A US court dismissed J&J’s bankruptcy strategy for tens of thousands of talc lawsuits

Jan 30 (Reuters) – A US appeals court overturned the Johnson & Johnson trial (JNJ.N) Attempting to offload tens of thousands of lawsuits related to its talc products into bankruptcy, it ruled that the healthcare group had improperly placed a subsidiary in Chapter 11 proceedings even though it did not face financial hardship.

The decision by the Philadelphia Third Circuit Court of Appeals on Monday rejected a Chapter 11 petition filed by a subsidiary of J&J Corporation that was created as recently as October to address more than 38,000 lawsuits from plaintiffs alleging that the company’s baby powder and other talcum products caused cancer.

Prior to the bankruptcy, J&J faced costs of more than $3.5 billion in judgments and settlements, including a judgment in which 22 women ultimately spent more than $2 billion, according to bankruptcy court records.

Several major companies, including J&J and 3M Co (MMM.N), to the bankruptcy court to manage collective tort liabilities. The plaintiff’s attorneys have called the cases improper manipulation of the bankruptcy system, while the companies say the Chapter 11 filings are intended to compensate the claimants fairly and equitably.

The J&J maneuver is known as a two-step in Texas of state law used to create a subsidiary that endures litigation and then declares bankruptcy. The Third Circuit opinion allows litigation to be appealed against the company.

J&J said it will appeal the ruling and that its talc products are safe.

Its shares fell more than 3% – the largest one-day drop in two years.

The New Jersey-based company, valued at more than $400 billion, said its subsidiary’s bankruptcy was initiated in good faith and designed to settle talc claims fairly in favor of all plaintiffs. J&J initially pledged $2 billion to the subsidiary to resolve the talc claims and entered into an agreement to fund a final settlement approved by the bankruptcy judge.

A three-judge Court of Appeals panel rejected J&J’s argument, finding that the company’s subsidiary, LTL Management, was created only to reach bankruptcy and not because it faced financial hardship.

In a 56-page opinion, the judges said, “Good intentions — such as protecting J&J’s trademark or comprehensively resolving litigation — are not enough alone.”

The decision calls into question J&J’s long-planned strategy to get rid of talc lawsuits after it lost an attempt to reverse a landmark ruling that ultimately awarded more than $2 billion to 22 women who blamed their ovarian cancer on baby powder and other talcum products.

More than 1,500 lawsuits against talc have been dismissed without J&J having to pay anything, and the majority of cases that go to trial have resulted in defense, mistrial or judgments in favor of the company on appeal, according to J&J’s court filings.

The Plateau Project

December 2018 Reuters investigation It revealed that the company knew of decades of tests showing its talc sometimes contained traces of the carcinogenic asbestos but kept that information from regulators and the public.

“As we have said since the beginning of this process, resolving this matter as quickly and efficiently as possible is in the best interest of the claimants and all stakeholders,” J&J said in a statement. “We continue to stand behind the safety of Johnson’s Baby Powder, which is safe, does not contain asbestos, and does not cause cancer.”

Facing relentless lawsuits, J&J enlisted the law firm Jones Day, which has helped other companies execute two-step bankruptcies in Texas to handle asbestos claims.

J&J effort, Described by Reuters last yearDubbed “Project Plato” internally, the staff working on it signed confidentiality agreements warning them not to tell anyone, including their spouse, about the plan.

Texas’ two-step strategy drew criticism from Democratic lawmakers, and inspired legislation that would severely restrict the practice.

Jones Day did not immediately respond to a request for comment.

Critics argue that the strategy is an inappropriate use of the bankruptcy system by well-off companies wishing to escape jury trials in state courts. Bankruptcy filings typically pause litigation, forcing plaintiffs into time-consuming settlement negotiations while leaving them unable to pursue their cases in the courts in which they originally filed.

“Bankruptcy courts are for honest companies in distress, not for mega-billionaire corporations like J&J,” said John Rockdishill, the attorney representing the talc plaintiffs.

Prosecutors and other legal experts urged US Bankruptcy Judge Michael Kaplan last year to dismiss the J&J subsidiary’s bankruptcy, arguing that it was filed in bad faith and risks becoming a scheme for large corporations seeking to avoid unwanted litigation.

However, Kaplan denied the application, finding that the J&J unit was in financial difficulty and that the bankruptcy court was a better forum for resolving litigation then the tort system in America.

Additional reporting by Tom Hales in Wilmington, Delaware. Mike Spector from New York. and Dan Levine, San Francisco. Additional reporting by Dietrich Knuth and Chuck Mikolajczak in New York; Edited by Bill Berkrot

Our standards: Thomson Reuters Trust Principles.

Thomson Reuters

An award-winning reporter with more than two decades of experience in international news, he focuses on high-stakes legal battles over everything from government policy to corporate dealmaking.

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