J&J’s court loss weakens controversial legal tactics used by big business – Latest News Update

A courtroom loss by Johnson & Johnson threatens a legal maneuver developed by a handful of the world’s most profitable companies to fight 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 about its baby powder. The company has vowed to appeal to preserve a legal tactic known to critics as the Texas Two-Step, which was trialled by industrial conglomerate 3M Co. and timber giant Georgia-Pacific.

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After spending more than $100 million in legal fees, J&J’s strategy was rejected by a three-judge panel, which sided with cancer victims. The judges ruled that J&J wrongfully bankrupted a specially created unit, LTL Management, to prevent juries across the country from hearing the lawsuits.

The ruling saw J&J’s stock fall 3.7% to $162 on Monday, its worst day since June 2020, and several of its most traded bonds fell less than 0.5%. Shares fluctuated between gains and losses before finishing higher the next day by 0.9% to close at $163.42.

“I don’t think we’ll see anyone else try this,” said Carl Tobias, a law professor at the University of Richmond who teaches classes on product liability law.

Legal strategy

J&J, 3M and Georgia-Pacific have all used a strategy that starts with shifting billions of dollars in legal claims to 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 judicial protection, the parents try to stop the lawsuits and negotiate a final settlement.

3M is fighting in a Chicago appeals court to stop 230,000 lawsuits from current and former soldiers who claim their hearing was damaged by earplugs the company sold to the US military. The case is slightly different from the others because the unit that bankrupted 3M is older and has its own operations.

In bankruptcy court in Charlotte, North Carolina, Georgia-Pacific’s Bestwall unit is fighting against people who claim asbestos in the company’s products has poisoned their lungs.

Now J&J will have 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 a group of victims.

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There have been ongoing talks to settle the talc cases filed in both state and federal courts. Before J&J filed for bankruptcy in 2021, the company offered to settle the lawsuits for a whopping $5 billion, according to Monday’s decision.

The court ruling will likely force J&J to do more. The world’s largest health product maker could pay as much as $10 billion to pay off its talc obligations, JP Morgan analyst Chris Schott said in a note to clients Monday. An agreement of that magnitude would raise about $250,000 per claim, Wells Fargo’s Larry Biegelsen said in his own note.

Non-binding decision

The decision is not binding in the 3M or Georgia-Pacific cases, but its central message — that for-profit companies should not use bankruptcy to resolve lawsuits — could influence the judges who oversee, legal experts predict.

That’s because the J&J ruling comes from a court with years of experience in litigation-triggered bankruptcy cases. For decades, companies that made products containing the carcinogen asbestos filed for bankruptcy in Delaware and New Jersey, taking advantage of Chapter 11 rules that allowed them to continue operating while working out a deal with hundreds of thousands of people who sued them. The Federal Court of Appeals in Philadelphia, which hears appeals from those courts, has heard some of the largest asbestos bankruptcy cases ever filed.

The big difference is that companies like chemical producer WR Grace and auto parts giant Federal-Mogul claimed they couldn’t afford to fight the asbestos lawsuits and so they filed for bankruptcy themselves to deal with what is known in the industry as exposure to mass wrongdoing.

“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. “Solvent entities using the bankruptcy process to resolve their mass tort exposure are clearly up for grabs and raise profound issues that judges are seriously grappling with and will continue to grapple with.”

The judges in Philadelphia found that only companies that are directly threatened with financial problems can use bankruptcy. Since J&J itself has never claimed to be in immediate danger, it cannot take advantage of Chapter 11 of the bankruptcy law by placing a unit under judicial protection, the judges found.

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Challenge statement

The ruling not only impacts the bankruptcy court, but also bolsters the vitality and legitimacy of the mainstream tort system in both state and federal courts, plaintiffs’ attorneys say. J&J’s attorney had complained about runaway juries handing out excessive verdicts in the talk cases.

Don Migliore, a South Carolina attorney representing former talk users suing J&J, said he was encouraged to see J&J’s attempt to circumvent the regular system for resolving civil disputes through the courts was crushed. “The MDL system works,” he said. “Hopefully, other courts will take the financial distress requirements for bankruptcy filings seriously.”

Multi-district litigations (MDLs) are used to consolidate lawsuits filed in federal courts across the country into a single judge to facilitate the exchange of information and hold trial trials on the validity of plaintiffs’ claims. Often they result in settlements of thousands of cases. Thousands of talc cases are being collected before a judge in New Jersey.

J&J will challenge the ruling, the company said in a statement. The bankruptcy was filed in good faith to “equitably resolve” talk claims, the company said. 3M continues to attempt to resolve the earbud lawsuits through judicial mediation, a company representative said. A representative for Koch Industries, which owns Georgia-Pacific, did not return messages asking for comment.

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J&J may ask any judge of the Philadelphia Court of Appeals to reconsider the decision of the three-member panel. The company could also ask the U.S. Supreme Court to hear its arguments for allowing the Chapter 11 case to proceed.

After the big loss in talk cases, J&J developed the new legal strategy designed to block the lawsuits and force plaintiffs to negotiate in LTL’s Chapter 11 case. J&J has long argued that there is no good scientific evidence linking its baby powder to cancer. The company argued that LTL’s case was the only way to control talk show litigation costs and ensure victims receive fair payment.

LTL’s bankruptcy was the first Texas Two-Step to reach an appeals court. After victim groups challenged Kaplan’s ruling, the Philadelphia appeals court agreed to expedite the case.

J&J’s strategy has been condemned by some lawyers and members of Congress because the company got a major benefit from Chapter 11 rules – a halt to litigation – without filing for bankruptcy, where it would be subject to judicial scrutiny of its expenses and other practices.

J&J will likely ask the U.S. Supreme Court to hear the issue, said Anthony Sabino, a law professor at St. John’s University. “I think it is very likely that this is not the end, and review by the Supreme Court is almost certain,” he said.

Still others, like Tobias, question J&J’s ability to get enough votes from the high courts to hear its appeal, as several judges have backed out in the past because of their investments in the company or their ties to the talk industry. That’s exactly what happened in 2021, when the court declined to hear J&J’s challenge of $2.1 billion in damages to women who blamed talc for their injuries.

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“I estimate J&J’s chance of getting the required number of votes to be less than 20%,” said Tobias.

J&J’s bankruptcy case is LTL Management LLC, 21-30589, U.S. Bankruptcy Court, District of New Jersey (Trenton).