This blog post shares three real-world earn-out litigations—each in a different forum, each tied to a transaction in the $5 million–$20 million range, and each presumably costing total attorney’s fees greater than $1 million!
1. STX Business Solutions, LLC v. Financial-Information-Technologies, LLC
Delaware Court of Chancery │ C.A. No. 2024-0038-JTL (Del. Ch. Oct. 31, 2024)
- Deal size: $5.3 M cash + $1.7 M in parent-company units at closing; up to $5.5 M in revenue-milestone earn-outs.
- Dispute: Seller’s founder was terminated “without cause” and claimed that termination triggered acceleration of all unpaid milestone payments. Buyer contended the clause covered only already-earned but unpaid amounts.
- Outcome: Vice Chancellor Laster denied the buyer’s motion to dismiss, finding ambiguity in the acceleration language and pre-suit “good-faith negotiation” requirement. The matter proceeds to binding expert determination on the acceleration issue.
- Key takeaway: Acceleration clauses must specify exactly which payments accelerate—and precisely how and when “good-faith” pre-suit discussions occur.
2. Hodges v. MedAssets Net Revenue Systems, LLC
U.S. District Court, N.D. Georgia │ No. 1:07-CV-2046-TCB, 2009 WL 3336471 (N.D. Ga. Oct. 15, 2009)
- Deal size: $8 M upfront; $3 M earn-out over two years based on net-revenue targets.
- Dispute: Seller alleged the buyer dumped affiliate overhead onto the acquired unit and paused a profitable service line to depress the net-revenue metric and avoid earn-out payments.
- Outcome: The court held the alternative dispute resolution clause—limited to “calculation disputes”—did not cover operational-misconduct claims. Seller’s breach-of-contract claims for bad-faith conduct survived and remained in federal court.
- Key takeaway: If you want operational-control or “good-faith” claims funneled into alternative dispute resolution, then draft the clause to cover “any dispute arising under or relating to the earn-out,” not merely “calculation” issues.
3. Fit Tech, Inc. v. Bally Total Fitness Holding Corp.
U.S. Court of Appeals, First Circuit │ 374 F.3d 1 (1st Cir. 2004)
- Deal size: $12 M upfront; $5 M earn-out tied to subscription-revenue milestones over three years.
- Dispute: Seller alleged buyer cloaked intercompany charges to depress subscription revenues and avoid earn-out payments, insisting all disputes go to the neutral-accountant alternative dispute resolution process.
- Outcome: The First Circuit held that operational-misconduct claims fell outside the narrow alternative dispute resolution clause—limited to GAAP-prepared calculations—and remanded for district-court adjudication.
- Key takeaway: Broaden alternative resolution triggers beyond “calculations prepared in accordance with GAAP” to “any dispute arising under or relating to the earn-out.”
There are a myriad of other cases with a variety of issues. I hope this scares the reader–whether you are a business owner, attorney, or someone else–into paying closer to each line of the earn-out provision.
David Seidman is the principal and founder of Seidman Law Group, LLC. He serves as outside general counsel for companies, which requires him to consider a diverse range of corporate, dispute resolution and avoidance, contract drafting and negotiation, and other issues. In particular, he has a significant amount of experience in hospitality law by representing third party management companies, owners, and developers.
He can be reached at david@seidmanlawgroup.com or 312-399-7390.
This blog post is not legal advice. Please consult an experienced attorney to assist with your legal issues.
Photo credit: Financial Crime Academy
