A U.S. appeals court recently rejected Johnson & Johnson's (J&J) bid to transfer thousands of lawsuits relating to its talc products into bankruptcy court. This marks the first significant rejection of a legal strategy that could have far-reaching implications for U.S. corporate liability law. Before the filing, J&J had faced costs of $3.5 billion in verdicts and settlements.
J&J was among four major companies that had filed what is known as a "Texas two-step bankruptcy" in an effort to avoid potential huge lawsuit exposure. The strategy involved creating a subsidiary to absorb the liabilities and then immediately filing for Chapter 11. The court ruled that J&J had improperly placed its subsidiary into bankruptcy, even though it was not facing financial distress. This ruling revives the over 38,000 lawsuits from plaintiffs who have accused the company's talc products of causing cancer.
In a statement, the company said it would challenge the ruling and that its talc products are safe.
Some legal experts have argued that the "Texas two-step" could set a dangerous precedent and provide a blueprint for any corporation to easily evade undesirable litigation. The appeals court decision could now force companies considering this strategy to more carefully evaluate its risks.
“It is a push back on the notion that any company anywhere can use the same tactic to get rid of their mass tort liability,” said Lindsey Simon, a professor at University of Georgia School of Law.
The U.S. 3rd Circuit Court of Appeals' ruling does not apply to three other Texas two-step bankruptcies filed by subsidiaries of Koch Industries-owned Georgia Pacific, Saint-Gobain, and Trane Technologies. A similar maneuver by 3M is still pending in the 7th Circuit.
J&J, valued at over $400 billion, has pledged $2 billion to the subsidiary to resolve talc claims and had entered into an agreement to fund a settlement approved by a bankruptcy judge. However, the appeals court judges found that J&J's subsidiary, LTL Management, had no legitimate need for bankruptcy and was created solely to file for Chapter 11 protection.
The decision could force J&J to fight the talc lawsuits for years in trial courts. The company has had a mixed record so far, with more than 1,500 talc lawsuits being dismissed and the majority of cases that have gone to trial resulting in verdicts in favor of J&J or mistrials.
J&J's talc products have been under scrutiny since a 2018 Reuters investigation revealed that the company knew for decades about tests showing that its talc sometimes contained traces of carcinogenic asbestos but kept the information from the public and regulators. J&J has denied that its talc contains asbestos or causes cancer.