|
 “It is critical that any activities related to Project Plato,
including the mere fact the project exists, be kept in strict
confidence,” Chris Andrew, a J&J lawyer, wrote in an internal memo
reviewed by Reuters.
The covert team would go on to evaluate a strategy to shift all the
liability from about 38,000 pending talc cases onto a newly created
subsidiary, which would immediately declare bankruptcy. The goal, as
a lawyer for the subsidiary said in a court filing: To halt all the
litigation and transfer the cases to bankruptcy court, where
plaintiffs would compete for compensation from a limited pool of
money.
In court and in public statements last July, Johnson & Johnson said
it intended to keep fighting the allegations that its products were
unsafe in trial courts. The company was actively defending itself in
talc trials, including one that would result in a $27 million jury
award that could be nullified by the bankruptcy maneuver. The
plaintiff in that case now may have to instead seek compensation
through a bankruptcy process.
Privately, J&J took concrete steps starting as early as April to
consider and plan the bankruptcy maneuver, according to internal
company documents, depositions and other court records reviewed by
Reuters. The strategy seeks to ensure the pending cases never reach
a jury and instead be handled in a bankruptcy court.
The documents provide the most detailed account to date of how the
New Jersey-based conglomerate strategized to limit compensation to
tens of thousands of talc plaintiffs.
Reuters exclusively reported the broad outlines of the bankruptcy
strategy being explored by J&J in July. The company went ahead with
the plan in October, offloading responsibility for the cases to the
new subsidiary, which then filed for bankruptcy. Before the filing,
the company faced costs from $3.5 billion in verdicts and
settlements, including one in which 22 women were awarded a judgment
of more than $2 billion, according to bankruptcy-court records.
Now, J&J proposes to give the subsidiary in bankruptcy $2 billion to
put into a trust to compensate all 38,000 current plaintiffs, as
well as all future claimants. J&J has said in court filings and in
public statements that the subsidiary, LTL Management LLC, could
also tap a stream of royalty revenues valued at more than $350
million at the time of the bankruptcy filing.
J&J did not answer detailed written questions from Reuters about its
planning of the bankruptcy maneuver. In a statement, J&J defended
the LTL bankruptcy as a way to resolve the talc claims.
“This filing follows established process, and courts have uniformly
acknowledged that equitably resolving these types of claims through
Chapter 11 is a legitimate use of the restructuring process,” the
statement said. “LTL’s objective is to reach a fair and equitable
resolution for claimants through a plan of reorganization and create
a reasonable framework to address the unprecedented number of
existing and future talc-related claims.”
It continued: “We stand behind the safety of Johnson’s Baby Powder,
which is safe, does not contain asbestos and does not cause cancer.
We continue to believe resolving this matter as quickly and
efficiently as possible is in the best interests of claimants and
all stakeholders. We will continue to follow the process and put
forth our position in the court.”
On Thursday, a lawyer for the J&J subsidiary appeared at a
bankruptcy hearing and accused attorneys for people who have sued
Johnson & Johnson over its talc products of sharing confidential
documents with Reuters in a "calculated" effort to try the case "in
the press."
Later Thursday, lawyers for J&J and its subsidiary sought a
temporary restraining order from the bankruptcy judge to block
Reuters from publishing information that, the company claims, comes
from confidential documents.
A Reuters spokesperson called J&J’s claims without merit.
"We reject the factually-unfounded and legally-meritless claims made
by J&J's lawyers and will continue to report without fear or favor
on matters of public interest," the spokesperson said in a statement
on Thursday.
BANKRUPTCY BENEFITS WITHOUT BURDENS
J&J started secretly considering and planning the maneuver to
redirect plaintiffs to bankruptcy court as early as April, when
company attorneys were briefed on the strategy by lawyers at Jones
Day, a firm with experience in the tactic, according to deposition
testimony from an LTL lawyer.
On July 19, the day after Reuters broke the news of the strategy, a
J&J official contacted Moody’s, the Wall Street ratings firm, to ask
if the subsidiary bankruptcy would harm the company’s pristine
credit, according to emails reviewed by Reuters. She was told it
likely wouldn’t because the agency would only consider the
maneuver’s impact on the finances of J&J, and not those of the
subsidiary in bankruptcy.
The exchange underscores why the strategy was so attractive: J&J
could create a related-party bankruptcy to limit liability, while
avoiding “the burdens” of declaring bankruptcy itself, seven legal
experts argued in an amicus brief filed with the court.
Moody’s declined to comment.
In court papers, a lawyer for the J&J subsidiary said the bankruptcy
filing was a "prudent and necessary" step that "offered the only
alternative for equitably and permanently resolving" all the talc
litigation.
