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

Bottles of Johnson & Johnson baby powder sit on a drugstore shelf in New York.

Lucas Jackson | Reuters

Johnson & JohnsonA federal appeals court on Monday rejected the strategy of using bankruptcy to resolve multibillion-dollar lawsuits over claims its talc products cause cancer, but the healthcare group said it would challenge the ruling.

The Philadelphia 3rd Circuit Court of Appeals decision removed the company’s LTL management unit from bankruptcy, which was facing more than 38,000 legal claims related to products like Johnson’s Baby Powder.

J&J shares were down about 3% at midday on the New York Stock Exchange.

J&J, which insists and reiterates on Monday that its talc products are safe, created and divested from an LTL and assigned the unit’s talc obligations and filed for bankruptcy in 2021.

J&J argued that bankruptcy provides a way to resolve tens of thousands of legal claims more efficiently and fairly than bringing cases to trial individually. The company has pledged “support” funding to ensure LTL’s ability to pay its talc claims.

The appeals court said it denied LTL’s Chapter 11 petition because the unit was created only to access the bankruptcy system.

“Application is made here,” said the 56-page opinion of the three-judge panel, “While LTL faces significant future liability for talc, its funding support clearly mitigate any foreseeable financial hardship at the date of the petition.”

J&J said it will challenge the Third Circuit ruling and continue to seek resolution of the cases in bankruptcy court.

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

J&J used a restructuring strategy known as the “Texas Two-Step” that has been criticized by lawmakers and academics who have argued that the maneuver could provide a blueprint for other big corporations to avoid juries in class tort lawsuits.

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

But 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 LTL court filings.

The appeals court was urged to dismiss the bankruptcy petition by the plaintiffs who sued over the talcum products. They argued that one of the world’s largest healthcare companies should not use bankruptcy to protect itself from lawsuits.

Cancer victims asked an appeals court to invalidate a New Jersey bankruptcy judge who allowed LTL’s bankruptcy to continue. LTL’s bankruptcy filing automatically stopped lawsuits from pursuing the case, and U.S. bankruptcy judge Michael Kaplan in Trenton, New Jersey ruled in February that LTL’s bankruptcy should also stop talc lawsuits against parent company J&J.

Kaplan said the bankruptcy court is better equipped to handle class tort claims than other courts are.

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