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Hedge-fund money complicates J&J's massive settlement for talc claims

LEGAL NEWSLINE

Thursday, December 26, 2024

Hedge-fund money complicates J&J's massive settlement for talc claims

Asbestos
Jere beasley beasley allen law firm

Jere Beasley | beasleyallen.com

HOUSTON (Legal Newsline) - Johnson & Johnson’s lawyers think they’ve identified the reason the company is having such a hard time settling thousands of lawsuits claiming its talcum powder causes cancer, even though it’s won the vast majority of the cases that have gone to trial.

Hedge funds are standing in the way, J&J says. They’ve lent so much to plaintiff lawyers that those lawyers have to hold out for more money to pay back the money they owe. While most funding agreements are cloaked in secrecy, J&J has identified what it said is at least one example: Fortress Investment Group, a big New York hedge fund, lent $24 million to Smith Law Firm, which represents thousands of talc claimants.

That loan was repaid with the proceeds of another loan from Elliott Associates. The firm Beasley Allen has become Smith's rival as Beasley claims Smith's approval of J&J's proposed multibillion-dollar settlement partly comes from a desire to pay off its funders.

“Litigation funding has permeated the talc litigation,” J&J said in a recent court filing, in which it accused plaintiff law firms of neglecting their duty to represent clients to meet the demands of their hedge fund financiers instead. “Beasley Allen’s conduct suggests that other undisclosed financial interests are actually driving its decisions relating to the resolution of the talc litigation.”

Beasley Allen Partner Andy Birchfield has stated under oath his firm has “not obtained litigation financing or funding for our talc claims.” But in its own lawsuit accusing the rival Smith Law Firm of breaking a contract to share in the cost of bringing talc suits, Beasley Allen claimed Smith owes $240 million to third-party financiers.

Those numbers make perfect sense to Samir Parikh, a professor at Wake Forest University who studies hedge funds and litigation finance, which he calls “opaque capital.” Hedge funds love investments that are difficult to price and that can grow exponentially in value with deft behind-the-scenes maneuvering, he said. 

Individual claims may trade at a discount because of the risk of losing in court, but assemble enough of them and you can force a settlement by threatening the target company with bankruptcy.

“Mass torts are alluring to opaque capital because they look familiar,” Parikh wrote in a recent article, “The Alchemists’ Inversion.” A successful outcome doesn’t involve legal arguments so much as “leveraging a position until a counterparty is broken and forced to concede,” he wrote.

While most of the billions of dollars in litigation finance flows into business disputes where the rules are fairly clear and the players honest, Parikh said, the money flooding into mass torts is distorting the process. In J&J’s case, the company is trying to settle highly contested claims its talcum powder causes ovarian cancer through a $9 billion bankruptcy plan that would pay claimants quickly. 

But Beasley Allen is holding out for more money, in what Parikh said is perfectly rational hedge-fund behavior.

A hedge-fund manager has learned “you get a premium recovery the longer you wait,” Parikh said in an interview with Legal Newsline. “If that’s the mentality, a (private equity) fund, a multi-strategy fund, they are willing to wait for optimum time to sell.”

Another problem with litigation finance is the lenders don’t have much of an incentive to separate good claims from bad, Parikh said. Plaintiff experts are the only ones who claim there is asbestos in talcum powder, for example, and there is scant scientific evidence someone could inhale enough of the stuff to cause cancer even if it did contain asbestos fibers.

That hasn’t stopped plaintiff lawyers and financiers from investing hundreds of millions of dollars in advertisements and marketing services to find talc plaintiffs. There’s little financial incentive to screen out non-meritorious claims in a game where the sheer volume of lawsuits, and impossibility of trying them all in court, drives multibillion-dollar settlements.

A few important reforms would change this dynamic, Parikh said. While most reformers focus on disclosure – the thrust of Rep. Darrell Issa’s proposed Litigation Transparency Act – Parikh thinks it would be more effective to focus on financial incentives.

“A lot of this is me identifying loopholes in the system,” he said. Closing those loopholes involves “analyzing the actors I know from the distressed debt market, so I know how they behave.”

Courts could impose fiduciary duties on plaintiff lawyers and their financiers, he suggests, to make it risky for them to push for results that produce higher fees and hedge-fund payoffs but don’t benefit clients. 

Courts also could punish lawyers for filing worthless claims. Some courts already require plaintiffs to submit fact sheets that can identify non-meritorious claims, he said. “It’s a low bar, but a lot of plaintiffs still can’t clear it,” he said. 

The next step would be disqualifying lawyers with too many bad claims from collecting from the common-benefit fee pool, a court-ordered fund to pay plaintiff litigation costs. Financiers typically lend against the fees lawyers expect to earn when they settle big cases, but those loans will become worthless if lawyers can’t tap the common benefit fund. The money saved could even be distributed to plaintiffs with meritorious claims, Parikh said.

A big question is whether judges are willing to take on the work of sorting through thousands of claims on the front end, when they can just proceed as normal and wait for the parties to come into court with a settlement agreement. Without a screening process, the toxic-tort finance business isn’t likely to change.

“The cost of filtering is very high and initially it is going to be borne by the court,” Parikh said. “Ultimately it would shift to the front end of the process, but I’m not sure judges are willing to bear that cost.”

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