Last July, Reuters reported that one of J&J’s attorneys told
plaintiffs’ lawyers that the company could pursue the bankruptcy
plan, according to people familiar with the matter. At the time, J&J
publicly downplayed concerns about the strategy and did not confirm
that it was exploring the option. “Johnson & Johnson Consumer Inc
has not decided on any particular course of action in this
litigation other than to continue to defend the safety of talc and
litigate these cases in the tort system, as the pending trials
demonstrate,” the company told Reuters at the time.
A few days later, in a California courtroom, a lawyer defending J&J
against talc plaintiffs told a judge that news of the bankruptcy
strategy amounted to unsubstantiated “rumors.” J&J executed the
bankruptcy plan starting on Oct. 11, taking the first steps to
create the new subsidiary. The new company swiftly filed for Chapter
11, on Oct. 14.
'ALTERNATIVE JUSTICE SYSTEM'
The strategy, while rare, could be adopted more widely by big
companies facing liability crises if Johnson & Johnson gets
bankruptcy-court approval, according to lawyers for talc plaintiffs
and some legal experts. If J&J succeeds, they argue, it could
provide a blueprint for Corporate America on how to circumvent jury
trials involving allegations of defective products or misconduct.
Such a precedent could allow companies to routinely pursue
related-party bankruptcies to escape accountability from juries,
said Melissa Jacoby, a University of North Carolina law professor.
“That's one step closer to making bankruptcy an alternative justice
system for big corporations,” Jacoby said. “If a company as deeply
pocketed as J&J can do this, where does it stop?”
In testimony last November, a lawyer for the Johnson & Johnson
subsidiary said the company pursued the strategy in reaction to an
onslaught of litigation with the potential for outsized jury awards.
A bankruptcy court, the lawyer argued, could provide a more
consistent and equitable process for compensating claimants. Johnson
& Johnson has said it would provide a fair amount of money to the
subsidiary to pay claims.
Johnson & Johnson, valued at more than $450 billion, had about $31
billion in cash and marketable securities on hand at the end of the
third quarter, securities filings show.
The New Jersey judge overseeing the subsidiary’s bankruptcy is
scheduled on Feb. 14 to begin hearing arguments on
plaintiff-creditors’ contention that the bankruptcy should be
dismissed because it was filed in bad faith.
The October bankruptcy temporarily halted the litigation against
Johnson & Johnson. LTL has said it will seek to “permanently”
resolve the talc litigation through a reorganization plan that would
prohibit current and future plaintiffs from seeking redress in a
trial court. Instead, their claims would be directed to a trust,
which would divvy up a limited amount of money through an
administrative process approved by the bankruptcy court.
TENS OF THOUSANDS OF PLAINTIFFS
J&J’s bankruptcy strategy is the latest example of the company’s
efforts to manage liability amid mounting allegations that asbestos
lurks in its iconic Baby Powder and other talc products. A December
2018 Reuters investigation revealed that the company knew for
decades about tests showing its talc sometimes contained
carcinogenic asbestos but kept that information from regulators and
the public.
Tens of thousands of plaintiffs, many with mesothelioma or ovarian
cancer, have filed lawsuits alleging that exposure to talc in J&J’s
Baby Powder and other company products made them sick. Records J&J
produced in response to those lawsuits led plaintiff lawyers to
refine their argument: The culprit wasn’t necessarily talc itself,
but also asbestos in the talc.
That assertion, backed by decades of science showing that asbestos
causes mesothelioma and is associated with ovarian and other
cancers, has had mixed success in court. The company has insisted in
lawsuits and public-relations campaigns that the product was safe
and asbestos-free.
One plaintiff is Thomas McHattie, 78 years old, who traveled the
world as an obstetrician-gynecologist before receiving a
mesothelioma diagnosis in March 2020. McHattie said he recommended
Baby Powder to “countless pregnant women” while also using it
himself. McHattie said he endured five courses of chemotherapy to
treat tumors in his abdomen, and has suffered from pronounced
fatigue and shortness of breath.
He sued J&J in New York in July, a few months after receiving his
diagnosis. His case had not yet gone to trial when LTL Management
filed for bankruptcy.
In a 2020 court filing, J&J said it denied “each and every
allegation, statement, matter and thing” asserted by McHattie in his
lawsuit.
McHattie told Reuters in an interview that he was “disappointed
they’ve chosen to do what is expedient and not what is right.”
“There is no excuse for them filing a bankruptcy,” McHattie said.
“Why? This is a solvent company.”
