Appeals court tosses J&J's controversial 'Texas two-step' bankruptcy case
A US appeals court has ruled against Johnson & Johnson’s use of bankruptcy to deal with mounting talc lawsuits, deciding that doing so would “create a legal blind spot.”
The Third Circuit Court of Appeals reversed a previous bankruptcy court decision on Monday, calling for the dismissal of a Chapter 11 filing by J&J’s subsidiary LTL Management.
Faced with more than 38,000 lawsuits alleging its talc-based products caused cancer, J&J spun its talc liabilities into a separate company called LTL Management back in October 2021 and filed for bankruptcy, a controversial move colloquially referred to as a “Texas two-step” bankruptcy. Claimants argued that the strategy is a misuse of the US bankruptcy code — and on Monday, a panel of judges agreed.
“For here the debtor was in no financial distress when it sought Chapter 11 protection. To ignore a parent (and grandparent) safety net shielding all liability then foreseen would allow tunnel vision to create a legal blind spot. We will not do so,” the court’s opinion reads.
J&J’s baby powder products were first sold in 1984, and have been used by hundreds of millions of people. Questions about whether the powder contained asbestos first arose back in the 1970s, although J&J maintains that it has “never manufactured a product that contained asbestos.” Up until 2010, there were a “small number of isolated claims” that the talc products caused conditions such as mesothelioma and rashes, according to court documents.
However, two jury verdicts for plaintiffs in 2013 and 2016 “ushered in a wave of lawsuits” alleging the products caused mesothelioma and ovarian cancer. By the time LTL Management filed for bankruptcy, there were more than 38,000 ovarian cancer claims against it.
J&J stopped manufacturing its talc products in the US in 2020, citing declining sales caused by “changes in consumer habits and fueled by misinformation around the safety of the product.” The company said it would change the formula of its baby powder products this past August, while maintaining that its talc-based powder is “safe, does not contain asbestos and does not cause cancer.”
An appeals court agreed to revisit the bankruptcy case in May. J&J previously promised that all talc products would be discontinued globally by 2023.
“The Third Circuit’s decision is a point-by-point rejection of J&J’s attempt to pervert the bankruptcy system and trample the Constitutional right to a jury trial of all Americans harmed by deadly products,” Jonathan Ruckdeschel, a lawyer representing mesothelioma claimants in a class action suit, said in a statement. “The Third Circuit’s decision reinforces that the Bankruptcy system is not a tool for the wealthy, no matter how many tens of millions of dollars they are willing to pay lawyers.”
Meanwhile, J&J defended its strategy, claiming in a statement to Endpoints News that LTL “initiated this process in good faith and our objective has always been to equitably resolve claims related to the Company’s cosmetic talc litigation.”
“Today’s ruling does not reflect the facts established during the Bankruptcy Court’s trial regarding the appropriateness of LTL’s formation and filing, nor the Company’s intention to efficiently resolve the cosmetic talc litigation for the benefit of all parties, including current and future claimants,” the company said, adding that it will challenge the latest ruling.
If the full panel of judges deny J&J’s challenge, the company can petition the Supreme Court, according to a Bloomberg report. Endpoints has request more information from J&J, and will update the story accordingly.
In October 2021, the pharma giant said it had racked up nearly $1 billion in defense costs, and $3.5 billion in payments for settlements and verdicts. J&J argued those costs were untenable, and that a Chapter 11 was needed to “appropriately assess, resolve, and administer these claims in an efficient and equitable manner.”
Johnson & Johnson’s stock $JNJ was down more than 3.3% on Monday afternoon, trading at around $162.61 per share.