A US appeals court has dismissed a bankruptcy petition filed by a unit of Johnson & Johnson, upending the healthcare company’s bid to resolve billions of dollars in legal claims from customers alleging that its talcum powder was causing cancer.
The U.S. Court of Appeals for the Third Circuit on Monday said it had dismissed the bankruptcy filing of J&J’s LTL management subsidiary, preventing it from transferring thousands of legal claims out of the trial courts to the bankruptcy system.
J&J had rolled out a legal maneuver called the “Texas two-step” to split the company into two separate companies before placing one of them, which faces more than 40,000 cancer claims, into bankruptcy. The company said this would lead to a more “efficient” and “fair” resolution of complaints.
But the court ruled that only companies facing financial difficulties can use the bankruptcy system to help them restructure. “As LTL faces substantial future talc liability, its financial support clearly mitigates any financial distress,” the court ruling said.
J&J had argued in court that its use of the bankruptcy system was not an attempt to reduce the amount of payments to cancer claimants and said it had agreed to fund LTL’s talc liabilities until worth $61 billion.
However, in a 56-page decision, Judge Thomas Ambro said that wanting to protect the J&J brand or “comprehensively resolve a dispute” was not an appropriate excuse to use the bankruptcy system. “Only a putative debtor in financial difficulty can do this. LTL was not.
Shares of J&J, which has a market valuation of more than $425 billion, fell 3% after the ruling, while 3M, which is pursuing a similar strategy to resolve lawsuits related to its earplugs, lost 1.5%.
The ruling means J&J risks being forced to fight talc plaintiffs in civil court, a process that could take decades and cost the company hundreds of billions of dollars, according to LTL’s legal documents.
In 2018, a Missouri jury ordered J&J to pay nearly $4.7 billion in damages to a group of nearly two dozen women who claimed their cancer was caused by its talc. The payout was later appealed and halved, but the company still paid more than $2 billion in damages.
Legal experts said the ruling could set a precedent and deter companies from using complex bankruptcy plans to handle mass tort claims. 3M, Georgia-Pacific, a subsidiary of Koch Industries, Trane Technologies and a US subsidiary of Saint-Gobain, based in France, have deployed similar strategies in recent years.
Carl Tobias, a law professor at the University of Richmond, said: “The only prospect left for J&J is an appeal to the Supreme Court, which grants review in a tiny percentage of appeals.”
J&J said it would appeal the decision.
“Resolving this matter as quickly and efficiently as possible is in the best interest of the plaintiffs and all stakeholders,” J&J said. “We continue to advocate for the safety of Johnson’s Baby Powder, which is safe, contains no asbestos and does not cause cancer.”
The plaintiffs allege that J&J’s talc-based baby powder contains traces of asbestos which caused their cancers and that the company lied about the safety of the product.
J&J has stopped selling its talc-based baby powder in the United States and Canada and will phase out sales worldwide this year.
Lawyers for the plaintiffs who allege J&J’s talc caused their cancers have welcomed the decision.
“The Third Circuit’s decision is a point-by-point rejection of J&J’s attempt to subvert the bankruptcy system and trample on the constitutional right to a jury trial of all Americans harmed by lethal products,” said Jon Ruckdeschel, a litigator who has represented mesothelioma victims for over 20 years.
“Bankruptcy courts are for honest businesses in financial trouble, not billionaire mega-corporations like J&J, 3M and Koch Industries, which seek to close the doors of courthouses to their victims.”