By Tom Hals, Mike Spector and Dan Levine
(Reuters) – A U.S. appeals court has overturned Johnson & Johnson’s bid to bankrupt tens of thousands of lawsuits over its talc products, ruling that the healthcare conglomerate wrongly placed a subsidiary in a Chapter 11 proceeding, even though she was not facing financial hardship.
The decision of the United States Court of Appeals for the 3rd Circuit in Philadelphia on Monday dismissed a Chapter 11 petition filed by a newly formed J&J subsidiary in October to handle more than 38,000 lawsuits brought by plaintiffs alleging that the company’s baby powder and other talc products caused cancer.
Prior to bankruptcy, J&J faced costs of $3.5 billion in verdicts and settlements, including one in which 22 women ultimately won a judgment for more than $2 billion, according to bankruptcy court records.
Several large corporations, including J&J and 3M Co, have turned to bankruptcy court to manage their mass tort liabilities. Plaintiffs’ attorneys have called the cases an improper manipulation of the bankruptcy system, while the companies say Chapter 11 filings aim to compensate plaintiffs fairly and equitably.
J&J’s maneuver is known as a two-step Texas lawsuit for a state law used to create a subsidiary that takes on litigation and then declares bankruptcy. The opinion of the Third Circuit allows the talc litigation against the company to be resumed.
J&J said it would challenge the ruling and that its talc products are safe.
Its shares fell more than 3% – the biggest one-day percentage drop in two years.
The New Jersey-based company, valued at more than $400 billion, said its subsidiary’s bankruptcy was initiated in good faith and designed to resolve talc claims fairly for the benefit of all plaintiffs. J&J initially pledged $2 billion to the subsidiary to resolve the talc claims and reached an agreement to fund a possible settlement approved by a bankruptcy judge.
A three-judge appeals court panel rejected J&J’s argument, concluding that the company’s subsidiary, LTL Management, was created solely to gain access to the bankruptcy system and not because it was facing financial hardships. financial difficulties.
“Good intentions – such as protecting the J&J brand or resolving disputes globally – are not enough on their own,” the judges said in a 56-page opinion.
The ruling casts doubt on J&J’s long-planned strategy to settle the talc lawsuit after it lost an attempt to overturn a landmark verdict that ultimately awarded more than $2 billion to 22 women who blamed their cancer from ovary to baby powder and other talc products.
More than 1,500 talc lawsuits have been dismissed without J&J having to pay anything, and the majority of cases that have gone to trial have resulted in defense verdicts, mistrials, or judgments for the company on appeal, according to court documents from the J&J subsidiary.
A December 2018 Reuters investigation found the company had been aware for decades of tests showing its talc sometimes contained traces of carcinogenic asbestos, but it was keeping that information from regulators and the public.
“As we have said since the beginning of this process, resolving this matter as quickly and efficiently as possible is in the best interest of the claimants and all stakeholders,” J&J said in a statement. “We continue to advocate for the safety of Johnson’s Baby Powder, which is safe, contains no asbestos and does not cause cancer.”
Faced with relentless litigation, J&J turned to the law firm Jones Day, which had helped other companies execute two-step bankruptcies in Texas to deal with asbestos-related lawsuits.
The J&J effort, which Reuters detailed last year, was internally dubbed “Project Plato”, and employees who worked there signed confidentiality agreements warning them not to speak to anyone, including their spouses. , plan.
Texas’ two-step strategy drew criticism from Democratic lawmakers and inspired legislation that would dramatically restrict the practice.
Jones Day did not immediately respond to a request for comment.
Critics argue that the strategy is an abuse of the bankruptcy system by solvent companies wishing to escape jury trials in state courts. Bankruptcy filings typically interrupt litigation, forcing plaintiffs into often lengthy settlement negotiations while leaving them unable to pursue their cases in the courts where they originally sued.
“Bankruptcy courts are for honest companies in financial trouble, not billionaire mega-corporations like J&J,” said Jon Ruckdeschel, an attorney representing the talc plaintiffs.
Plaintiffs and other legal experts urged US bankruptcy judge Michael Kaplan last year to dismiss the J&J subsidiary’s bankruptcy, arguing it was filed in bad faith and risked becoming a model for big business seeking to avoid unwanted litigation.
Kaplan, however, denied the request, believing that the J&J unit faced financial difficulties and that a bankruptcy court was a better forum to resolve the dispute than the US tort system.
(Reporting by Tom Hals in Wilmington, Delaware; Mike Spector in New York; and Dan Levine and San Francisco; Additional reporting by Dietrich Knauth and Chuck Mikolajczak in New York; Editing by Bill Berkrot)