Johnson & Johnson can proceed with controversial bankruptcy strategy, judge rules
A US judge has ruled that Johnson & Johnson can proceed with a controversial bankruptcy strategy to help it manage almost 40,000 legal claims that its baby talc causes cancer.
Claimants had sought to dismiss the bankruptcy case by J&J subsidiary LTL Management and lift a stay on thousands of personal injury lawsuits, arguing that J&J’s manoeuvring would delay justice, strip their right to a jury trial and put an unfair cap on how much they would receive in any settlement of the claims.
But Judge Michael Kaplan on Friday denied the talc claimants’ motion to dismiss the bankruptcy, finding they had not proved J&J had acted in “bad faith” by placing its LTL subsidiary into bankruptcy.
He said resolving claims through the bankruptcy process was in the public interest, noting a $2bn settlement trust proposed by J&J could benefit talc claimants whose time may be limited due to illness.
J&J shares climbed by almost 5 per cent following the ruling, which the company said was a “positive development” and a step towards a global resolution of talc litigation.
“We continue to stand behind the safety of Johnson’s Baby Powder, which is safe, does not contain asbestos and does not cause cancer,” said J&J. It stopped selling talc-based baby powder in North America last year.
During a five-day hearing earlier this month J&J warned it faced litigation costs of up to $190bn linked to a deluge of claims its talc caused cancer, some of which have resulted in multibillion-dollar verdicts. It argued LTL’s bankruptcy filing was justified due to the severe threat posed to the company’s finances from the talc claims.
Talc claimants argued the LTL bankruptcy was filed in “bad faith” and should be dismissed, noting J&J had a market capitalisation of $430bn. They warned a failure to dismiss LTL’s bankruptcy could open the floodgates for other corporates to deploy the so called “Texas two-step” scheme.
The bankruptcy manoeuvre utilises business-friendly laws in Texas that allowed J&J to split itself into two separate entities and ringfence all its talc liabilities within the LTL subsidiary. LTL then filed for Chapter 11 bankruptcy protection, which put a stay on talc claims.
Judge Kaplan wrote in his decision that “allegations of bad faith are insufficient to preclude” the debtor from utilising the bankruptcy system to achieve its goals, which the court believed would ensure justice for existing and future talc claimants.
The ruling also dismissed concerns that allowing LTL to remain in the bankruptcy system could lead to a deluge of similar claims by other corporates, arguing its impact was limited to the facts argued in the current case.
“Given that this determination is limited to the unique facts of the case presently before the court, this ruling will not open the floodgates to an unchecked, unregulated, or inherently abusive method of addressing liability,” Judge Kaplan wrote.
During the case J&J suggested to the court an independent examiner should be appointed to consider whether the corporate restructuring that led to the creation of LTL was appropriate.
The court will consider the appointment of an examiner at an upcoming hearing. J&J said it was confident the examiner appointed by the court would reach the same conclusion as the court.
Jon Ruckdeschel, one of the lawyers representing talc claimants, said the judgment would be appealed. People suffering from cancer they allege was caused by J&J’s asbestos-tainted talc have a constitutional right to have a jury decide their case, he added.
“The bankruptcy code was never intended to be abused in this way by massively profitable corporations as a means to delay or prevent cancer victims from having their day in court,” he said.