A U.S. appeals court on Monday rejected Johnson & Johnson’s attempt to bring tens of thousands of lawsuits over its talc products to bankruptcy court. The ruling marked the first major repudiation of an emerging legal strategy with the potential to upend US liability law.
J&J is one of four major companies that have filed so-called Texas two-step bankruptcies to avoid potentially massive lawsuits. The tactic includes creating a subsidiary to absorb the liabilities and immediately file for Chapter 11.
The court ruled that the healthcare conglomerate had wrongly declared its subsidiary bankrupt, even though it had no financial problems. J&J sought in two steps to end more than 38,000 lawsuits from plaintiffs alleging that the company’s baby powder and other talc products caused cancer. The appeals court ruling breathes new life into those lawsuits.
Reuters detailed Texas secret planning in two steps last year Johnson & Johnson and other major corporations in a series of reports on corporate attempts to evade lawsuits through bankruptcy.
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Monday’s decision by the U.S. 3rd Circuit Court of Appeals in Philadelphia rejected the 2021 bankruptcy filed by the J&J subsidiary. Prior to the filing, J&J had faced $3.5 billion in judgment and settlement costs.
J&J shares closed 3.7% lower — the biggest one-day percentage drop in two years. The company said in a statement that it would challenge the ruling and that its talc products are safe.
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The plaintiffs’ attorneys and some legal experts have argued that the two steps could set a dangerous precedent and provide a blueprint for any company to easily avoid unwanted lawsuits. The appeals court’s decision could force companies considering the strategy to weigh its risks more carefully, two legal experts said.
“It’s a step back from the idea that any company anywhere can use the same tactic to get rid of its mass tort liability,” said Lindsey Simon, a professor at the University of Georgia School of Law.
Bankruptcy filings usually suspend litigation in courts, forcing plaintiffs into often time-consuming settlement negotiations while preventing them from pursuing their case in the courts where they were originally sued.
The 3rd Circuit ruling does not apply to three other Texas bankruptcies filed by subsidiaries of Georgia Pacific owned by Koch Industries, global construction giant Saint-Gobain and Trane Technologies. Those cases fall under the jurisdiction of the Court of Appeals of the 4th Circuit. 3M attempted a similar maneuver, which is currently pending in the 7th Circuit.
SSaint-Gobain said in a statement that the 3rd Circuit’s 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 the 3rd Circuit ruling or did not immediately respond to questions. All have previously defended the bankruptcies in two steps as the best way to be honest pay receivables. Plaintiffs’ attorneys have countered that the two-stage operation in Texas is an improper manipulation of the bankruptcy system. The strategy takes advantage of a Texas law to split an existing company in half, creating the new subsidiary intended to carry 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 settle talk claims and entered into an agreement to fund a final settlement that was approved by a bankruptcy judge.
“Resolving this case as quickly and efficiently as possible is in the interest of the plaintiffs and all stakeholders,” said J&J.
A three-judge panel on the appeals court rejected J&J’s argument, finding that the company’s subsidiary, LTL Management, was formed solely to file for Chapter 11 protection but had no legitimate need to do so. Only a debtor in financial distress can file for bankruptcy, the panel ruled. The judges pointed out that J&J assured it would give LTL enough money to pay talk plaintiffs.
“Good intentions — such as protecting the J&J brand or comprehensively resolving lawsuits — are not enough,” the judges said in a 56-page opinion. “LTL was highly solvent at the time of filing and had access to cash to comfortably meet its obligations.”
PROJECT PLATO
The decision could force J&J to fight talk cases in courts for years to come. The company has a mixed record in battling the suits so far. While the company was hit with significant judgments in some cases before filing for bankruptcy, more than 1,500 lawsuits against talc have been dismissed and most of the cases that have gone to court have resulted in judgments in favor of J&J, judgments for the company in appeal or mistrial. according to court filings from its subsidiary.
A December 2018 Reuters investigation found that J&J officials had known for decades about tests that showed the company’s talc sometimes contained traces of carcinogenic asbestos, but kept that information hidden from regulators and the public. J&J has said that its talc does not contain asbestos and does not cause cancer.
Faced with relentless lawsuits, J&J enlisted law firm Jones Day, which had helped other companies execute Texas two-step bankruptcies to address asbestos-related lawsuits.
The J&J effort, as Reuters reported last year, was internally dubbed “Project Plato,” and employees working on it signed non-disclosure agreements. A company lawyer warned them not to tell anyone, including their spouses, about the plan.
Jones Day did not immediately respond to a request for comment.
The two-step operation in Texas has drawn criticism from Democratic lawmakers in Washington and led to proposed legislation that would severely limit the practice.
Senator Sheldon Whitehouse, a Democrat from Rhode Island, applauded Monday’s appeals court decision. Whitehouse chaired the first congressional hearing on two-step bankruptcies last February.
“Bankruptcy is meant to give honest debtors in unfortunate circumstances a fresh start,” he said, not to allow “big, highly profitable companies” to evade responsibility for wrongdoing with a legal “shell game” .
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