corporate Acquisitions, 119 Yale L.J. 848, 867 (2010)).

55
market or industry risk returns the risk 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 suffered an effect that was material and

adverse.” 216 Upon carrying that burden, 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, under the operative MAE provision,

that the target’s “performance was 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 that 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 initial, 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 88–89.
219
JX 376 at 88–89.

56
 The April Novitas Rate Was 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 adverse 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 engaged . . . 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, data
management and remote patient monitoring devices (including
ambulatory 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 contemplated 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 “events” under the Agreement because an MAE “is best

read as a backstop protecting the acquiror 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.

57
parties signed the Agreement.222 On this point, Bardy’s attempt to render the

Agreement’s language dead letter by pointing in the abstract 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 discussed, in Akorn, the seller argued that an event could not

qualify 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 decision interpreted a
broad 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 specifically 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 limitation of a
remedy where the fraudster intentionally misrepresents a fact embodied in a contract).
224
Akorn, 2018 WL 4719347, at *60.
225
Id. As Professor Robert Miller points out, then-Vice Chancellor Strine’s full quote in
IBP is better understood when placed 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 contracts are
heavily negotiated and cover a large number of specific risks explicitly. As a result, 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 acquiror from the
occurrence of unknown events that substantially threaten the overall earnings potential of
the target in a durationally-significant manner.” IBP, 789 A.2d at 68. The second sentence

58
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 “unknown facts, events, circumstances, changes, effects or conditions”;

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, therefore, 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 contrast 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 DeLucca 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 burdens 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.) (explaining 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”).

59
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 condition, 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 reference to the Company’s financial condition but instead

focuses on the Company’s operations. According to Bardy, because changes to

reimbursement rates affect only Bardy’s revenue and not its operations, those

changes cannot constitute an MAE because they do not affect Bardy’s “Business”

as defined. Hillrom responds that the Novitas rate decreases affect the Company’s

“sales,” “marketing,” and “other commercialization activities” for ambulatory

cardiac monitors and associated devices. Accordingly, says Hillrom, the rate

decreases affect the Company’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, at *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 Companies, taken as a whole.”); IBP, 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 Deal: Two Models of Material Adverse Change Clauses
in Business Combination Agreements, 31 Cardozo L. Rev. 99, 115 (2009); see also
AB Stable, 2020 WL 7024929, at *62 & n.128–30 (recognizing Miller’s “MAE Objects”

60
This list is carefully crafted by the deal parties,229 and in this case, the MAE Objects

identified in the Agreement apparently differ from those most frequently found in

agreements containing MAE clauses. 230 As a matter of contract construction, the

Court must respect the parties’ bargain by giving 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 in isolation; for example,

it is difficult to conceive how a negative “result of operations, 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 definition’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 Miller, Canceling the Deal, 31 Cardozo L. Rev. at 116 (documenting the frequency
with which MAE Objects appear in a sample of contract MAE definitions). Based on
Miller’s sample, the 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 1058096, 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, at *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 307445, at *15 (Del. Ch. June 6, 1996)

61
 In this case, it is not reasonable to construe the definition of “Business,” and

its identified MAE Objects, so narrowly that it would 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

enumerated MAE Objects, including “commercialization activities.” “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 “commercialize” 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 rate decrease, therefore, affects the Company’s “Business”

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 avoid 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 something”).
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/
commercialization (last visited June 22, 2021) (“the organization of something in a way
intended to make a profit”).

62
 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 estimate 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 will be considered in determining whether
there has occurred a Company Material Adverse Effect) . . . . 235

This carve-out would be superfluous had the parties intended to exclude any non-

operations related events affecting Bardy’s defined “Business” from the general

MAE in the first instance, contrary to principles of contract construction well-settled

under Delaware law. 236 Placed in proper context, then, Bardy’s proposed

construction of “Business” is unreasonable.

