On September 19, 2022, a panel of the 3rd U.S. Circuit Court of Appeals heard arguments to overturn Johnson & Johnson’s bankruptcy maneuver. In October of last year, J&J created a subsidiary to transfer all of its pending talcum powder litigation. However, once J&J shifted all talc liabilities, its subsidiary immediately filed for bankruptcy, essentially halting all legal proceedings. Plaintiffs who allege that they developed cancer after using Johnson & Johnson’s talc-based products argue that the bankruptcy tactic is in bad faith.
Johnson & Johnson’s “Texas Two-Step” Aims to Avoid Talcum Powder Litigation
Founded in 1886, the major pharmaceutical company Johnson & Johnson has crafted consumer health products, medical technology, and pharmaceutical products for nearly 130 years. Its personal care portfolio consists of a wide range of commodities, including mouthwash, bandaids, skin care treatments, baby powder, and feminine hygiene goods. Countless people nationwide and globally have incorporated Johnson & Johnson’s talcum powder-based products into their hygiene routines for decades. However, many claim that this prolonged exposure caused them to suffer adverse health effects such as ovarian cancer and mesothelioma.
Thousands have filed lawsuits accusing Johnson & Johnson of selling asbestos-tainted products to consumers. Asbestos, a known carcinogen, and talc are naturally occurring minerals that appear close to one another in the earth. Therefore, when companies mine for talc, it may become contaminated with asbestos. Furthermore, victims assert that Johnson & Johnson knew that its talc-based products contained asbestos far back as the 1970s but actively concealed this information from the public.
In October 2021, as the litigation steadily increased against Johnson & Johnson, the New Jersey company created a new subsidiary known as LTL Management in Texas. J&J subsequently funneled its talc liabilities into LTL Management which quickly filed for bankruptcy. Additionally, Johnson & Johnson allocated $2 billion to LTL Management through a trust to settle future talcum powder litigation. This trust is grossly below the total evaluation and profitability of J&J. The bankruptcy ploy is known as the “Texas Two-Step” in the legal community. Through this maneuver, Johnson & Johnson paused talcum powder lawsuits and shielded itself from shelling out billions of dollars to settle talcum powder litigation. At least for now.
In February 2022, Bankruptcy Judge Michael Kaplan ruled in favor of Johnson & Johnson’s bankruptcy maneuver.
Talcum Powder Plaintiffs Appeal Johnson & Johnson Bankruptcy Technique
When Johnson & Johnson implemented its bankruptcy strategy, it faced nearly 38,000 claims. J&J’s decision brought widespread media attention and outrage. In the appeals court, the plaintiffs stated that Johnson & Johnson abused Chapter 11 bankruptcy proceedings when it formed LTL Management to squash talcum powder lawsuits. Attorneys argued that bankruptcy filings should be reserved for businesses in financial distress, which Johnson & Johnson is not. Plaintiffs pleaded with the circuit judges that the company unfairly created its subsidiary to avoid court proceedings. J&J countered that it is simply not feasible to litigate each claim individually and will only delay victim’s from receiving compensation. Typically businesses want to exit Chapter 11 bankruptcy sooner rather than later to resume operations. However, attorneys countered that LTL Management is in no hurry to reach a settlement and exit bankruptcy since its sole purpose is to house talc liabilities.
Furthermore, attorneys presented evidence that J&J has engaged in activities that bankruptcy restructuring normally prevents. In September 2022, Johnson & Johnson revealed that it will repurchase up to $5 billion of the company’s common stock. While J&J spends billions on shares, thousands of claimants continue to wait indefinitely.
Until J&J’s bankruptcy action ceased litigation, the company had paid $3.5 billion in verdicts and settlements for talcum powder litigation. It is uncertain when the 3rd U.S. Circuit Court of Appeals will announce its ruling.