As suits mount, J&J spins out talc liabilities into Chapter 11 using 'Texas two-step' maneuver
With lawsuits piling up alleging its talc baby powder products are unsafe, J&J has taken the controversial step of spinning out its related liabilities into a new company and filing for Chapter 11 bankruptcy, according to court papers filed late Thursday.
The procedures will now head to bankruptcy court in North Carolina, halting all lawsuits and their respective discovery processes. It’s a move that comes a few months after the Wall Street Journal and Reuters both reported J&J was exploring this option, and after a federal judge said the process could move forward in August.
Had J&J not engaged in the new subsidiary’s Chapter 11, the payouts would not have been tenable, it said in court documents. As the lawsuits have mounted, growing to nearly 40,000 claims, J&J said it’s spent almost $1 billion in defense costs in the last five years. Settlements and jury-awarded payments, meanwhile, reached as high as $3.5 billion.
“[T]he costs associated with the continued litigation of the claims for decades to come would have been simply unsustainable,” the documents read. “The status quo therefore was untenable, and this chapter 11 case is necessary to appropriately assess, resolve, and administer these claims in an efficient and equitable manner.”
Although J&J itself, the world’s biggest pharma company worth more than $420 billion in market cap, did not declare bankruptcy, it utilized a Texas law that allows liabilities to be separated from assets into a new entity. J&J’s subsidiary, called LTL Management, was created solely for the purpose of holding the talc-related debts and paying out creditors.
The process is known formally as a divisional merger but colloquially — and derisively by critics — as a Texas two-step bankruptcy. Several companies facing asbestos-related litigation have used the maneuver to shield themselves from Chapter 11 proceedings.
The barrage of lawsuits has stemmed from allegations that the company’s talcum-based baby powder products contained harmful materials, such as asbestos, and J&J hid the information while continuing to market and sell. J&J has taken talc-related suits to court in the past, losing a Missouri case in 2018 when a jury awarded plaintiffs more than $4.7 billion in damages.
J&J is also appealing another suit in which a Mississippi court ruled against the company, petitioning the Supreme Court in August to review the case. Earlier this month, eight former FDA officials filed an amicus brief supporting J&J, saying the lower court’s decision “threatens to upend” the way the agency makes labeling decisions.