*****

Having determined the Novitas rate decrease was an “event” affecting

Bardy’s “Business,” the question remains whether the rate decrease was also an

MAE under the Agreement. I endeavor to answer that question next.

235
JX 376 at 88; see also Robert T. Miller, What Do Exceptions in MAE Definitions
Except?, BUS. L. TODAY (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 effect by the court.”).

63
 The Novitas Rate Decrease Was Not an MAE

Under the Agreement’s MAE provision, Hillrom’s burden was to prove that

the Novitas rate 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 look 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

Absent evidence to the contrary, “a corporate acquirer may be assumed to be

purchasing the target as part of a long-term strategy.”240 Because neither party

attempted 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 88.
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, 2018 WL 4718347, at *52 (quoting Hexion, 965 A.2d at 738).
240
Hexion, 965 A.2d at 738.

64
acquiror.”241 To prove the materiality of the April Novitas Rate, therefore, 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-term hiccup in earnings.”242

Distilled to prima facie elements, in order to prevail on its claim that it was

excused from closing by the occurrence of an MAE, Hillrom was obliged to prove

by a preponderance of the evidence that (1) the April Novitas Rate’s effect on

Bardy’s “earnings potential,” 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 Hillrom invoked the MAE clause, would “reasonably be expected” to

endure for a “durationally significant” period. 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
Medsystems, 2019 WL 6896462, at *34.
242
IBP, 789 A.2d at 68; Channel Medsystems, 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 see 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 durational

65
 For the sake of advancing the analysis, I will assume that Hillrom has proven

the April Novitas Rate (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 record
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 expert,
Lucy Allen, did not create her own valuation model but instead 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 conclusion that Bardy is worth less than nothing is
incredible on its face. The evidence of record uniformly shows the CAM patch is an
exceptional, patent-protected product. See JX 204 at 3 (Hillrom’s Dr. Johannes de Bie,
remarking that “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.”); 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 88 (defining an
MAE by asking whether it “would reasonably be expected to have a material adverse effect
on . . . the Business of the Acquired Companies, taken as a whole,” as opposed to the
combined company. (emphasis added)); see also Akorn, 2018 WL 4719347, at *56
(examining substantively identical language and concluding that “the plain language of the
definition of an MAE makes clear that any MAE must 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, like Allen, failed to deliver useful evidence.

66
support the contention that neither Novitas nor CMS will increase the April Novitas

Rate within a commercially reasonable period.

a. Hillrom Failed to Prove the April Novitas Rate Will Endure for a
Commercially Reasonable Period

As noted, to establish an MAE’s durational significance, the party invoking

the MAE clause must prove by a preponderance of the evidence that the target

suffered a material adverse effect for a “commercially reasonable period,” as judged

from the perspective of a “reasonable acquiror.”245 Our courts have observed that

“one would expect [a] commercially reasonable period to be measured in years

rather than months.”246 While that general guidance is useful, our courts have

stopped short of prescribing specific time periods when assessing “durational

significance,” and for good reason. Like most matters of law that exist in the realm

of “reasonableness,” the determination of what is a “commercially 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.

67
 When Hillrom acquired Bardy, it understood the Company to be a startup in

a medical device segment where rapid growth was prioritized over profits.247

Indeed, prior 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 slimmer margins and an

increased 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 predicates: (1) the new reimbursement rate will

not be revisited by Novitas or CMS until 2026, at the earliest, 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 Like” 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 10 year zero
return was positive? A. Not that I recall. Q. Approximately how many different 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 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 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 also 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).

68
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 words, Hillrom was

prepared to own and operate the Company for three 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 years. On this point, both

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
access to capital, as evidenced by its recently 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
This conclusion is further buttressed by Bardy’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 update).

69
parties retained experts offering diametrically opposed views regarding the

durability of the April 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 rate 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 compliance.258 The practical implications of her lack of relevant

experience were on full display when 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 normal
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.

