A Johnson & Johnson court loss threatens a legal maneuver devised by a handful of the world’s most profitable companies to pursue lawsuits.
A federal appeals court in Philadelphia ruled that J&J is too wealthy to use the bankruptcy to settle more than 40,000 cancer claims over its baby powder. The company has vowed to appeal to uphold a legal tactic known to critics as the Texas Two-Step, which was attempted by industrial conglomerate 3M Co. and lumber giant Georgia-Pacific.
After spending more than $100 million in legal fees, J&J’s strategy was overturned by a three-judge panel that sided with the cancer victims. The judges ruled that J&J mistakenly bankrupted a specially created entity, LTL Management, to bar juries across the country from hearing the lawsuits.
The ruling sent J&J shares down 3.7% to $162 on Monday, their worst day since June 2020, and several of its top-traded bonds fell less than 0.5%. Shares fluctuated between gains and losses before closing 0.9% higher the next day, closing at $163.42.
“I don’t think we’re going to see anyone else trying that,” said Carl Tobias, a law professor at the University of Richmond who teaches product liability law courses.
legal strategy
J&J, 3M, and Georgia-Pacific have all pursued a strategy that begins with moving billions of dollars of legal claims into small subsidiaries, which then file for Chapter 11 bankruptcy. The parent companies agree to pay all of those entities’ creditors, including those they are suing. With the units under legal protection, the parents are attempting to stop the lawsuits and negotiate a final settlement.
3M is fighting in a Chicago appeals court to stop 230,000 lawsuits by current and former soldiers alleging their hearing was damaged by earplugs the company sold to the US military. His case is slightly different from the others as the 3M bankrupted unit is older and has its own operations.
In bankruptcy court in Charlotte, North Carolina, Georgia-Pacific’s Bestwall unit is fighting people who claim asbestos in the company’s products poisoned their lungs.
Now J&J must defend itself against claims that tainted talc in its baby powder causes cancer. The company has lost a number of such cases — including one that went all the way to the US Supreme Court before J&J was forced to pay more than $2 billion to a group of victims.
There have been ongoing talks aimed at settling the Talk cases that have been filed in both state and federal courts. Before J&J declared its unit bankrupt in 2021, the company offered to settle the lawsuits for up to $5 billion, according to Monday’s decision.
The court ruling will likely force J&J to do more. The world’s largest health products maker could end up paying as much as $10 billion to pay off its talc debt, JP Morgan analyst Chris Schott said in a note to clients Monday. A deal of this magnitude would yield about $250,000 per claim, Wells Fargo’s Larry Biegelsen said in his own note.
Non-binding decision
The ruling won’t be binding in the 3M or Georgia-Pacific cases, but the key message — that profitable companies shouldn’t use bankruptcy to settle court cases — could sway the judges overseeing them, legal scholars predict.
That’s because the J&J ruling comes from a court with extensive experience in bankruptcy cases caused by lawsuits. For decades, companies that made products containing the cancer-causing substance asbestos filed for bankruptcy in Delaware and New Jersey, using Chapter 11 rules that allowed them to continue while hammering out a deal with hundreds of thousands of people who had sued them . The federal circuit court in Philadelphia, which hears appeals from these courts, has handled some of the largest asbestos bankruptcies ever filed.
The key difference is that companies like chemical maker WR Grace and auto parts giant Federal-Mogul argued they couldn’t afford to fight the asbestos lawsuits, so they filed for bankruptcy themselves to deal with what the industry is calling… mass crime is known.
“The J&J decision makes the Texas Two-Step bankruptcy a much less reliable strategy,” said Ralph Brubaker, a professor at the University of Illinois College of Law. “Solid companies using bankruptcy to solve their mass torts are clearly on the brink and pose profound problems that judges are seriously struggling with and will continue to grapple with.”
The Philadelphia judges determined that only companies that are in imminent danger of financial problems can file for bankruptcy. Because J&J itself has never claimed to be in imminent danger, it cannot benefit from Chapter 11 of the Bankruptcy Code by placing an entity under judicial protection, the judges determined.
challenge decision
The ruling not only affects the bankruptcy court, but also strengthens the vitality and legitimacy of the regular tort system in both state and federal courts, plaintiffs’ attorneys say. J&J’s attorney had complained about runaway grand juries making exaggerated verdicts in the Talk cases.
Don Migliore, a South Carolina-based attorney representing former talc users suing J&J, said he was heartened to see J&J’s attempt to bypass the courts’ regular system for resolving civil disputes has been defeated. “The MDL system works,” he said. “Hopefully other courts will take the requirements for good faith bankruptcy filings seriously.”
Multi-District Litigations (MDLs) are used to consolidate lawsuits filed in federal courts across the country before a single judge to facilitate information sharing and conduct testing procedures on the validity of plaintiffs’ claims. Often they lead to comparisons of thousands of cases. Thousands of Talk cases are being tried before a judge in New Jersey.
J&J will appeal the verdict, the company said in a statement. The bankruptcy was filed in good faith to “fairly resolve” talc claims, the company said. 3M is continuing to attempt to resolve the earbud complaints through court-ordered arbitration, a company official said. A representative from Koch Industries, which owns Georgia-Pacific, did not respond for comment.
J&J may request that all judges of the Philadelphia Circuit Court of Appeals reconsider the three-judge panel’s decision. The company could also ask the US Supreme Court to hear its arguments if the case were allowed under Chapter 11.
After its big Talk trial loss, J&J developed the new legal strategy aimed at blocking the cases in court and forcing the plaintiffs to try Chapter 11 in LTL’s case. J&J has long argued that there is no good scientific evidence linking baby powder to cancer. The company argued that LTL’s case was the only way to manage Talk’s litigation costs and ensure victims were paid fairly.
LTL’s bankruptcy was the first Texas Two-Step to reach an appeals court. After victim groups challenged Kaplan’s verdict, the Philadelphia Circuit Court of Appeals agreed to accelerate the case.
J&J’s strategy has been condemned by some legal scholars and members of Congress because the company got a major benefit from Chapter 11 rules — a dismissal of claims — without having to file for bankruptcy, where it faces court oversight of its spending and other practices would be subject.
J&J will likely ask the US Supreme Court to deal with the matter, said Anthony Sabino, a law professor at St. John’s University. “I think it’s very likely that this isn’t the end and a Supreme Court review is all but certain,” he said.
Still others, like Tobias, doubt J&J can get enough votes in court to hear its appeal, given that several judges have resigned in the past over their investments in the company or their ties to the talc industry. That’s exactly what happened in 2021, when the court refused to hear J&J’s $2.1 billion damages claim against women who blamed Talk for their injuries.
“I would put J&J’s chances of getting the required number of votes at less than 20%,” Tobias said.
The J&J bankruptcy case is LTL Management LLC, 21-30589, US Bankruptcy Court, District of New Jersey (Trenton).
(Updates with analysts’ settlement forecasts in paragraph seven, additional details throughout.)
To contact reporters on this story:
Steven Church of Wilmington, Delaware at schurch3@bloomberg.net;
Jef Feeley in Wilmington, Delaware at jfeeley@bloomberg.net
To contact the editors responsible for this story:
Angela Moon at hmoon43@bloomberg.net
Dawn McCarty
© 2023 Bloomberg LP All rights reserved. Used with permission.