[to top of second column] |
 RELEASED FROM LIABILITY
J&J’s subsidiary bankruptcy is one variation of
a longstanding and increasingly controversial
tactic of limiting liability through so-called
nondebtor releases granted to companies, owners
or executives. The releases can allow companies
or executives to piggyback on the bankruptcies
of other entities to obtain broad protection
from lawsuits and restrict litigation payouts.
The party receiving the release typically agrees
to contribute a lump sum to the company in
bankruptcy to pay off plaintiffs in exchange for
an exemption from all future liability.
That was the case with members of the Sackler
family, the billionaire owners of Purdue Pharma
LP, which filed for bankruptcy as a hail of
lawsuits alleged it had contributed to a deadly
addiction epidemic with its opioid painkiller,
OxyContin. In a landmark decision in December, a
U.S. district judge in New York invalidated
Purdue’s bankruptcy reorganization plan on the
grounds that it improperly insulated the Sackler
family from liability through nondebtor
releases.
Purdue has appealed the ruling. The company
pleaded guilty in November 2020 to three
felonies covering misconduct regarding its
handling of opioids. Sackler family members, who
also faced litigation, have denied allegations
they contributed to the opioid crisis.
J&J’s bankruptcy takes the approach a step
further. Instead of seeking releases from
liability in an existing bankruptcy proceeding,
the company created a bankruptcy by forming a
company that plaintiff-creditors allege has no
business purpose other than to limit J&J’s legal
exposure.
Lawyers for talc plaintiffs contend that the J&J
maneuver amounts to an abuse of the bankruptcy
system, which is intended to help a struggling
business reorganize – and not to help a
well-capitalized conglomerate limit legal
liability for alleged wrongdoing.
“This case is all about litigation advantage”
for J&J, said Robert Stark, a Brown Rudnick LLP
lawyer representing a creditors’ committee of
talc plaintiffs during a December hearing of the
subsidiary’s bankruptcy. J&J successfully halted
the claims by tens of thousands of plaintiffs
“while people are dying of cancer” and trying to
prepare their families financially for their
deaths, Stark said at the hearing. “It does not
get more inhumane than that,” he said.
The Purdue and J&J bankruptcy strategies have
sparked efforts in the U.S. Congress to stop
such tactics. U.S. Senator Dick Durbin of
Illinois is co-sponsoring legislation with other
Democrats that would all but outlaw the strategy
J&J is using and restrict the ability of
companies to obtain liability releases without
declaring bankruptcy themselves.
“Our bankruptcy code and civil procedure has to
be explored to make sure that this exploitation
does not take place,” Durbin said in an
interview.
Business groups and some bankruptcy lawyers say
that nondebtor releases can be an effective tool
to resolve litigation to the benefit of both
plaintiffs and the companies they sue. While
limited amounts for compensation are often
criticized, they offer plaintiffs better odds of
getting paid than if they take their chances in
trial courts, said Donald Workman, a Baker &
Hostetler restructuring lawyer who isn’t
involved in the J&J subsidiary’s case.
“You have an elegant solution to resolve
burdensome if not crushing obligations,” Workman
said, that “provides funding for constituencies
that might otherwise receive nothing.”
TEXAS TWO-STEP
J&J turned to the bankruptcy plan following a
series of setbacks.
The U.S. Food and Drug Administration found
trace amounts of asbestos in a bottle of Baby
Powder purchased online, forcing the company to
issue a recall in October 2019. In May 2020, the
company stopped selling talc-based Baby Powder
in the U.S. and Canada, citing “misinformation”
and “unfounded allegations” regarding the
product's safety.
In April, J&J attorneys consulted with Jones Day
lawyers, who explained how the company could use
a Texas law to split the company’s
consumer-product business into two parts. One
would absorb all the talc liability; the other
would carry on the business free from the threat
of billion-dollar judgments. Texas pioneered the
so-called divisional merger, which allows
companies to break apart and more easily divvy
up assets and liabilities among the resulting
companies.
Jones Day helped Georgia-Pacific, a company
owned by conglomerate Koch Industries, execute
the maneuver in 2017 to offload mounting
asbestos litigation. Georgia-Pacific faced
allegations regarding asbestos exposure from
building products that spanned decades.
Georgia-Pacific used the Texas law to create a
new subsidiary called Bestwall to shoulder
asbestos liability. As the subsidiary declared
bankruptcy, the “new” Georgia-Pacific continued
to produce Brawny paper towels and other
lucrative brands. The maneuver came to be known
in legal circles as a “Texas two-step.”
Georgia-Pacific paid nearly $3 billion in
dividends to Koch over the next several years,
according to a court filing, that it might have
been unable to dole out had it filed for
bankruptcy itself. Georgia-Pacific has proposed
giving Bestwall $1 billion to settle all
asbestos claims, an amount plaintiff-creditors
are still challenging in bankruptcy court.