70
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 CMS 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 Novitas 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 announced that it would no

longer serve Medicare patients in reaction to the April Novitas Rate 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 dispute 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.’ Post-Trial 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 original)).
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 effect on iRhythm’s business.
Defs.’ Post-Trial Opening Br. at 38. That may be true, but reimbursement rates are

71
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

diagnoses 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 there 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

process and that it follows “no rules” as it determines when and at what 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. Public markets 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
error. That the parties agreed expert testimony on this 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 by 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 JX 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 also no published rules for how often

72
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 useful

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 cycle

and, at the latest, by 2023. 267 In contrast to Kohler, Renbaum’s opinion 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

Rates would be revised in short order after they were announced. 269 And she predicts

now 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 $400+ and subsequently

delegate to the MACs temporary pricing authority pending submission of 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 ¶ 15; 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).

73
information signals that CMS will take up the issue again soon. 271 In this regard,

Renbaum found significant that, 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, under CMS’s “triple aim,”

its decision-making process is guided by: (1) the health of each individual patient;

(2) the health of the population, including managing healthcare disparities 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) (explaining 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 resolved.”).
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 Medicare’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).

74
by challenging the commercial viability of devices in that category.276 Given the

dynamic growth in demand for LTH devices, 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 received 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

iRhythm, 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 individual 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 that 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 Medicare 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 that it could not serve Medicare patients at the April Novitas
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).

75
monitoring.”279 Renbaum believes that public pressure, combined with the

category’s increasing importance to patients, makes it likely 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 Hillrom argues Novitas 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’ recently erratic pricing

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 the RUC’s
pricing recommendation to CMS of $440. See JX 70 at 2; Tr. 307:2–10 (Renbaum).
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.

76
 Hillrom also makes much of the fact that the April Novitas Rate was the

product of a considered, months-long process with industry 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 occurred between the January Novitas Rate and the April Novitas

Rate were Bardy’s “one shot” to persuade the MAC to raise its rates.282 But that

sentiment 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. But 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) Dep. 253:11–15.
283
Tr. 177:15–178:14 (Querry); id. at 492:18–493:11 (Frank); id. at 566:19–567:2
(Groetelaars).

77
the relevant CPT codes.284 Indeed, Novitas continues to engage with industry

participants, including iRhythm, to discuss the appropriate pricing for extended

AECG devices.285 If Novitas believed it had already considered all relevant

evidence and had made a final, informed decision, then there would be no reason for

it to continue engaging in these discussions.

Hillrom has likewise failed to carry its burden 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 used a valuation methodology
based on assumed cost inputs. Unlike our experience with NICE in the UK or with our
commercial payers in the UK, [as] well with our commercial payers, the overall impact on
health care costs was not directly considered in this analysis.”); 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 model we have shared with them has been successfully applied in
other areas of the CMS physician fee schedule and we believe 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 attempt to secure higher
reimbursement for the LHM”).

78
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 collected more data. Hillrom does not dispute (indeed, its

lawsuit is premised on the fact) that the April Novitas Rate’s significant departure

from Novitas’ historical reimbursement rates has created turbulence in a growing

market serving an increasing number of patients. Though Hillrom channels its

expert to argue CMS will not act without a RUC recommendation (not scheduled to

occur before October 2024), it argues in the next breath that Bardy and the industry

have been decimated by the change in reimbursement rates. 288 Its position 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 (explaining why a CPT code would move from Category III to
Category I); Tr. 300:5–18 (Renbaum) (same).

79
well-documented “triple 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 within the next two years.

