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Court rejects Johnson & Johnson’s Texas two-step bankruptcy ploy for talc claims

A federal appeals court panel has voted unanimously to dismiss Johnson & Johnson’s attempt to use the controversial Texas two-step strategy to resolve claims from users who allege that the company’s talc products cause cancer.

The ruling, from the Third U.S. Circuit Court of Appeals, prevents J&J from funneling approximately 40,000 lawsuits into its newly created subsidiary, LTL Management LLC, and declaring it bankrupt, a ploy that could save the company billions.

In a statement, J&J said it will challenge the ruling.

“LTL initiated this process in good faith and our objective has always been to equitably resolve claims related to the company’s cosmetic talc litigation,” J&J wrote. “Today’s ruling does not reflect the facts established during the bankruptcy court’s trial regarding the appropriateness of LTL’s formation and filing.”

On Monday, the court ruled that only companies in “financial distress” can declare bankruptcy, citing that J&J had agreed to fund LTL’s liabilities up to $61.5 billion.

“LTL has a funding backstop, not unlike an ATM disguised as a contract, that it can draw on to pay its liabilities,” Judge Thomas Ambro wrote in his opinion.

Ambro also noted that J&J had over $400 billion in equity value, a AAA credit rating and $31 billion in cash and marketable securities. The company also distributed more than $13 billion to shareholders in both 2020 and 2021.

The ruling could have far-reaching consequences, affecting other companies attempting to employ the game plan to reduce the cost of personal-injury litigation and settlements, said Jonathan Ruckdeschel, who represents claimants against J&J.

“Bankruptcy courts are for honest companies in financial distress, not billionaire mega-corporations like J&J, 3M and Koch Industries, that seek to close courthouse doors to their victims,” Ruckdeschel said in an emailed statement.

By close on Monday, J&J shares fell by 3.7%, while 3M’s shares fell by 2.3%, as noted by Financial Times. 3M has attempted a similar Texas two-step strategy to deal with mounting personal-injury claims from users of the company’s earplugs.

J&J has had mixed results in its talc litigation—winning some court battles, losing some and settling others. The most damaging loss came in Missouri in 2018, as more than 20 women were awarded $4.69 billion, which was later reduced to $2 billion after appeals.

On Monday, J&J stood by its long-held claim that its iconic baby powder is “safe, does not contain asbestos and does not cause cancer.” The company halted baby powder sales in the U.S. and Canada in 2020 and announced last August that it would do the same worldwide by the end of this year, replacing it with a cornstarch-based version.

With Monday’s decision, the Georgia-based Beasley Allen law firm said it will “immediately seek to return these cases to their rightful venues.”

“The court has sent a message to corporate America that a bankruptcy action must be legitimately pursued in good faith for the purposes of reorganization, rather than solely to gain an advantage over consumers or other claimants in litigation,” said Leigh O’Dell of Beasley Allen.