Johnson & Johnson Secures Votes for $6.5B Talc Settlement
More than 75% of plaintiffs have voted to support Johnson & Johnson’s proposed plan to settle roughly 61,000 lawsuits for $6.475 billion, according to Bloomberg. This could clear the way for a possible third J&J bankruptcy attempt.
The company has tried unsuccessfully for years to use the “Texas Two-Step” strategy to transfer its legal liabilities to a subsidiary and then have the subsidiary declare bankruptcy. A judge previously rejected J&J’s two bankruptcy attempts, ruling the company wasn’t qualified since it wasn’t in financial distress.
A spokesperson for J&J, Clare Boyle, said the company couldn’t yet comment on the results since the vote count isn’t officially final. If approved, the plan would settle 99.75% of the company’s remaining ovarian cancer lawsuits in the U.S.
The deal wouldn’t affect any remaining mesothelioma lawsuits, which the company says will address separately. J&J has settled 95% of its mesothelioma cases.
Despite successful litigation against the company, J&J continues to deny its talc-based products cause cancer. However, according to court documents in previous lawsuits, J&J executives were aware of asbestos-contamination concerns at talc mines as early as the 1950s. The company has spent around $1 billion on legal defense in talc cases.
Andy Birchfield, who represents plaintiffs opposed to the settlement plan, calls J&J’s voting process a “fake bankruptcy election” that wouldn’t stand up in court. “No matter what tally is announced, I expect it will be challenged and eventually rejected so that juries can decide what to do about J&J’s egregious conduct,” he said.
J&J and The Texas Two-Step
The company has tried unsuccessfully for years to use the “Texas Two-Step” strategy to transfer its legal liabilities to a subsidiary and then have the subsidiary declare bankruptcy. A judge previously rejected J&J’s two previous bankruptcy attempts, ruling the company wasn’t qualified since it wasn’t in financial distress.
As Connor W. Symons, who received the American Bankruptcy Institute’s Medal of Excellence, explained in the Appalachian Journal of Law, J&J subsidiary Johnson & Johnson Consumer Inc. owned the company’s talc business and was responsible for talc claims. Initially there weren’t many, but, as Symons wrote, “This changed in 2013, when a jury found for a plaintiff who alleged that Johnson’s caused her ovarian cancer.”
Symons added, “By January 2020, Old JJCI’s successor-in-interest was named in a talc lawsuit on average over once every hour, with the total number of claims since 2014 reaching 38,000 in 2021.” As the number of lawsuits continued to swell and court costs accumulated, “…Old JJCI began a ‘labyrinthine’ and ‘somewhat overwhelming’ series of mergers – a Two-Step – to reach a global resolution of these claims.”
Only 2 days after LTL was formed, it filed for Chapter 11 bankruptcy. LTL then sought protections for J&J’s other entities.
As Symons further explained, “Two-Step proponents argue that bankruptcy is a valid forum for mass tort resolution because it is Congressionally sanctioned.” However, he said, “Two-Step opponents also argue that mass tort plaintiffs deserve their day in court, and that forcing that court to be a bankruptcy court violates due process.”
The courts have typically upheld companies’ efforts to use the Texas Two-Step. Chief Justice Michael Kaplan stated In re LTL Management LLC, “Argument has been put forward by Movants, other parties in interest, and the drafters of the amici curie brief that allowing this case to proceed will inevitably ‘open the floodgates’ to similar machinations and chapter 11 filings by other companies defending against mass tort claims. Given the Court’s view that establishment of a settlement trust within the bankruptcy system offers a preferred approach to best serve the interests of injured tort claimants and their families, maybe the gates indeed should be opened.”
However, last year Kaplan denied LTL’s bankruptcy bid. He wrote in the denial, “In sum, this Court smells smoke, but does not see the fire. Therefore, the emphasis on certainty and immediacy of financial distress closes the door of chapter 11 to LTL at this juncture.”
Third Circuit Court Affirms Denial of J&J’s Second Bankruptcy Attempt
As the deadline for the plaintiffs’ vote loomed, J&J was appealing the Bankruptcy Court’s decision dismissing LTL’s second bankruptcy attempt. The Third Circuit Court issued its opinion on July 25, 2024 affirming the dismissal.
Judge Thomas L. Ambro wrote, “A Chapter 11 bankruptcy case can be dismissed if it was not filed in good faith, an issue on which the debtor bears the burden of proof. Good faith is somewhat of a misnomer: ‘subjective intent’ is not determinative; a key question is whether a case serves a ‘valid bankruptcy purpose.’ That ‘assumes a debtor in financial distress.’”
Ambro wrote that the court was “unpersuaded” that LTL’s value exceeded the company’s “worst-case scenario” for potential talc liabilities. As a result the court “did not see financial distress.”
In addition to contesting the court’s determination LTL would not be in financial distress, the company sought dismissal on procedural grounds. Ambro countered these as well, saying the cases LTL’s attorneys cited were “not on point” and “inapposite or conclusory.”
In conclusion, Ambro stated, “For these reasons, we affirm the comprehensive decision of the Bankruptcy Court dismissing LTL’s second Chapter 11 petition.” J&J reportedly plans to appeal to this latest ruling.