Having found that the preponderance of the evidence does not support

Hillrom’s contention that neither CMS nor Novitas will revisit the April Novitas

Rate within a commercially reasonable period, the question remains whether these

regulators are likely to revise the reimbursement rate meaningfully upward such that

an MAE would not reasonably be expected to have occurred. Hillrom says no;

Bardy says 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 Not Be
Meaningfully Revised 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 adequate information on the

direct cost of the CAM patch itself.291 Because Bardy can turn a profit at the

290
Defs.’ Post-Trial Opening Br. at 40–41.
291
PTO ¶ 28; JX 350 at 3.

80
April Novitas Rate, Hillrom reasons syllogistically that the CAM patch’s unit

economics confirm that the April Novitas Rate is here to stay.292

Hillrom’s cynicism regarding the regulators’ inclination to revisit and increase

the April Novitas Rate is striking when set against its 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 understands the

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]
reimbursement for [Bardy]”); JX 391 (including CAM patch margins in Hillrom DCF);
JX 170 (Groetelaars agreeing there is “little merit to the 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 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

81
 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 2020 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 service,” 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

(Querry) (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
(Groetelaars); 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 broad
group of suppliers, as they do not want the few invoices presented to CMS to be for a list
price 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 Rate. Tr. 50:4–17, 67:24–
68:3 (Bardy) (seeing little risk in December 2020 that reimbursement rates would decrease
in 2021, and expressing shock at Novitas’ price revision); JX 253 (Bardy presentation to
Hillrom days after CMS announced its final fee schedule 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.

82
Hillrom’s CEO, Groetelaars, agreed with this assessment, stating, “[i]t is highly

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 pre-litigation characterization of CMS pricing as

more holistic 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 disclaims that view, contending that CMS’s

proposed 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

analyses. 301 There is no reason 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

was 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).

83
“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 offers no reason 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 fashion and continues to engage in

conversations concerning flaws in its pricing methodology. 303 Nothing about

Bardy’s fundamental business or the strength of its technology has changed. 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 the

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) (viewing Muller Report as outlier);
(Roehrich) Dep. 85:18–92:7 (discussing JX 197, Hillrom’s team was “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 (Frank) (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).

84
record supports the assumptions underlying Bardy’s pro forma model calculating

the clinical value of its service to justify the historic $365 Novitas rate or above. 305

Returning to Hillrom’s burden, it 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 it reasonably would have

expected that CMS would not meaningfully increase the current Medicare

reimbursement rates for the relevant CPT codes, it has likewise failed to prove that

the current state of those rates constitutes an MAE.

*****

For reasons explained, Hillrom has failed to carry its burden to prove 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, therefore, could end here. For the sake of completeness, 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).

85
 The April Novitas Rate is a “Health Care Law” Carved Out From 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 Body, 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 federal agency within the federal Department of Health and Human

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

“Regulations and Policies” section of the CMS website.311 Medical device suppliers

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 Regulations (2018),
https://www.cms.gov/regulations-and-guidance/regulations-and-policies/medicare-fee-
for-service-payment-regulations (last visited June 4, 2021).

86
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 any schedule of fees set by CMS that governs payments

to doctors or other suppliers for Medicare services, while colloquially referred to as

“rates” or “prices,” are regulations or rules as contemplated by the Agreement. 313

Here, the Medicare reimbursement rates in question are not presently set

directly by CMS. Rather, they 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 schedules 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. § 1395cc(a)(1)(A).
313
Tr. 310:16–311:8 (Renbaum); id. at 668:6–16 (Kohler); id. at 169:6–170:1 (Querry).
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 functions to its
[MACs], including determining the amount of the payments to be made to provide[r]s as
required by the Medicare statute.”).

87
 CMS regularly delegates the setting of reimbursement rates, among other

functions, to MACs.315 Indeed, Hillrom acknowledges that CMS has never set a

national rate for the CPT codes applicable to the CAM patch; Novitas has always

determined the amount to be paid to Bardy in the regions where it operates.316 Bardy

could not ignore MAC pricing or seek to negotiate higher reimbursement rates from

Medicare any more 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 regulations 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) (requiring 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 payment amounts”); Patwardhan, 2014 WL 1093049, at *1 (describing
the nature of CMS’s delegation authority vis-à-vis MACs).
319
JX 376 at 88–89.

