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.

Has the mo­ment fi­nal­ly ar­rived for val­ue-based health­care?

RBC Capital Markets’ Healthcare Technology Analyst, Sean Dodge, spotlights a new breed of tech-enabled providers who are rapidly transforming the way clinicians deliver healthcare, and explores the key question: can this accelerating revolution overturn the US healthcare system?

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Tech-enabled healthcare providers are poised to help the US transition to value, not volume, as the basis for reward.
The move to value-based care has policy momentum, but is risky and complex for clinicians.
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