Jan 30 (Reuters) – A U.S. appeals court on Monday shot down Johnson & Johnson (JNJ.N) It is trying to send tens of thousands of lawsuits over its talc products to bankruptcy court. The ruling marked the first major rejection of a growing legal strategy with the potential to upend US corporate liability law.
The tactic included J&J forming a subsidiary to absorb the liabilities of one of the Big Four and immediately filing for Chapter 11.
The court ruled that the healthcare conglomerate improperly bankrupted its subsidiary despite facing any financial crisis. J&J’s two-step, plaintiffs sought to halt more than 38,000 lawsuits claiming the company’s baby powder and other talc products caused cancer. The appeals court ruling revives those cases.
Reuters last year described a secretive two-step scheme between Johnson & Johnson and Texas Other large companies A Series of reports Examining corporate efforts to avoid litigation through bankruptcies.
Monday’s decision by the U.S. 3rd Circuit Court of Appeals in Philadelphia rejected a bankruptcy filing by a J&J subsidiary in 2021. Before the filing, J&J faced $3.5 billion in costs from judgments and settlements.
J&J shares fell 3.7% – the biggest one-day percentage decline in two years. The company said in a statement that it is challenging the ruling and that its talc products are safe.
Plaintiffs’ lawyers and some legal experts have argued that the two steps could set a dangerous precedent, providing a blueprint for any company to easily avoid unsavory lawsuits. The appeals court ruling could force companies considering the strategy to consider its risks more carefully, two legal experts said.
“It pushes back the idea that any company anywhere can use the same tactic to escape their massive tort liability,” said Lindsay Simon, a professor at the University of Georgia School of Law.
Bankruptcy cases typically stall cases in trial courts, forcing plaintiffs into often time-consuming settlement negotiations when they are unable to pursue their cases in the courts where they originally litigated.
The 3rd Circuit ruling does not directly affect three other Texas two-step bankruptcies filed by subsidiaries of Koch Industries-owned Georgia Pacific, a global construction company. Saint-Gobain(SGOB.PA)and Trane Technologies (2IS.F). Those cases fall under the jurisdiction of the 4th Circuit Court of Appeals. 3M (MMM.N) tried a similar maneuver, which is currently pending in the 7th Circuit.
Those companies did not comment on the 3rd Circuit ruling or immediately respond to inquiries. All have previously defended bankruptcies as the best way to fairly compensate claimants. The plaintiffs’ attorneys countered that it was an improper manipulation of Texas’ two-step bankruptcy system. The strategy uses Texas law to split an existing corporation in two and create a new subsidiary to bear the lawsuits.
New Jersey-based Johnson & Johnson, worth more than $400 billion, said its subsidiary’s bankruptcy was initiated in good faith. J&J initially pledged $2 billion to the subsidiary to settle the talc claims and eventually entered into an agreement to fund the settlement approved by a bankruptcy judge.
“It is in the interest of the claimants and all stakeholders to resolve this matter as expeditiously and efficiently as possible,” J&J said.
A three-judge panel at the appeals court rejected J&J’s argument that the company’s subsidiary, LTL Management, was created only for Chapter 11 protection, but not legally required to do so. The panel ruled that only a debtor in financial distress can resort to bankruptcy. The judges pointed out that J&J promised LDL a lot of money to pay the talc claimants.
“Good intentions — such as protecting the J&J brand or settling the case entirely — are not enough,” the justices said in a 56-page opinion. “LTL, at the time of filing, was highly solvent with access to cash to comfortably meet its obligations.”
The decision could force J&J to fight talc cases in trial courts for years. The company has had a mixed record fighting lawsuits so far. Although the company was hit with landmark rulings in some cases before the company filed for bankruptcy, more than 1,500 Talc cases have been dismissed, and most cases that have gone to trial have had J&J rulings in favor of the company on appeal or mistrials. According to its subsidiary’s court filings.
A December 2018 Reuters investigation revealed that J&J officials had known for decades about tests showing that the company’s talc sometimes contained traces of cancer-causing asbestos, but kept that information from regulators and the public. J&J claims its talc is asbestos-free and does not cause cancer.
Faced with relentless litigation, J&J enlisted the law firm Jones Day, which has helped other companies file Texas two-step bankruptcies to resolve asbestos-related cases.
J&J’s effort, Reuters reported last year, was internally dubbed “Project Plato,” and employees working on it signed confidentiality agreements. A company lawyer warned them not to tell anyone, including their wives, 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, who have encouraged proposed legislation that would severely restrict the practice.
Senator Sheldon Whitehouse, D-Rhode Island, welcomed the appeals court ruling on Monday. In February of last year, Whitehouse chaired the first congressional inquiry to examine two-step bankruptcies.
“Bankruptcy is about giving honest debtors in unfortunate circumstances a fresh start,” he said, noting that “large, highly profitable corporations” should not be held liable for mistakes in a legal “shell game.”
Reporting by Tom Halls in Wilmington, Delaware; Mike Spector in New York; and Don Levine in San Francisco; Additional reporting by Dietrich Knath and Chuck Mikolajczak in New York; Editing by Bill Bergrod and Brian Thevenot
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