A U.S. court rejects J&J's bankruptcy strategy for thousands of talc lawsuits

Johnson & Johnson's (JNJ.N) attempt to dump tens of thousands of lawsuits over talc products into bankruptcy court was rejected by a U.S. appeals court on Monday. It was the first significant rebuke of a legal strategy that could have upended corporate liability law in the United States.

J&J is one of four major companies to file so-called Texas two-step bankruptcies to avoid potentially massive lawsuits. The tactic involves setting up a subsidiary to absorb liabilities and filing for Chapter 11 immediately afterward.

Even though the healthcare conglomerate had no financial distress, it improperly placed its subsidiary in bankruptcy. The appeals court's ruling revives over 38,000 lawsuits alleging that J&J's baby powder and other talc products caused cancer. The company's two-step sought to halt those lawsuits.

Last year, Reuters reported on Johnson & Johnson's and other companies' secret plans to avoid lawsuits by filing for bankruptcy.

The U.S. 3rd Circuit Court of Appeals in Philadelphia dismissed a bankruptcy filed by a J&J subsidiary in 2021. Before filing, J&J had incurred $3.5 billion in verdicts and settlements.

Shares of J&J closed down 3.7% - the biggest one-day decline in two years. The company said in a statement that it would challenge the ruling and that its products are safe.

Several lawyers and plaintiffs' attorneys have argued the two-step process could create a dangerous precedent, enabling any corporation to avoid unwanted litigation easily. According to two legal experts, the appeals court decision might make companies more cautious about the strategy.

The case pushes back on the idea that companies anywhere can use the same tactic to avoid mass tort liability, said Lindsey Simon, a law professor at University of Georgia.

Generally, bankruptcy filings suspend litigation in trial courts, forcing plaintiffs to engage in time-consuming settlement negotiations while being unable to pursue their cases in the original courts.

As a result of the 3rd Circuit ruling, three other Texas two-step bankruptcies filed by subsidiaries of Koch Industries-owned Georgia Pacific, Saint-Gobain (SGOB.PA), and Trane Technologies (2IS.F) do not apply. Those cases fall under the jurisdiction of the 4th Circuit appeals court. 3M (MMM.N) attempted a similar maneuver, which is currently pending in the 7th Circuit.

"The 3rd Circuit ruling has no direct impact" on Saint-Gobain's subsidiary's Chapter 11 case. The company remains confident that the subsidiary will be able to reach a "final, full and fair resolution." Inquiries about the 3rd Circuit ruling were not immediately responded to by the other companies, who have previously defended two-step bankruptcies as the best way to pay claims fairly. Plaintiffs' attorneys have countered that the Texas two-step improperly manipulated the bankruptcy system. Using Texas law, an existing company is split in two, creating a new subsidiary that will handle the lawsuits.

Johnson & Johnson, a company worth more than $400 billion, said its subsidiary's bankruptcy was initiated in good faith. In order to resolve talc claims, J&J pledged $2 billion to the subsidiary and entered into an agreement to fund a settlement approved by the bankruptcy court. It is in the best interest of claimants and all stakeholders to resolve this matter as quickly and efficiently as possible.

There is no legitimate reason for the company's subsidiary, LTL Management, to seek Chapter 11 protection, according to a three-judge panel on the appeals court. As the judges pointed out, J&J assured LTL that it would give plenty of money to pay talc claimants, only a debtor in financial distress could seek bankruptcy. The judges wrote in a 56-page opinion that "good intentions - such as protecting the J&J brand or resolving litigation comprehensively - do not suffice." LTL was highly solvent at the time of filing and had ample cash to meet its liabilities.

According to a company's court filings, J&J will have to fight talc lawsuits in trial courts for years to come. The company has been hit with major judgments before declaring bankruptcy in some cases, but more than 1,500 talc lawsuits have been dismissed. 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 that tests showed that the company’s talc sometimes contained traces of carcinogenic asbestos but kept that information from regulators and the public. In its statement, J&J says its talc does not contain asbestos or cause cancer.

Jones Day, which had helped other companies file Texas two-step bankruptcies to address asbestos lawsuits, stepped in to help J&J deal with unrelenting litigation. As reported by Reuters last year, J&J's effort was internally referred to as "Project Plato," and employees signed confidentiality agreements. Company lawyers warned them not to tell anyone, including spouses.

Democratic lawmakers in Washington have criticized the Texas two-step, and proposed legislation that would severely restrict it. Rhode Island Senator Sheldon Whitehouse, a Democrat, chaired the first congressional hearing on two-step bankruptcies.

