Judge Backs J&J Talc Bankruptcy, Keeping Cancer Lawsuits Frozen
A bankruptcy judge allowed a J&J subsidiary to stay in chapter 11, signing off on an emerging legal strategy for profitable companies to resolve mass litigation
The decision maintains a pause on further jury trials on allegations that Johnson’s Baby Powder caused ovarian cancer or contained asbestos, which the company denies.PHOTO: SOUMYABRATA ROY/ZUMA PRESS
By Jonathan Randles
Updated Feb. 25, 2022 12:07 pm ET
A bankruptcy judge allowed Johnson & Johnson to use chapter 11 to drive a settlement of litigation linking its baby powder to cancer, backing a controversial tactic that has helped profitable companies freeze roughly a quarter of a million injury lawsuits.
Judge Michael Kaplan of the U.S. Bankruptcy Court in Trenton, N.J., ruled Friday against personal-injury lawyers who asked to throw out the chapter 11 filing of a J&J subsidiary created last year to move into bankruptcy about 38,000 pending lawsuits over allegedly dangerous talc-based products.
Judge Kaplan ruled the subsidiary, LTL Management LLC, didn’t file for chapter 11 in bad faith to gain an unfair edge over personal-injury claimants, as they had alleged, but for the legitimate purpose of resolving mass litigation. Instead he sided with J&J, which argued chapter 11 provides cancer victims with a fairer and more efficient forum to receive compensation than the civil jury system.
“This chapter 11 is being used, not to escape liability, but to bring about accountability and certainty,” Judge Kaplan said.
The judge’s ruling signed off on an emerging legal strategy for profitable companies to access the benefits of chapter 11 without placing valuable business assets in bankruptcy. Plaintiffs’ lawyers and academics opposed to J&J’s strategy have said it could provide other solvent corporations a blueprint for tapping chapter 11 while avoiding filing bankruptcy themselves.
The decision maintains a pause on further jury trials on allegations that Johnson’s Baby Powder caused ovarian cancer or contained asbestos, which the company denies.
“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,” said Jon Ruckdeschel, a lawyer representing individuals with cancer claims against J&J.
J&J officials testified they explored the bankruptcy strategy after the Supreme Court declined in June to review a $2.1 billion judgment in Missouri for 20 women who alleged the baby powder caused ovarian cancer.
J&J has said its talc-based products are safe but stopped selling the product in the U.S. and Canada in 2020 as the number of injury lawsuits grew, saying the litigation and widespread advertising by plaintiffs’ lawyers had sowed misinformation about the safety of the product.
Injury claims are expected to continue for decades to come as more former talc users get sick, according to the company, which has said bankruptcy is its only option for resolving those future claims and defining its talc liability.
Friday’s ruling follows a week-long trial examining J&J’s use of a Texas law that lets companies fill subsidiaries like LTL that have limited business operations with legal liability for injury litigation before those units file for bankruptcy. Committees of people blaming talc for their illnesses argued that bankruptcy law didn’t permit LTL’s filing, saying it was a litigation tactic designed to sap their negotiating leverage and sidestep jury trials.
Judge Kaplan found that rather than hindering and delaying payments, a settlement through bankruptcy “may indeed accelerate payment to cancer victims and their families.”
Earlier this month, the Senate Judiciary Committee scrutinized how J&J and a handful of other companies engineered similar corporate restructurings in Texas to hive off tort liabilities and shift them into chapter 11, and is considering legislation to reign in the practice. The company used the Texas law to separate the talc liabilities from its consumer-health business and place them in LTL, which filed chapter 11 two days after its creation in October, carrying pending and future talc claims with it.
Talc lawsuits against J&J in federal and state courts have been paused since LTL filed bankruptcy in October and will now stay on hold while the chapter 11 case moves forward, giving the consumer-health giant time to try to build support for a broad settlement. J&J has offered $2 billion so far, an amount that could increase during the bankruptcy, according to testimony by a company lawyer.
J&J officials denied at trial that it acted in bad faith or to shortchange claimants by moving its talc liabilities to LTL. Lawyers for LTL said claimants could rely on a funding agreement with J&J to cover any amounts the subsidiary is deemed to owe, which it cited as a critical piece of evidence supporting the chapter 11 case.
The trial provided insight into how J&J has sought to address the talc litigation. John Kim, chief legal officer of bankrupt LTL, testified that several months before the bankruptcy, J&J was close to settling most of its talc liability for between $4 billion and $5 billion.
In an attempt to ease concerns from injury claimants, an LTL lawyer said it would agree to bring in an examiner to conduct an independent investigation of the prebankruptcy maneuvers if the bankruptcy moves forward. Talc claimants said J&J turned to bankruptcy to stem the damage costly jury verdicts have had on its brand, while the company argued that continued jury trials would result in “lottery-like” outcomes where some plaintiffs win big and others get nothing.
A J&J spokeswoman said Friday that the company is confident that an independent examination of LTL’s formation and chapter 11 filing will reach the same conclusion as Judge Kaplan.
“LTL stands ready to work with claimants’ counsel and the mediator to reach an equitable and efficient resolution as ordered by the bankruptcy court,” the J&J spokeswoman said.
Injury claimants also disputed LTL’s assertion that talc litigation was so significant that it posed a serious financial risk to J&J’s consumer-health business, necessitating the Texas restructuring and subsequent bankruptcy.
Judge Kaplan disagreed, finding that jury verdicts for ovarian cancer and mesothelioma lawsuits, coupled with defense costs, would imperil “the continued viability of all J&J companies.”
“No public or private company can sustain operations and remain viable in the long term with juries poised to render nine- and ten-figure judgments, and with such litigation anticipated to last decades going forward,” he said.
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