Johnson & Johnson Employs Bankruptcy Strategy to Cap Litigation Payouts

In 2021, The U.S. Supreme Court declined to hear J&J’s appeal of one headline case from St. Louis. This case ended with a $2.1 billion dollar verdict for 20 female plaintiffs. The plaintiffs had suffered from ovarian cancer after using the talc powder.

In total, 38 lawsuits alleging that Johnson’s baby powder had asbestos that caused ovarian cancer and mesothelioma loomed over J&J’s talc product.

Johnson & Johnson’s Texas Bankruptcy Law Strategy

J&J’s stock price fell significantly after the initial St. Louis verdict. The stock price fell a bit more after the Supreme Court rejection. In the meantime, a small group at J&J and their outside counsel had been hatching a plan to manage the potentially enormous talc product liability.

The company decided on a subsidiary bankruptcy strategy allowed under Texas law. Other large companies and persons have employed this strategy to shift shouldering huge lawsuit liabilities to an entity in bankruptcy. The way this strategy works is a company sets up a subsidiary. Then, the company shifts responsibility for lawsuit liabilities to it. The sub declares bankruptcy. Then, the parent (or other entities or executives) makes a payment to the “failing” subsidiary. The payment covers the litigation liability in exchange for an exemption from all future liability from lawsuits. Plaintiffs end up having to compete for a limited pool of money under a bankruptcy proceeding instead of having financial awards determined in a civil courtroom based on their case facts. In effect, this caps potential payouts to claimants.

Enter: J&J’s LTL Management LLC

In October 2021, Johnson & Johnson executed the bankruptcy strategy to deal with the talc product liability. The company established a company named LTL Management LLC (LTL). Then, J&J swept the talc product litigation liability to the new company. LTL then filed for bankruptcy in North Carolina. The proceeding was later moved to New Jersey where J&J is headquartered.

Next came the financial contribution. J&J announced plans to give LTL $2 billion dollars for a trust. The trust would compensate all 38,000 current talc powder lawsuit plaintiffs as well as all future claimants. Before the bankruptcy filing, J&J was on the hook for $3.5 billion in talc powder lawsuit verdicts and settlements, including the $2 billion St. Louis award. J&J has said in court filings and in public statements that the subsidiary, LTL Management LLC, could also potentially tap a $350 million royalty revenue stream if needed.

LTL lawyers have stated that the bankruptcy filing was a prudent and necessary alternative for equitably and permanently resolving all the talc litigation. The company said its aim is for the reorganization plan to create a reasonable framework to address the unprecedented level of claims. Others view this maneuver as another example of how wealthy companies or organizations are avoiding the burdens of bankruptcy and shunning responsibility for the harm alleged against them in lawsuits.

Will the Subsidiary Bankruptcy Strategy Work?

The immediate effect of J&J shifting talc claims liability to a subsidiary and then filing for bankruptcy for that sub was to freeze all the lawsuits for months or years. Lawsuits to stop or alter J&J’s talc claims strategy will tie things up as courts rule on challenges and appeals.

J&J got an initial boost in late February 2022. The bankruptcy court did not agree with the plaintiffs’ view that J&J made the bankruptcy filing in bad faith. The judge asserted that Johnson & Johnson has a fiduciary duty to shareholders to minimize liabilities from the lawsuit. Therefore, J&J acted in good faith when it took steps to do so under available bankruptcy law.

The judge commented that recent uses of bankruptcy proceedings in mass tort litigations show that “[c]laims reconciliation through these bankruptcy trusts place reduced evidentiary and causation burdens on the injured and their families, and resolution of claims and payments to victims can be achieved at a far more expeditious pace than through uncertain litigation in the tort system.”

The plaintiffs will likely appeal this ruling. In addition, the judge pointed out that J&J still runs the risk that any negotiated plan under this scenario may not be approved by a supermajority of tort claimants as the law requires.

The Talc Lawsuits

The lawsuits that J&J wants resolved under the bankruptcy courts stem from claims that Johnson & Johnson baby talc powder causes ovarian cancer and mesothelioma. In October 2019, the FDA warned consumers to stop using Johnson’s Baby Powder lot #22318RB. This was because the agency had found asbestos in a sample. During talc mining, if purification procedures are not sufficient, asbestos can contaminate the talc. J&J maintains its product is safe and is vigorously defending all the lawsuits. However, the company did recall the product.

Since then, tens of thousands of lawsuits alleged that J&J baby powder contains cariogenic asbestos that causes cancer.

J&J’s Strategy Big Picture Impacts

Purdue Pharma, Georgia Pacific, and others have also pursued this strategy of offloading lawsuit liabilities to an entity in bankruptcy. As such, law professors, members of congress, and plaintiffs have sounded the alarm about the implications and repercussions.

A University of North Carolina law school professor worries that the J&J precedent opens the door for companies to routinely escape jury trial accountabilities by pulling the related-party bankruptcy escape hatch. The legal maneuver sets up an alternative justice system in the bankruptcy courts for gigantic corporations. Another law professor suggests that it’s not at all clear that these “bankruptcy grifters” tactics are permitted under bankruptcy law. He believes there’s a “realistic chance that at some point a court will say it’s not allowed.”

The House Committee on the Judiciary Subcommittee on Antitrust, Commercial and Administrative Law is considering legislation. The act, the Nondebtor Release Prohibition Act of 2021 (“NRPA”), would largely prohibit the use of nonconsensual third-party releases. Some experts argue that this bill “ignores the possibility that in some cases a respite from litigation and an eventual third-party release may in certain instances be in the interest of creditors and could even have overwhelming creditor support.”

No doubt, all claimants and the larger legal community will closely watch the Johnson & Johnson legal bankruptcy strategy to limit liability for the talc powder lawsuits.