J&J remains committed to using bankruptcy to address its mass tort asbestos liabilities stemming from allegedly tainted baby powder, despite seeing two prior Chapter 11 filings for its talc unit tossed out of court last year in the span of just six months. Bankruptcy protection allows the company to avoid incurring legal defense costs while negotiating a potential deal that curtails decades of future talc litigation.
The health-care giant is making strides to tailor its would-be third attempt with a critical mass of support from lawyers representing ovarian cancer claimants, and by taking care of other types of claims, including mesothelioma claims, outside the bankruptcy process. And it tentatively agreed earlier this month to pay about $700 million to end an investigation by more than 40 US states into the company’s marketing of talc products without health warnings, Bloomberg News reported.
By settling mesothelioma cases and consumer protection claims outside of Chapter 11, the company is trying to piece together a bankruptcy plan that focuses on addressing ovarian cancer claims, which constitute the bulk of its asbestos-related legal liabilities.
But the money J&J has offered to settle more than 50,000 ovarian cancer claims isn’t enough to secure a required threshold of support for a new bankruptcy plan, according to people involved in the talks who requested anonymity to discuss private negotiations. Under bankruptcy rules, the formation of an asbestos bankruptcy trust requires approval from at least 75% of present claimants.
The company is now offering to pay about $6.9 billion to resolve all non-mesothelioma cancer claims, according to multiple sources. That dollar figure tracks with the amount the company proposed to pay ovarian cancer claimants earlier this year as part of a broader, $8.9 billion bankruptcy settlement. J&J’s refusal to increase its settlement offer with the group of claimants it’s soliciting to support a third Chapter 11 attempt is a major obstacle, the people said.
But some attorneys believe J&J will eventually throw enough on the table to advance a restructuring deal with a level of support above what the company reached in April 2023 when it put its specially-created talc liability unit, LTL Management LLC, into bankruptcy for the second time.
“I think we’re making constructive progress,” said plaintiffs’ attorney Mikal Watts of Watts Guerra LLP, a key negotiator of the prior $8.9 billion deal. “What I know is that they’re just working hard to solve a very complex problem.”
J&J has maintained that its talc products are safe and don’t cause cancer.
Steps to a Deal
It’s not clear how much settlement money plaintiffs attorneys will demand to garner a required threshold of support, but sources said the company will have to increase the offer by billions.
A lawyer who previously represented J&J against talc litigation proposed a deal in November that would see J&J pay $19 billion to eliminate all its talc liabilities. The offer was met with a chilly reception from J&J, which accused him of wrongfully disclosing privileged information.
In addition to gaining enough creditor support, a third shot at bankruptcy must also overcome the legal infirmities that doomed the two previous filings. The US Court of Appeals for the Third Circuit found in January 2023 that the talc unit was unable to show that it faced real financial distress because it had a $61.5 billion funding agreement from its parent. New Jersey Bankruptcy Judge Michael Kaplan cited the appellate court’s holding when he dismissed the second bankruptcy in July for lack of imminent financial distress.
J&J has taken steps to smooth out the legal viability of a third case by preparing to file it in a new venue—Texas instead of New Jersey. While the company last year considered filing a new case in the Southern District of Texas, it has more recently expressed a strong preference for filing in Dallas, in the Northern District of Texas, sources said. In late December, LTL Management changed its name to LLT Management and converted its registered address from one in North Carolina to one in Dallas.
J&J’s initial effort in 2021 to conduct the bankruptcy in the Western District of North Carolina failed when a judge determined the case should be handled in New Jersey, where the company is headquartered. J&J’s lawyers had hoped to proceed in the North Carolina court, which is viewed as friendly to the controversial legal maneuver they were trying to employ known as the Texas Two-Step, whereby a company spins off liability into a newly-created entity and places it into Chapter 11.
Should the latest venue change work in its favor, J&J will at least have found a place to test out its new bankruptcy settlement strategy.
More Money Needed
The third time around, J&J likely won’t initiate a bankruptcy until it has lined up significant support and feels it can quickly get a plan approved, a lawyer who has a large number of clients with claims against the company said.
The problem plaguing those negotiations is that the company is trying to rally lawyers who supported the last bankruptcy and lawyers who have vehemently opposed the bankruptcies without increasing the offer, according to people involved.
Some parties that supported the second bankruptcy petition won’t accept a new deal without improved terms to account for the demonstrable uncertainties of pursuing a resolution in Chapter 11 and the cost of pausing litigation that resumed once the company was forced back into the civil tort system in July, some of the people said.
Only a handful of the roughly 15 firms that expressly supported the second bankruptcy are actively litigating talc cases against J&J, and are content to continue doing so, which is shaping some of the nuanced posturing around a potential settlement, sources said.
The company also needs to persuade one of two plaintiffs’ law firms that opposed the second bankruptcy—Arnold & Itkin LLP or Beasley Allen—to sign on to a deal in order for a consensual bankruptcy plan to take shape, according to sources familiar with the negotiations. Both firms have publicly opposed J&J’s bankruptcy strategy.
“J&J is not going to get us to sign on to any deal—bankruptcy or not—that doesn’t fairly compensate victims,” Beasley Allen attorney Andy Birchfield said. “I have a hard time envisioning a path where they can pull off an improper and hostile bankruptcy and I don’t think J&J is willing to pay reasonable values to the clients so long as it views bankruptcy as an option.”
Erik Haas, J&J’s worldwide vice president of litigation, told investors in mid-October that the company expected to hold a vote “in the next six months to determine whether the requisite supermajority of claimants support the plan.”
But attorneys involved in the discussions said it’s unlikely or unclear if any bankruptcy-related deal will be reached in that span of time.
Haas said in a statement to Bloomberg Law that the company “continues to pursue several paths to achieve a comprehensive resolution of the talc litigation,” including a renewed bankruptcy filing.
Third Time’s the Charm?
On top of the difficult task of wrangling 75% of asbestos exposure claimants to vote in favor of a bankruptcy plan that channels all current and future claims to a funded trust, J&J needs to find a way around the Third Circuit’s financial distress requirement.
J&J has vowed to pursue an appeal all the way to the US Supreme Court if need be, but if the bankruptcy proceedings are conducted in a court that isn’t controlled by Third Circuit precedent, the company could avoid a high court showdown.
The company originally considered filing a potential third case in Houston, but has soured on that location due to a judicial ethics scandal that led to the November resignation of Judge David R. Jones from the US Bankruptcy Court for the Southern District of Texas, sources said.
Instead, Dallas is seen as a more hospitable venue for a third case, according to sources.
J&J declined to comment on its preference for venue.
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