A US appeals court has dismissed a bankruptcy petition filed by a unit of Johnson & Johnson, upending the healthcare company’s attempt to resolve billions of dollars of legal claims from customers alleging its talcum powder caused cancer.
The Third US Circuit Court of Appeals on Monday said it had dismissed a bankruptcy filing from J&J’s subsidiary LTL management, preventing it from shifting thousands of legal claims out of trial courts and into the bankruptcy system.
J&J had deployed a legal manoeuvre called the “Texas two-step” to divide the company into two separate businesses before placing one of them, which is facing more than 40,000 cancer claims, into bankruptcy. The company said this would lead to a more “efficient” and “equitable” resolution of the claims.
But the court ruled that only companies facing financial stress can call on the bankruptcy system to help with restructuring. “While LTL faces substantial future talc liability, its funding backstop plainly mitigates any financial distress,” said the court ruling.
J&J had argued in court that its use of the bankruptcy system was not an attempt to reduce the size of payouts to cancer claimants and said it had agreed to fund LTL’s talc liabilities up to the value of $61bn.
However, in a 56-page ruling, Judge Thomas Ambro said that wanting to protect the J&J brand or to “comprehensively resolve litigation” was not an appropriate pretext for using the bankruptcy system. “Only a putative debtor in financial distress can do so. LTL was not.”
Shares of J&J, which has a market valuation of more than $425bn, fell 3 per cent after the ruling, while 3M, which is pursuing a similar strategy to resolve lawsuits related to its earplugs, lost 1.5 per cent.
The ruling means J&J risks being forced to fight talc claimants in civil courts, a process that could last decades and cost the company hundreds of billions of dollars, according to legal filings from LTL.
In 2018, a Missouri jury ordered J&J to pay nearly $4.7bn in damages to a group of nearly two dozen women who claimed their cancer was caused by its talc. The payout was later appealed against and cut in half but the company still paid out more than $2bn in damages.
Legal experts said the ruling could set a precedent and dissuade companies from using complex bankruptcy schemes to handle mass tort claims. 3M, Koch Industries subsidiary Georgia-Pacific, Trane Technologies and a US unit of France-based Saint-Gobain have deployed similar strategies in recent years.
Carl Tobias, law professor at University of Richmond, said: “The only prospect left for J&J is an appeal to the Supreme Court, which grants review in a minuscule percentage of appeals.”
J&J said it would appeal against the decision.
“Resolving this matter as quickly and efficiently as possible is in the best interests of claimants and all stakeholders,” J&J said. “We continue to stand behind the safety of Johnson’s Baby Powder, which is safe, does not contain asbestos and does not cause cancer.”
Claimants allege that J&J’s talc-based baby powder contains traces of asbestos that caused their cancers and the company had lied about the safety of the product.
J&J has stopped selling its talc-based baby powder in the US and Canada and will phase out sales worldwide this year.
Lawyers for claimants who allege J&J’s talc caused their cancers welcomed the ruling.
“The Third Circuit’s decision is a point-by-point rejection of J&J’s attempt to pervert the bankruptcy system and trample the constitutional right to a jury trial of all Americans harmed by deadly products,” said Jon Ruckdeschel, a trial lawyer who has been representing victims of mesothelioma for more than 20 years.
“Bankruptcy courts are for honest companies in financial distress, not billionaire mega-corporations like J&J, 3M and Koch Industries, that seek to close courthouse doors to their victims.”