88
January and April 2021 fall under the Agreement’s MAE exception for changes of

Law. 320

The April Novitas Rate Did Not Have a “Disproportionate Impact” 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 nevertheless 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 cannot 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 against any 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 have concluded 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 68.

89
prove (1) the universe of “similarly situated” companies “operating in the same

industries or locations” as Bardy, and (2) that Bardy, as compared to those

businesses “similarly situated,” suffered a “materially disproportionate impact” from

the April Novitas Rate. 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 same industries or locations . . . .” 323 This language differs from language

interpreted in other Delaware MAE cases, where the carve-out exceptions

contemplated disproportionate impact on “comparable entities operating in the

[same] industry . . . .” 324 Here again, well-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 exclusions 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 added)).
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).

90
universe of such companies to a subset “operating in the same industries or

locations.” Thus, I must determine what makes a company “similarly situated”

before turning to whether Bardy was “disproportionately impacted” by the

April Novitas Rate as compared to others in “the same industries.”

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

The Agreement does not provide any criteria by which to assess whether a

company is “similarly 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 4719347, 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.

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situation is factually relative by design; under 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, because the rate changes at

issue affect specific categories of products in the ambulatory 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 party disputes that iRhythm is “similarly situated” for purposes of

interpreting the disproportionate 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 LTH device (the Zio XT patch).332 Further, like Bardy, iRhythm

has yet to turn a profit, signaling it also currently prioritizes growth over

profitability. 333 While iRhythm is publicly traded, Bardy maintains healthy access

329
JX 376 at 89.
330
See Genesco, 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-Trial Reply Br. at 30. While it also sells MCOT services, these
account for a negligible portion of its current revenue.
333
Tr. 204:8–205:13 (Querry); id. at 442:22–24 (Jeffers).

92
to capital to fuel its expansion.334 The only substantive distinction between iRhythm

and Bardy is operational 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

devices for their revenue, with only 9% and 15% of their annual revenue coming

from LTH devices, respectively.337 What LTH devices they do sell, they source

from third parties.338

Where 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 “situational” 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 665 ¶ 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 Bardy. 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).

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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 for BioTelemetry. 341

Hillrom proffers the composition 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, Hillrom points to its pre-litigation Board 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 shared 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 iRhythm because it is
privately-held with revenue numbers 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 fluctuations 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 players with skin in the game).

94
operating in the same “market.” 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 parsing of a company’s situation than mere

participation in the LTH market.

Indeed, the market assessments highlighted by Hillrom demonstrate how

Bardy differed from BioTelemetry and Preventice in salient ways, including its

reputation as a best-in-class “pure player” that fields only LTH technology, its

relative financial immaturity and its small size.345 Companies seeking to make a

strategic acquisition within a market inevitably survey multiple potential targets,

each of which often bring meaningfully different 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

Agreement’s exception to the MAE carve-outs.

I acknowledge 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 the target and, therefore, might be

344
JX 376 at 88–89.
345
JX 51 at 24 (presentation to Hillrom’s board describing Bardy as having a “[b]est in
class device”).

95
expected to suffer similar impacts from external events affecting the featured

product(s). That figment disappears, however, after more careful observation. As a

one-product company that operates in a high-growth, heavily regulated market, it is

not surprising that Bardy 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 impacted 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 impact” on Bardy.347 Before

turning to the evidence on this point, I pause to parse two aspects of the parties’

346
Chi. Bridge, 166 A.3d at 926–27 (holding that, to understand a contract, “[t]he basic
business relationship 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 from higher
paying commercial carriers, the impact on Bardy relative to iRhythm would likely be
disproportional.
347
JX 376 at 88–89.

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chosen contractual phrasing. First, the Agreement provides that the carve-out’s

exception applies “to the extent” “such matter” impacts the target disproportionately.

