Johnson & Johnson has failed to move thousands of lawsuits to a bankruptcy court. J&J had attempted to move the women’s lawsuits to the books of a bankrupt subsidiary it created for the purpose, but last week a judge rejected the company’s latest attempt to escape liability.
J&J has long prolonged its legal fight to escape litigation, from tens of thousands of women, that alleges the company’s former flagship product, Johnson & Johnson baby powder, contained talc linked to ovarian cancer. Last week, a federal appeals court rejected the company’s attempt to remove more than 38,000 talc cancer lawsuits into bankruptcy court.
Texas Two-Step Fail
In the face of mounting talc suits, J&J created a new subsidiary in 2021 that it named “LTL Management.” The company had hoped the new “subsidiary” could then be made responsible for any and all liability in talc-related litigation claims filed against J&J. The company’s next move – referred to in street legalese as “the Texas Two-Step” – was to file papers declaring the “new” company bankrupt, just days after it had been “created.”
A panel of three judges dismissed the bankruptcy filing, which J&J is likely to appeal. Roughly 38,000 talc cancer cases hang in the balance.
According to court filings, the newly created Johnson subsidiary, “LTL Management” had argued that the cases could take decades to litigate and cost the company “hundreds of billions of dollars.”
Judge Thomas Ambro, however, wrote in the ruling that only debtors in financial distress should file for bankruptcy. He said that was not the case with LTL, because it has $61 billion in backing provided by J&J. He noted that the company is one of the world’s largest, with a market capitalization of $430 billion. J&J’s total liability, financial analysts have said, was well shy of the amount LTL claimed.
An analyst at JPMorgan, Chris Schott, said, “We see this ruling resulting in significantly longer timelines for talc litigation resolution.” JPMorgan estimates J&J’s total liability for the talc cases somewhere between $8 and $10 billion.
Mr. Schott opined: “It will require J&J to litigate talc claims on a state-by-state basis, leave talc as an ongoing overhang on shares.”
J&J began selling baby powder in 1894, It quickly became the company’s flagship product. The company has always denied that its talc-based products contain asbestos that can cause cancer.
Huge J&J Court Losses led to Strategy Change
It has fought the cases with some success from the beginning of the litigation, but things changed in 2018 when a Missouri court ordered the company to pay more than $4.7 billion (later reduced to $2 billion) to nearly two dozen women who alleged they developed cancer as a result of using J&J talc-based products for years. That ruling made the company change its strategy and create LTL.
Johnson & Johnson hired a Cleveland-based law firm, Jones Day, which created the dubious “Texas two-step” in an attempt to let companies split into separate entities so that their legal liabilities can be transferred to the newly-created one which is then declared “bankrupt.”
The October 2021 two-step move placed the talc litigation on hold.
Plaintiffs’ lawyers hope that the latest ruling will allow the cases to go forward to resolution.
J&J joins companies like Koch industries in attempting to use a subsidiary which it later declares “bankrupt” to help the parent company escape liability. A Koch subsidiary Georgia-Pacific, Trane Technologies and 3M have also used the Texas two-step ploy, or attempted to use it. Those companies have argued that the mass tort paradigm is broken and poses financial risks to business. They say cases can be managed more expeditiously in bankruptcy court than before juries.
On the other side, tort lawyers say solvent companies that use bankruptcy schemes to escape liability abuse those courts and wrongfully deny citizens their right to a trial by jury. Those lawyers say that the two-step ploy not only does not expedite settlement, but also unfairly puts the cases on hold. That removes a major incentive which would otherwise help move a company to the settlement table.
The two-step strategy, they say, gives solvent companies every benefit of the bankruptcy system without making them bear any burdens. Plaintiffs’ attorneys see the bankrupt strategy as cynical, and say the major reason for it is to close the courthouse doors to claimants.
Because more and more companies have resorted to employing the Texas two-step ploy to escape or heavily mitigate their liability, some judges appear more open to questioning the reasoning, fairness, and legality behind that ploy.
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