Appeals court blocks J&J talc bankruptcy but J&J doubles down

In its ongoing attempts to evade responsibility for its asbestos-contaminated baby powder, Johnson & Johnson faced another rebuke by the courts recently. In January, as we discussed on this blog, a three-judge panel of a federal appeals court ruled that J&J’s “Texas two-step” maneuver in the bankruptcy court was not lawful.

Now, the entire body of judges who comprise the U.S. Court of Appeals for the Third Circuit have refused J&J’s efforts to have all the judges on the Third Circuit rehear the appeal. This would seemingly leave the U.S. Supreme Court as J&J’s only option. Yet, while vowing to appeal further, J&J has floated an alternative plan to see if it gains any traction.

J&J is facing nearly 60,000 lawsuits claiming that people who used Baby Powder or other J&J talc products for routine personal hygiene later developed mesothelioma or ovarian cancer. They allege J&J’s talc products were contaminated by asbestos and that J&J knew for decades but hid that information from the public.

J&J denies that its talc products are tainted with asbestos, although it has stopped selling them in the U.S. and has said it would do so soon worldwide. The alternative (and safer) option to J&J? Corn starch, which has been around for decades.

What’s the ‘Texas two-step’ maneuver?

The “Texas two-step” maneuver involves a parent company creating a new company, then offloading the parent’s liabilities on a particular topic to that subsidiary, and then having that subsidiary promptly file for bankruptcy. If successful, the idea is that the parent would be able to wash its hands of responsibilities, while the subsidiary would receive the protections and limitations imposed under federal bankruptcy law.

J&J set up LTL Management, LLC, and transferred all liability for the talc lawsuits to the new company. It also transferred about $2 billion to LTL Management to pay the victims.

If the bankruptcy was approved, the victims would have had to apply to the bankruptcy court for compensation instead of going to a trial court and having a jury decide what each case was worth. Crucially for J&J, the victims would be limited to only a slice of the $2-billion pie.

Limiting their total liability to $2 billion would have been tremendously advantageous for J&J. $2 billion was not nearly as much as it many experts think J&J would pay if those 60,000 cases went to trial or were otherwise settled by agreement in the normal pre-trial negotiating process.

It seemed at first like J&J’s scheme would work. A bankruptcy judge approved LTL Management’s plan last year. Then, in January, the Third Circuit Court of Appeals overruled the bankruptcy judge. The appeals court found that neither J&J nor LTL Management qualified for bankruptcy because neither was in genuine financial distress. It ordered the bankruptcy to be dismissed.

Now, the Third Circuit refused to put its order on hold and dismissed the bankruptcy. Would the victims finally get their day in court? In the words of college football commentator Less Corso, “Not so fast my friends.”

J&J plays the same card for higher stakes

Days after it was thwarted by the Third Circuit, Johnson & Johnson announced that LTL Management will re-file for Chapter 11 bankruptcy protection. The difference this time?

It will still be a “Texas two-step.” LTL Management would still be solely liable for compensating the talc cancer victims. The fund for those victims would still be limited.

But this time, the victim fund would be $8.9 billion.

It seems like the same dance, but there is one more difference. This time, some plaintiffs have agreed to the plan, although many have not.

Other companies are trying the ‘Texas two-step’ maneuver

Will J&J get away with limiting its total exposure to $8.9 billion? That’s an important question because other companies with large potential liabilities are also trying the “Texas two-step.” Purdue Pharma (opioids), 3M (faulty combat ear plugs) and Georgia Pacific (asbestos) are betting that they too can say how much they owe the people they hurt instead of trial courts and juries.

If the maneuver works, injured people could lose their right to a day in court. They could be limited to a slice of a pie that was predetermined by the very company responsible for their injury, disease, or even death.

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