That language, plainly read, indicates that Bardy only agreed to assume the risk of

an event where the delta of its impact on the target’s business, as compared to others

“similarly situated,” is, itself, material. For example, if the risk “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.” The proportionality of an event’s “impact” could be understood by

measuring its effect on the target relative to other comparables delimited in the

MAE. Under that company-specific 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-19 article).

97
the same as an across-the-board cut to reimbursement rates; in other words, the

reduction in the reimbursement rate could not, by definition, be “disproportionate”

because all companies selling covered devices would experience an identical drop

in revenue per unit.

While the latter reading of “impact” has 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 seller, 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 intended “impact” to be

measured by the absolute effect of the event itself, 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 Agreement

could have more clearly defined “impact,” when reading the Agreement 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 376 at 89.

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other companies. Under this reading, even though the April Novitas Rate applies

equally to all companies selling LTH devices under the relevant CPT codes, 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 metric should

serve as the defining benchmark for the analysis. Bardy focuses on revenue and

volume of sales, which it contends are the most relevant factors to a growth-oriented

company like Bardy and formed the bases for Hillrom’s determination that Bardy

was an attractive acquisition target. 352 Hillrom emphasizes profitability and

discounted cash flows (“DCF”), which it argues are standard benchmarks in any

acquisition and metrics that figured prominently in Hillrom’s pre-acquisition due

diligence of Bardy. 353

This 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 no 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.’ Post-Trial Reply Br. at 13–18.
354
IBP, 789 A.2d at 68.

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results of the business.355 EBITDA, of course, measures a company’s free cash

flows. 356 And free cash flows, as the source for calculating a firm’s value through a

DCF analysis, is regarded by many as the “gold standard” valuation metric. 357 That

metric operates with less force, however, when the target is still in startup mode and,

like its “similarly situated” comparator, is unprofitable and invested 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 failed to prove that Bardy suffered a disproportionate 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 of the business” than earnings per share); Akorn, 2018
WL 4719347, at *53–57, *62 (placing the most 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
See Aswath Damodaran, Investment Valuation: Tools and Techniques for Determining
the Value of Any Asset 17–18 (Wiley, 3d ed. 2012) (“Discounted cash flow valuation is
based on expected future cash flows and discount rates. Given these estimation
requirements, 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. (observing that
DCF valuations often do not properly account for unutilized assets or patents.). As noted,
iRhythm, the “similarly situated” comparator, is also unprofitable and currently oriented
toward growth.
359
Hexion, 965 A.2d at 740.

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iRhythm by any measure. 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 April Novitas Rate in

terms of revenues, gross profits and other valuation metrics. And the numbers bear

this out.

The April Novitas Rate’s impact on revenue is clearly not disproportional.

Bardy and iRhythm attribute 29% and 27% of their revenue to Medicare

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
attributable 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.

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 The 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 discern from the parties’ competing 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 It is,

therefore, difficult to assess whether the experts’ granular analysis is actually

comparing apples to apples.364 On a less granular level, the 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 calculate their cost of sales on a different
basis from one another and include or exclude certain expenses and costs that are not
always obvious. These inclusions and exclusions are not clearly defined in their financial
statements. It is particularly more complex to determine cost of sales basis for these
companies, as they have high technology and services components, so costs and expenses
related to labor, compensation, and research and development may or may not be partially
or fully included in cost of sales, according to an individual company’s accounting
practices.”).
364
Bardy’s expert, Jeffers, could not say for sure whether his gross margins calculations
included device costs “beyond just the plastic patch and adhesive tape.” Tr. 425:21–426:17
(Jeffers). He further assumed iRhythm’s gross margins for its Medicare business were the
same as its overall gross margins, without support for that assumption. Id. at 426:23–
427:11, 420:12–431:4 (Jeffers). Hillrom’s expert, Allen, based her gross margin numbers
for iRhythm on public disclosures, but it is unclear whether those numbers are calculated
in the same way as Bardy’s numbers. See JX 631 ¶ 68; see also JX 668 ¶¶ 67–68
(Jeffers persuasively critiquing Allen’s methods).