Koch Industries and Georgia-Pacific declined to
comment; Jones Day did not respond to a request
for comment.
When J&J needed help last year, it hired
Dallas-based Jones Day partner Greg Gordon and
other members of the firm’s Georgia-Pacific
legal team.
As the bankruptcy planning moved forward, a
major court defeat heightened the urgency. In
June of last year, J&J lost a bid to reverse a
watershed verdict in favor of 22 women who
blamed their ovarian cancer on Baby Powder and
other talc products. The women had initially won
a verdict of $4.69 billion from a Missouri jury.
A state appeals court reduced the award to more
than $2 billion.
PROJECT PLATO
By July 12, the company had secretly set up the
Project Plato team. The more than 30 employees
staffing it came from J&J’s finance, risk
management, tax and business development
operations, according to the internal J&J memo
and deposition testimony.
A week later, J&J treasurer Michelle Ryan
reached out to Moody’s to get guidance on the
impact to J&J’s credit rating.
“We are looking at a number of ways of capping
our talc liability,” Ryan said in a July 19
email to Michael Levesque, a senior vice
president at the credit-ratings firm focused on
pharmaceutical companies. One scenario under
consideration, Ryan said, would be to “capture
the liability in one subsidiary” and then
“basically bankrupt that subsidiary.”
Ryan asked whether the bankruptcy would hurt the
company’s credit rating. J&J at the time was one
of just two U.S. companies with a triple-A
rating, the other being Microsoft.
Levesque replied that the “technical aspect” of
the subsidiary bankruptcy wasn’t likely to cause
concern about J&J’s creditworthiness. Rather, he
said, Moody’s was “highly likely” to focus on
how the subsidiary’s Chapter 11 filing affected
J&J’s finances, which the maneuver intended to
help.
Ryan did not respond to a request for comment.
To execute the plan, J&J created a limited
liability company on Oct. 11 in Texas through a
series of transactions. That company then merged
with J&J’s existing consumer products business.
The merged company then divided itself under the
state’s divisional merger law, creating the
subsidiary that would take on all the talc
liability.
The consumer business could then go on as if the
lawsuits had never been filed.
GREEN LIGHT
Early on the morning of Oct. 11, Andrew, the
in-house J&J lawyer who initially sent the
internal memo to the Project Plato team, sent an
email to eight J&J colleagues, including several
senior executives. He asked them to approve the
Texas two-step bankruptcy plan “as soon as
possible” and no later than that day, according
to Andrews’ email to his colleagues, which was
reviewed by Reuters.
He attached a detailed memo outlining the
impending bankruptcy’s purported benefits. It
would allow, the memo said, the bankruptcy court
to determine the final amount of money for
resolving all of the litigation, in a process
enabling claims to be settled in an “equitable
and efficient manner, without the waste and
abuses experienced in the state court tort
system.”
The memo warned of risks. The plan would be
consummated under a tight time frame and would
be scrutinized by the media. “Appropriate
messaging (internally and externally) will be
required to avoid or mitigate misunderstandings
about the nature of the restructuring and
negative publicity,” the memo said.
Andrew quickly received the green light, within
hours of the request, internal emails reviewed
by Reuters show.
LTL, the new subsidiary, held its first board
meeting on Oct. 14.
 The board members and lawyers discussed that LTL
faced what they viewed as “exorbitant” costs if
the current talc litigation barrage continued,
which included 12,000 lawsuits alone through the
first nine-and-a-half months of 2021, according
to meeting minutes and deposition testimony
Reuters reviewed. The group noted that J&J faced
a total of about $5 billion in costs from
judgments, settlements and legal fees.
The board voted to pursue a Chapter 11 filing.
J&J disclosed the move in a news release that
evening as one that would “equitably” resolve
the litigation.
A plaintiffs’ lawyer grilled Robert Wuesthoff –
a J&J manager appointed president of LTL
Management – on that point in a Dec. 22
deposition.
“One of the considerations was to treat
claimants equitably; it was for their benefit?
Is that what you're saying?” asked Jeffrey
Jonas, a Brown Rudnick lawyer representing a
creditors committee comprising talc plaintiffs.
“Yes, it would be more equitable to the
claimant. Yes, we believe that,” Wuesthoff
responded.
“But the real reason we filed for bankruptcy,”
the LTL executive said, was that the large and
growing amount of talc cases – some with
“lottery-size” awards – put J&J’s consumer
products business in “financial distress.”
(Reporting by Mike Spector and Dan Levine;
editing by Janet Roberts and Brian Thevenot)
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