Johnson & Johnson's (JNJ.N) attempt to dump tens of thousands of lawsuits over talc products into bankruptcy court was rejected by a U.S. appeals court on Monday. It was the first significant rebuke of a legal strategy that could have upended corporate liability law in the United States.

J&J is one of four major companies to file so-called Texas two-step bankruptcies to avoid potentially massive lawsuits. The tactic involves setting up a subsidiary to absorb liabilities and filing for Chapter 11 immediately afterward.

Even though the healthcare conglomerate had no financial distress, it improperly placed its subsidiary in bankruptcy. The appeals court's ruling revives over 38,000 lawsuits alleging that J&J's baby powder and other talc products caused cancer. The company's two-step sought to halt those lawsuits.

Last year, Reuters reported on Johnson & Johnson's and other companies' secret plans to avoid lawsuits by filing for bankruptcy.

The U.S. 3rd Circuit Court of Appeals in Philadelphia dismissed a bankruptcy filed by a J&J subsidiary in 2021. Before filing, J&J had incurred $3.5 billion in verdicts and settlements.

Shares of J&J closed down 3.7% - the biggest one-day decline in two years. The company said in a statement that it would challenge the ruling and that its products are safe.

Several lawyers and plaintiffs' attorneys have argued the two-step process could create a dangerous precedent, enabling any corporation to avoid unwanted litigation easily. According to two legal experts, the appeals court decision might make companies more cautious about the strategy.

The case pushes back on the idea that companies anywhere can use the same tactic to avoid mass tort liability, said Lindsey Simon, a law professor at University of Georgia.

Generally, bankruptcy filings suspend litigation in trial courts, forcing plaintiffs to engage in time-consuming settlement negotiations while being unable to pursue their cases in the original courts.

As a result of the 3rd Circuit ruling, three other Texas two-step bankruptcies filed by subsidiaries of Koch Industries-owned Georgia Pacific, Saint-Gobain (SGOB.PA), and Trane Technologies (2IS.F) do not apply. Those cases fall under the jurisdiction of the 4th Circuit appeals court. 3M (MMM.N) attempted a similar maneuver, which is currently pending in the 7th Circuit.

"The 3rd Circuit ruling has no direct impact" on Saint-Gobain's subsidiary's Chapter 11 case. The company remains confident that the subsidiary will be able to reach a "final, full and fair resolution." Inquiries about the 3rd Circuit ruling were not immediately responded to by the other companies, who have previously defended two-step bankruptcies as the best way to pay claims fairly. Plaintiffs' attorneys have countered that the Texas two-step improperly manipulated the bankruptcy system. Using Texas law, an existing company is split in two, creating a new subsidiary that will handle the lawsuits.

Johnson & Johnson, a company worth more than $400 billion, said its subsidiary's bankruptcy was initiated in good faith. In order to resolve talc claims, J&J pledged $2 billion to the subsidiary and entered into an agreement to fund a settlement approved by the bankruptcy court. It is in the best interest of claimants and all stakeholders to resolve this matter as quickly and efficiently as possible.

There is no legitimate reason for the company's subsidiary, LTL Management, to seek Chapter 11 protection, according to a three-judge panel on the appeals court. As the judges pointed out, J&J assured LTL that it would give plenty of money to pay talc claimants, only a debtor in financial distress could seek bankruptcy. The judges wrote in a 56-page opinion that "good intentions - such as protecting the J&J brand or resolving litigation comprehensively - do not suffice." LTL was highly solvent at the time of filing and had ample cash to meet its liabilities.

According to a company's court filings, J&J will have to fight talc lawsuits in trial courts for years to come. The company has been hit with major judgments before declaring bankruptcy in some cases, but more than 1,500 talc lawsuits have been dismissed. 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 that tests showed that the company’s talc sometimes contained traces of carcinogenic asbestos but kept that information from regulators and the public. In its statement, J&J says its talc does not contain asbestos or cause cancer.

Jones Day, which had helped other companies file Texas two-step bankruptcies to address asbestos lawsuits, stepped in to help J&J deal with unrelenting litigation. As reported by Reuters last year, J&J's effort was internally referred to as "Project Plato," and employees signed confidentiality agreements. Company lawyers warned them not to tell anyone, including spouses.

Democratic lawmakers in Washington have criticized the Texas two-step, and proposed legislation that would severely restrict it. Rhode Island Senator Sheldon Whitehouse, a Democrat, chaired the first congressional hearing on two-step bankruptcies.