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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, notwithstanding

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

competing 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 DCF 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 (McClanahan) Dep. 98:14–99:6 (noting that Hillrom specifically
looked at iRhythm’s growth rates and margin expectation when it assessed the future value
of Bardy).
366
JX 823 at 3.
367
Tr. 189:1–190:12 (Querry) (confirming Bardy continues to operate profitably and
suggesting iRhythm’s wavering on serving Medicare patients presented an opportunity 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.

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paper on which the Agreement was printed is facially incredible given the value 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 compares apples to oranges—you can do it, but the result yields very

different flavors on the palate. 371

Hillrom failed to carry its burden to prove that the disproportionate-effect

exception applies to disable the applicable MAE carve-out. That carve-out,

therefore, renders Hillrom’s refusal to close a breach of the Agreement.

C. The Purpose of the Agreement is Not Frustrated

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 doctrine discharges a contracting party’s

obligations when his “principal purpose is substantially 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’ experts’ 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 Rate 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 reiterate that
iRhythm’s stock price, on this record, is not a reliable indicator of its estimated value.
See JX 665 ¶ 10 (documenting correlation between iRhythm’s stock price and the timing
of Novitas’ rate announcements).

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on which the contract was made.”372 “This common law doctrine provides an escape

for an acquirer if the target experiences a catastrophe during 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 frustration must be so severe

that it is not fairly to be regarded as within the risks that he assumed 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 event, 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 will suffer

as a result of the April Novitas Rate. For these reasons, Hillrom’s invocation of the

frustration of purpose doctrine fails.

372
Wal-Mart Stores, Inc. v. AIG 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.

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 D. Remedies

Because Hillrom has failed to prove the occurrence of an MAE, its failure to

close the Merger on February 25 breached 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 does it appear to contest

Bardy’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, the parties agreed that specific performance

375
JX 376 §§ 1.3, 5.1.
376
Tr. 401:12–403:18 (Jeffers); JX 636 at 30–33 (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. Enbridge Energy Co., 159 A.3d 242, 262 (Del. 2017) (“Once liability has
been found, 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 Bardy’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 Agreement).
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 performance and its order
that payment of delayed purchase price include interest).

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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 Equityholder Indemnified 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 and, with respect to covenants and
agreements required to be performed after Closing, the Company or
Surviving Corporation, of any of their respective covenants or
agreements in this Agreement.380

“Adverse Consequence” 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 responds that the term “Equityholder” is defined to mean “a holder

of Company Capital Stock, Company Options, Company Warrants or Promised

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 93.

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Indeed, Bardy does not claim any Equityholder 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 related to a breach or non-fulfillment by [Hillrom]” pre-closing; on

the other hand, “with respect to covenants and agreements required to be performed

after Closing,” Hillrom would reimburse “the Company [Bardy] or Surviving

Corporation.”384 By distinguishing Equityholder Indemnified Parties 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 indemnification for any pre-closing breaches by Hillrom,

including its refusal to consummate the 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.

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conspicuously fails to cite any authority stating as much. 385 At oral argument, Bardy

raised for the first time “the We Work case from last year” as an instance where this

court allowed a company to 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 estate entity, had standing to pursue breach of

contract claims against its shareholder, Softbank Group Corp. (“SBG”), under a

Master Transactions Agreement (“MTA”) that obligated SBG, inter alia, to

consummate a tender offer to WeWork’s shareholders. 387 Although WeWork was

not among the tendering stockholders allegedly trodden upon 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

acknowledged that the parties were entitled 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.

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broadly to a company that failed 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 disadvantage) stockholders seeking to enforce 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 could sue for SBG’s breach, 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 collect 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 carry 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)).

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April Novitas Rate will have a durationally significant material effect on Bardy.

Even if Hillrom had successfully proven 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 in the same industries 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 for 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 final judgment within ten (10) days of the date of

this opinion.

390
6 Del. C. § 2301(d).

111