(Reuters) — A U.S. appeals court on Monday shot down Johnson & Johnson’s attempt to take tens of thousands of lawsuits over its talc products to bankruptcy court. The ruling marked the first major rejection of an emerging legal strategy with the potential to upend US corporate liability law.
J&J is among four major companies that have filed so-called Texas two-step bankruptcies to avoid potentially massive exposure to lawsuits. The tactic involves creating a subsidiary to absorb the debts and immediately filing for Chapter 11.
The court ruled that the healthcare conglomerate wrongfully bankrupted its subsidiary even though it was not facing any financial problems. J&J̵
7;s two-stage trial sought to stop more than 38,000 lawsuits from plaintiffs alleging that the company’s baby powder and other talc products caused cancer. The Court of Appeal’s decision revives those lawsuits.Monday’s ruling by the U.S. 3rd Circuit Court of Appeals in Philadelphia dismissed the bankruptcy filing by the J&J subsidiary in 2021. Before the filing, J&J had faced costs of $3.5 billion in judgments and settlements.
The company said in a statement that it would challenge the ruling and that its talc products are safe.
Plaintiffs’ lawyers and some legal experts have argued that the two-step process could set a dangerous precedent, providing a blueprint for any company to easily avoid unwanted litigation. The appeals court’s ruling could force companies considering the strategy to more carefully consider its risks, two legal experts said.
“It’s a blowback to the notion that any company anywhere can use the same tactics to get rid of their mass tort liability,” said Lindsey Simon, a professor at the University of Georgia School of Law.
Bankruptcy filings typically suspend litigation in trial courts, forcing plaintiffs into often time-consuming settlement negotiations while preventing them from pursuing their cases in the courts where they originally sued.
The 3rd Circuit ruling does not apply to three other Texas two-stage bankruptcies, filed by subsidiaries of Koch Industries-owned Georgia Pacific, global construction giant Saint-Gobain and Trane Technologies. These cases fall under the jurisdiction of the 4th Circuit Court of Appeals. 3M attempted a similar maneuver, which is currently pending in the 7th Circuit.
Johnson & Johnson, valued at more than $400 billion, said its subsidiary’s bankruptcy was entered into in good faith. J&J initially pledged $2 billion to the subsidiary to settle talc claims and entered into an agreement to fund an eventual settlement approved by a bankruptcy judge.
“Resolving this matter as expeditiously and efficiently as possible is in the interests of the plaintiff and all stakeholders,” J&J said.
A three-judge panel of the appeals court rejected J&J’s arguments, finding that the company’s subsidiary, LTL Management, was created solely to file for Chapter 11 protection but had no legitimate need to. Only a debtor in financial distress can file for bankruptcy, the panel ruled. The judges pointed out that J&J assured that it would provide LTL with plenty of cash to pay talk claims.
“Good intentions — such as protecting the J&J brand or comprehensively resolving disputes — are not enough alone,” the justices said in a 56-page opinion. “LTL, at the time of its application, was very solvent with access to cash to comfortably meet its debts.”
The decision could force J&J to fight talc for years in court.
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