U.S. court rejects J&J bankruptcy strategy for thousands of talc
lawsuits
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[January 31, 2023] By
Tom Hals, Mike Spector and Dan Levine
(Reuters) -A U.S. appeals court on Monday shot down Johnson & Johnson's
attempt to offload tens of thousands of lawsuits over its talc products
into bankruptcy court. The ruling marked the first major repudiation of
an emerging legal strategy with the potential to upend U.S. corporate
liability law.
J&J is among four major companies that have filed so-called Texas
two-step bankruptcies to avoid potentially massive lawsuit exposure. The
tactic involves creating a subsidiary to absorb the liabilities and to
immediately file for Chapter 11.
The court ruled the healthcare conglomerate improperly placed its
subsidiary into bankruptcy even though it faced no financial distress.
J&J’s two-step sought to halt more than 38,000 lawsuits from plaintiffs
alleging the company’s baby powder and other talc products caused
cancer. The appeals court ruling revives those lawsuits.
Reuters last year detailed the secret planning of Texas two-steps by
Johnson & Johnson and other major firms in a series of reports exploring
corporate attempts to evade lawsuits through bankruptcies.
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Monday's decision by the U.S. 3rd Circuit Court of Appeals in
Philadelphia dismissed the bankruptcy filed by the J&J subsidiary in
2021. Before the filing, J&J had faced costs of $3.5 billion in verdicts
and settlements.
J&J shares closed down 3.7% - the biggest one-day percentage decline in
two years. The company said in a statement that it would challenge the
ruling and that its talc products are safe.
Plaintiffs attorneys and some legal experts have argued the two-step
could set a dangerous precedent, providing a blueprint for any
corporation to easily avoid undesirable litigation. The appeals court
decision could force companies considering the strategy to more
carefully consider its risks, two legal experts said.
“It is a push back on the notion that any company anywhere can use the
same tactic to get rid of their mass tort liability,” said Lindsey
Simon, a professor at University of Georgia School of Law.
Bankruptcy filings typically suspend litigation in trial courts, forcing
plaintiffs into often time-consuming settlement negotiations while
leaving them unable to pursue their cases in the courts where they
originally sued.
The 3rd Circuit ruling does not apply to three other Texas two-step
bankruptcies, filed by subsidiaries of Koch Industries-owned Georgia
Pacific, global construction giant Saint-Gobain, and Trane Technologies.
Those cases fall under the jurisdiction of the 4th Circuit appeals
court. 3M attempted a similar maneuver, which is currently pending in
the 7th Circuit.
Saint-Gobain said in a statement that the 3rd Circuit ruling had "no
direct effect" on its subsidiary's Chapter 11 case. The company said it
remains confident in the subsidiary's legal ability to reach a "final,
full and fair resolution with the asbestos claimants."
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The other companies did not comment on the 3rd Circuit ruling or did not
immediately respond to inquiries. All have previously defended the
two-step bankruptcies as the best way to fairly pay claims. Plaintiffs’
attorneys have countered that the Texas two-step is an improper
manipulation of the bankruptcy system. The strategy uses a Texas law to
split an existing company in two, creating the new subsidiary meant to
shoulder the lawsuits.
New Jersey-based Johnson & Johnson, valued at more than $400 billion,
said its subsidiary’s bankruptcy was initiated in good faith. J&J
initially pledged $2 billion to the subsidiary to resolve talc claims
and entered into an agreement to fund an eventual settlement approved by
a bankruptcy judge.
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![](../images/013123PIX/busine28.jpg)
A bottle of Johnson and Johnson Baby
Powder is seen in a photo illustration taken in New York, February
24, 2016.REUTERS/Shannon Stapleton/Illustration
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“Resolving this matter as quickly and efficiently as possible is in
the best interests of claimants and all stakeholders,” J&J said.
A three-judge panel on the appeals court rejected J&J’s argument,
finding the company’s subsidiary, LTL Management, was created solely
to file for Chapter 11 protection but had no legitimate need for it.
Only a debtor in financial distress can seek bankruptcy, the panel
ruled. The judges pointed out that J&J assured that it would give
LTL plenty of money to pay talc claimants.
"Good intentions - such as to protect the J&J brand or
comprehensively resolve litigation - do not suffice alone," the
judges said in a 56-page opinion. "LTL, at the time of its filing,
was highly solvent with access to cash to meet comfortably its
liabilities."
'PROJECT PLATO'
The decision could force J&J to fight talc lawsuits for years in
trial courts. The company has a mixed record fighting the suits so
far. While the firm was hit with major judgments in some cases
before filing bankruptcy, more than 1,500 talc lawsuits have been
dismissed and the majority of cases that have gone to trial have
resulted in verdicts favoring J&J, judgments for the company on
appeal, or mistrials, according to its subsidiary's court filings.
A December 2018 Reuters investigation revealed that J&J officials
knew for decades about tests showing that the company’s talc
sometimes contained traces of carcinogenic asbestos but kept that
information from regulators and the public. J&J has said its talc
does not contain asbestos and does not cause cancer.
Facing unrelenting litigation, J&J enlisted law firm Jones Day,
which had helped other companies execute Texas two-step bankruptcies
to address asbestos-related lawsuits.
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J&J’s effort, as Reuters reported last year, was internally dubbed
“Project Plato,” and employees working on it signed confidentiality
agreements. A company lawyer warned them to tell no one, including
their spouses, about the plan.
Jones Day did not immediately respond to a request for comment.
The Texas two-step has garnered criticism from Democratic lawmakers
in Washington, and inspired proposed legislation that would severely
restrict the practice.
Senator Sheldon Whitehouse, a Democrat from Rhode Island, cheered
Monday’s appeals court decision. Whitehouse chaired the first
congressional hearing scrutinizing two-step bankruptcies in February
of last year.
“Bankruptcy is meant to give honest debtors in unfortunate
circumstances a fresh start,” he said, not to allow “large, highly
profitable corporations” to avoid accountability for wrongdoing with
a legal “shell game.”
(Reporting by Tom Hals in Wilmington, Delaware; Mike Spector in New
York; and Dan Levine in San Francisco; additional reporting by
Dietrich Knauth and Chuck Mikolajczak in New York; editing by Bill
Berkrot and Brian Thevenot)
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