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J&J’s Controversial Bankruptcy Strategy Upheld by Judge (1)

Feb. 25, 2022, 4:56 PM

Johnson & Johnson won a federal judge’s permission to continue with its controversial strategy to force a settlement with people who claim the company’s baby powder gave them cancer.

U.S. Bankruptcy Judge Michael Kaplan refused to throw out a Chapter 11 petition filed by a unit of J&J. The bankruptcy is an effort to resolve billions of dollars in claims that tainted talc in the company’s baby powder harmed more than 40,000 people. His ruling is poised to benefit J&J because most, if not all, of the lawsuits filed by cancer victims will remain blocked while the company tries to negotiate a settlement.

“The Court is aware that its decision today will be met with much angst and concern,” Kaplan wrote in his opinion. “The Court remains steadfast in its belief that justice will best be served by expeditiously providing critical compensation through a court-supervised, fair, and less-costly settlement trust arrangement.”

J&J argued during a week-long trial that setting up a trust fund in bankruptcy would be more fair and get money to victims faster than if each of the lawsuits was fought in front of different juries around the country.

Credit Rating

“Today’s ruling is a positive development and step forward to reaching a global resolution of the cosmetic talc litigation. LTL stands ready to work with claimants’ counsel and the mediator to reach an equitable and efficient resolution as ordered by the Bankruptcy Court,” a representative for the company said in a statement.

J&J, which has a pristine credit rating and is one of the biggest health-care conglomerates in the world, is employing a controversial legal tactic known as the Texas Two-Step to try to settle the suits. Under the strategy, the company set up a unit under a business-friendly Texas law and then put that entity into bankruptcy, which brought a temporary halt to the baby powder suits.

Previously: J&J Bankruptcy Tactic Must be Dismissed, Cancer Victims Say

Cancer victims attacked the effort as a manipulative ploy that undermined the basic premise of corporate bankruptcy law, which is designed to help troubled companies restructure their debts and keep operating. J&J itself didn’t file bankruptcy, but benefitted from a rule that halts all litigation against a bankrupt company.

Victims had asked Kaplan, who is based in Trenton, New Jersey, to throw J&J’s unit, LTL Management, out of bankruptcy so the lawsuits could proceed. J&J argued it should be allowed to use the Chapter 11 case to set up a trust fund worth at least $2 billion that would take responsibility for the baby powder claims.

New Approach

J&J changed its approach to resolving talc lawsuits last year after losing a jury trial and being forced to pay more than $2 billion to about 22 women, according to court records. Previously, the company vowed to keep fighting all of the claims in court one at a time.

Groups representing people who sued J&J say they prefer to fight in court and let juries decide how much the company must pay. Negotiating the size of a trust fund for victims, as well as the rules about how payments are made, can take years, victims’ lawyers have said. In the meantime, cancer victims get sicker while J&J saves money because it doesn’t have to defend itself in court, they said.

Johnson & Johnson denies that the talc in its baby powder causes cancer and that it is abusing the bankruptcy system by putting LTL into Chapter 11. Company officials have repeatedly defended LTL’s bankruptcy, arguing that it creates a fair and efficient process for paying all current and future talc claims.

The bankruptcy case has drawn the ire of Congress, where some members are crafting legislation designed to bar profitable companies like J&J from taking advantage of bankruptcy without subjecting themselves to any of the restrictions.

The case is LTL Management LLC, 21-30589, U.S. Bankruptcy Court, District of New Jersey (Trenton).

(Updates with excerpt from judge’s ruling in third paragraph.)

To contact the reporter on this story:
Steven Church in Wilmington, Delaware at schurch3@bloomberg.net

To contact the editors responsible for this story:
Claire Boston at cboston6@bloomberg.net

Rick Green, Dawn McCarty

© 2022 Bloomberg L.P. All rights reserved. Used with permission.