Jan 30 (Reuters) – A U.S. appeals court on Monday dismissed an attempt by Johnson & Johnson (JNJ.N) to offload tens of thousands of lawsuits over its talc products in bankruptcy court. The ruling marked the first major repudiation of an emerging legal strategy that could upend US corporate liability law.
J&J is among four major companies that have filed so-called two-step bankruptcies in Texas to avoid potentially massive exposure to lawsuits. The tactic is to set up a subsidiary to absorb the liability and immediately file Chapter 11.
The court ruled that the healthcare conglomerate had improperly placed its subsidiary into bankruptcy, even though it was not facing any financial difficulty. J&J’s two steps sought to end more than 38,000 lawsuits filed by plaintiffs alleging that the company’s baby powder and other talc-based products caused cancer. The decision of the Court of Appeal revives these lawsuits.
Last year, Reuters detailed secret two-step Texas planning by Johnson & Johnson and other big companies in a series of reports exploring the companies’ attempts to evade prosecution through bankruptcies.
Monday’s ruling from the United States Court of Appeals for the 3rd Circuit in Philadelphia dismissed the bankruptcy filing filed by subsidiary J&J in 2021. Prior to the filing, J&J had faced costs of $3.5 billion dollars in verdicts and settlements.
J&J shares closed down 3.7% – the biggest one-day percentage drop in two years. The company said in a statement that it would challenge the decision and that its talc products are safe.
Plaintiffs’ attorneys and some legal experts have argued that the two steps could set a dangerous precedent, providing a blueprint for any company to easily avoid unwanted litigation. The appeals court ruling could force companies considering the strategy to take a closer look at its risks, two legal experts said.
“It’s a pushback against the idea that any company, anywhere, can use the same tactic to get rid of mass tort liability,” said law school professor Lindsey Simon. from the University of Georgia.
Bankruptcy filings typically suspend litigation in trial courts, forcing plaintiffs into often lengthy settlement negotiations while leaving them unable to pursue their cases in the courts where they originally filed suit.
The 3rd Circuit ruling does not directly impact three other two-step bankruptcies in Texas, filed by subsidiaries of Georgia Pacific, owned by global construction giant Koch Industries Saint-Gobain (SGOB.PA) and Trane Technologies (2IS.F). These cases fall under the jurisdiction of the 4th Circuit Court of Appeals. 3M (MMM.N) attempted a similar maneuver, which is currently on hold in the 7th circuit.
These companies did not comment on the 3rd Circuit’s decision or immediately respond to inquiries. All have previously championed bankruptcies as the best way to fairly compensate claimants. Plaintiffs’ attorneys countered that Texas two-step is a mishandling of the bankruptcy system. The strategy uses a Texas law to split an existing company into two, creating the new subsidiary to take on the lawsuit.
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 resolve the talc claims and reached an agreement to fund a possible settlement approved by a bankruptcy judge.
“Resolving this matter as quickly and efficiently as possible is in the best interest of the plaintiffs and all stakeholders,” J&J said.
A three-judge appeals court panel rejected J&J’s argument, finding that the company’s subsidiary, LTL Management, was created solely to seek Chapter 11 protection, but had no legitimate need for it. . Only a debtor in financial difficulty can file for bankruptcy, the panel ruled. The judges pointed out that J&J had assured that he would give LTL a lot of money to pay the talc plaintiffs.
“Good intentions – such as protecting the J&J brand or resolving disputes globally – are not enough on their own,” the judges said in a 56-page opinion. “LTL, at the time of its filing, was very creditworthy with access to cash to comfortably service its debts.”
‘PLATO PROJECT’
The decision could force J&J to fight talc lawsuits for years in trial courts. The company has a mixed record in fighting lawsuits so far. While the company was hit with major judgments in some cases before filing for bankruptcy, more than 1,500 talc lawsuits were dismissed and the majority of cases that went to trial resulted in verdicts in favor of J&J, judgments for the company on appeal or cancellations of trials, according to the court records of its subsidiary.
A Reuters investigation in December 2018 found that J&J officials had been aware for decades of tests showing that the company’s talc sometimes contained traces of carcinogenic asbestos, but they were keeping that information from regulators and public. J&J has stated that its talc does not contain asbestos and does not cause cancer.
Faced with relentless litigation, J&J turned to the law firm Jones Day, which had helped other companies execute two-step bankruptcies in Texas to deal with asbestos-related lawsuits.
The J&J effort, as Reuters reported last year, was internally dubbed “Project Plato,” and the employees working there signed confidentiality 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 Texas two-step has drawn criticism from Democratic lawmakers in Washington and inspired a bill that would significantly restrict the practice.
Sen. Sheldon Whitehouse, a Democrat from Rhode Island, applauded Monday’s appeals court decision. Whitehouse chaired the first congressional hearing examining two-stage bankruptcies in February last year.
“Bankruptcy is meant to give honest debtors a fresh start in unfortunate circumstances,” he said, not to allow “large, highly profitable corporations” to avoid liability for wrongdoing with a “game of shells” legal.
Reporting by Tom Hals in Wilmington, Delaware; Mike Spector in New York; and Dan Levine in San Francisco; additional reporting by Dietrich Knauth and Chuck Mikolajczak in New York; edited by Bill Berkrot and Brian Thevenot
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