PHILADELPHIA (Legal Newsline) - A federal appeals court rejected Johnson & Johnson’s attempt to resolve thousands of lawsuits claiming talcum powder causes cancer in bankruptcy court, saying a nearly unlimited financial guarantee the pharmaceuticals giant extended to a unit formed for that purpose meant it wasn’t actually insolvent.
Acknowledging J&J was to some extent being penalized for its generosity, the Third Circuit Court of Appeals nevertheless dismissed the Chapter 11 bankruptcy proceedings for LTL Management, the unit J&J formed to hold its talc liabilities in October 2021 in a maneuver critics call a “Texas Two-Step.” LTL was created under Texas law to manage lawsuits over talc, backstopped by a guarantee from J&J’s consumer-products unit with an estimated value of $61 billion.
With J&J’s billions behind it, the Third Circuit ruled, LTL’s bankruptcy filing wasn’t justified by any threat of real financial distress.
“LTL has a funding backstop, not unlike an ATM disguised as a contract, that it can draw on to pay liabilities without any disruption to its business or threat to its financial viability,” the court concluded. “While LTL faces substantial future talc liability, its funding backstop plainly mitigates any financial distress foreseen on its petition date.”
Johnson & Johnson said it will challenge the ruling, which sparked a 3% decline in its stock representing more than $10 billion in value.
A bankruptcy court approved J&J’s plan to resolve talc liabilities through Chapter 11, saying it was the most equitable and efficient way to make sure anyone with a valid claim got paid. But the Third Circuit said the bankruptcy never should have gotten that far: There was no “reasonable justification” for the case to begin, given the financial guarantee J&J provided LTL.
Plaintiff lawyers opposed J&J’s filing because it would funnel all their cases into a single court with the power to assess their value and force a settlement. Those lawyers created talc litigation about a decade ago, hiring experts who mostly had experience in other asbestos cases to provide opinions that tiny particles in Johnson’s Baby Powder were actually asbestos fibers and there were enough of them to make consumers sick.
Johnson & Johnson denies there is any asbestos in its products and accuses the experts of confusing jurors by juggling different scientific and regulatory definitions of asbestos to convince them talc particles are actually the deadly fibers. It has sued some of the most prominent experts, accusing them of fabricating scientific evidence suggesting people contracted mesothelioma from talc because they had no other source of exposure. Such opinions fly in the face of the fact asbestos fibers are ubiquitous in the environment and humans have billions of them in their lungs by the time they reach old age.
The Third Circuit said J&J has won more than half the lawsuits that have gone to trial so far, but lost a $2.2 billion verdict in favor of 20 plaintiffs in Missouri after the U.S. Supreme Court refused to hear an appeal. It paid $1 billion to settle 6,800 talc claims and has won dismissals of another 1,300 ovarian cancer and 250 mesothelioma cases.
The company still faces more than 38,000 ovarian cancer and 400 mesothelioma cases and verdicts it hasn’t gotten reversed have averaged 39.7 million per claim. It was those numbers that led the bankruptcy judge to conclude it would cost as much as $190 billion and take decades to resolve all those cases at trial.
“What these projections ignore is the possibility of meaningful settlement, as well as successful defense and dismissal, of claims,” the Third Circuit said, however. While the future is uncertain, the court said, when it filed for bankruptcy LTL was unquestionably solvent. Johnson & Johnson can continue to fight cases or try and negotiate a global settlement without much risk of exhausting its assets, the court concluded.
“We do not duck an apparent irony: that J&J’s triple A-rated payment obligation for LTL’s liabilities, which it views as a generous protection it was never required to provide to claimants, weakened LTL’s case to be in bankruptcy,” the court said. “Put another way, the bigger a backstop a parent company provides a subsidiary, the less fit that subsidiary is to file.”
Last August, the U.S. Chamber filed a brief with the Third Circuit urging it to leave the bankruptcy filing intact, arguing it was the fairest way to resolve mass tort cases which increasingly involve tens of thousands of lawsuits that are frequently generated through plaintiff advertising.