A courtroom loss by Johnson & Johnson is threatening a legal manoeuvre developed by a handful of the most profitable companies in the world to fight lawsuits.
A federal appeals court in Philadelphia found that J&J is too rich to use bankruptcy to resolve more than 40,000 cancer claims over its baby powder. The company has vowed to appeal in order to preserve a legal tactic known to critics as the Texas Two-Step that has been tried by industrial conglomerate 3M Co. and lumber giant Georgia-Pacific.
After spending more than $100 million in legal fees, J&J had its strategy thrown out by a three-judge panel, which sided with cancer victims. The judges ruled that that J&J wrongly put a specially created unit, LTL Management, into bankruptcy to block juries around the country from hearing the lawsuits.
The ruling sent J&J’s stock tumbling Monday by 3.7%, its worst day since June 2020. Bloomberg Intelligence analysts Holly Froum and Negisa Balluku estimated J&J would need to pay about $5 billion to settle the cases.
“I don’t think we’ll see anybody else try this,” said Carl Tobias, a University of Richmond law professor who teaches classes about products-liability law.
J&J, 3M and Georgia-Pacific have all used a strategy that begins with shifting billions of dollars in legal claims into small subsidiaries, which then file Chapter 11 bankruptcy cases. The parent companies agree to pay all creditors of those units, including the people suing them. While the units are under court protection, the parents try to halt the lawsuits and negotiate a final settlement.
3M is fighting in an appeals court in Chicago to halt 230,000 lawsuits it faces from current and former soldiers who claim their hearing was damaged by earplugs the company sold the US military. 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 will need to 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 was appealed all the way to the US Supreme Court, before J&J was forced to pay more than $2 billion to one group of victims.
The decision is not binding in the 3M or Georgia-Pacific cases, but the central message — that profitable companies shouldn’t use bankruptcy to resolve lawsuits — may influence the judges overseeing them, legal scholars predict.
That’s because the J&J ruling comes from a court with long experience in bankruptcy cases caused by lawsuits. For decades, companies that made products with the cancer-causing substance asbestos filed bankruptcy in Delaware and New Jersey, taking advantage of Chapter 11 rules that let them keep operating while they worked out a deal with hundreds of thousands of people who had sued them. The federal appeals court in Philadelphia, which hears appeals from those courts, handled some of the biggest asbestos bankruptcies ever filed.
The major difference is that companies like chemical maker WR Grace and auto parts giant Federal-Mogul argued they could not afford to fight the asbestos lawsuits and so they filed bankruptcy themselves to deal with what is known in the industry as mass-tort exposure.
“The J&J decision makes the Texas Two-Step bankruptcy a much less reliable strategy,” said Ralph Brubaker, a professor at University of Illinois College of Law. “Solvent entities using the bankruptcy process to resolve their mass-tort exposure is clearly up for grabs and raises profound issues that judges are and will continue to seriously struggle with.”
The Philadelphia judges found that only companies directly threatened with financial troubles can use bankruptcy. Since J&J itself never claimed to be in immediate danger, it can’t benefit from Chapter 11 of the bankruptcy code by putting a unit under court protection, the judges found.
“Good intentions—such as to protect the J&J brand or comprehensively resolve litigation—do not suffice alone,” to file for bankruptcy, Judge Thomas Ambro wrote.
J&J will challenge the ruling, the company said in a statement. The bankruptcy was filed in good faith to “equitably resolve” talc claims, the company said. 3M continues to try to resolve the earplugs lawsuits through court-ordered mediation, a company representative said. A representative of Koch Industries, which owns Georgia-Pacific, did not return messages requesting comment.
J&J can ask that all judges on the Philadelphia appeals court reconsider the three-judge panel’s decision. The company could also ask the US Supreme Court to hear its arguments that the Chapter 11 case should be allowed to proceed.
After its major talc litigation loss, J&J developed a new legal strategy designed to block the cases from trial and force claimants to negotiate in the Chapter 11 case of LTL. J&J has long argued that there is no good scientific evidence linking its baby powder to cancer. The company argued LTL’s case was the only way of managing talc litigation costs and ensuring victims get a fair payment.
LTL’s bankruptcy was the first Texas Two-Step to reach an appeals court. After victim groups challenged Kaplan’s ruling, the appeals court in Philadelphia agreed to expedite the case.
J&J’s strategy has been condemned by some legal scholars and members of Congress because the company received a major benefit of Chapter 11 rules — a halt to lawsuits — without filing for bankruptcy, where it would be subject to court oversight of its spending and other practices.
J&J is likely to ask the US Supreme Court to take on the issue, said Anthony Sabino, a law professor at St. John’s University.
“I think it highly likely this is not the end, and Supreme Court review is a near certainty,” he said.
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