J&J’s Strategy on Cancer Suits Questioned by Appeals Court (2)

Johnson & Johnsonfaced tough questions from federal appellate judges about whether placing a unit in bankruptcy to deal with more than 40,000 cancer lawsuits over its baby powder was legitimate.

The three-judge panel in Philadelphia heard arguments about LTL Management’s Chapter 11 case Monday and will decide later whether the case was filed in good faith, or should be thrown out because J&J and its units don’t face immediate financial distress. Should J&J and LTL lose, juries would once again hear talc cancer claims, leaving J&J facing legal and financial uncertainties as it fights individual cases around the country.

Last year, the health care giant used a legal maneuver, known as the Texas Two-Step, to funnel the suits into a new unit without any operations. That unit, LTL, immediately filed for bankruptcy to block the litigation while trying to negotiate settlements. Cancer victims claim tainted talc in J&J’s iconic baby powder made them sick and want the federal appeals court to let their lawsuits go forward instead of being resolved as part of LTL’s Chapter 11 case.

The judges asked LTL’s lawyers whether the case was really filed to project J&J from the lawsuits, or to give the company an advantage in negotiating a deal to end them all, as cancer victims claim.

“The timing really suggests you did this for litigation advantage,” Judge Luis Felipe Restrepo asked during an unusual, three-hour hearing on Monday. “You concede there is a litigation advantage?”

Litigation Costs

If there is an advantage to bankruptcy, it’s incidental, LTL lawyer Neal Katyal said. “I think it’s a byproduct, but that it isn’t the reason” for the bankruptcy. Katyal was a former acting solicitor general in the Obama administration, meaning he argued cases before the U.S. Supreme Court.

J&J, which denies its baby powder products cause cancer, argues LTL’s Chapter 11 case is the only way of corralling talc litigation costs and ensuring victims get a fair payment. US Bankruptcy Judge Michael Kaplan, who is based in Trenton, New Jersey -- not far from J&J’s headquarters in New Brunswick -- ruled in February LTL’s bankruptcy was legitimate and a better solution than continuing to have juries weigh claims nationwide.

“Since the day LTL began this process, it has consistently and unequivocally endorsed early resolution for the benefit of all parties, including current and future claimants,” J&J said in an emailed statement. “We hope the court agrees with Judge Kaplan’s well-reasoned opinion that this filing was done in good faith and is the right way to efficiently and equitably resolve these cases.”

J&J Says Law Firm Profits Motivate Opposition to Bankruptcy Deal

During Monday’s appellate arguments, Katyal repeatedly pointed to a $4.7 billion award in 2018 to about 20 women who blamed their cancers on J&J’s baby powder as one of the justifications for the company putting the newly created unit into Chapter 11. The award -- later cut to $2.1 billion -- blew up any chance J&J could put together a reasonable settlement program in the future, the lawyer said. J&J ended up paying a total of $2.5 billion with interest.

“Lottery-Style”

After that case, plaintiffs’ lawyers all wanted similar “lottery-style home runs of a verdict,” Katyal said. Mark Lanier, the Texas-based lawyer who won the mammoth award against J&J, dismissed Katyal’s description of the verdict. “Not a lottery verdict. It was the penalty for killing people for money,” Lanier said in an emailed statement.

Talc victims contend J&J knew for more than 50 years its talc-based powders were tainted with asbestos, a carcinogen, and continued to sell its iconic baby powder anyway to rack up profits. J&J took the product off the market in the U.S. and Canada in 2020 and has announced it will no longer sell it globally after next year.

Katyal also cited rising defense costs for the talc cases as another justification for LTL’s bankruptcy filing. He said the world’s largest maker of health-care products is paying as much as $5 million per case for lawyers and other costs. “That’s a huge dead-weight loss.” But Jeffrey Lamken, who represents talc victims, noted in his argument J&J has a market capitalization of $450 billion.

Chain Reaction

The appellate judges also asked whether the ruling could set off a chain reaction of similar filings by otherwise solvent companies seeking to get the benefits of bankruptcy without any of the downsides. Advocates for cancer victims say the filing is just a way for J&J to cap how much it has to pay out.

LTL’s bankruptcy would be difficult to copy, in part because of an agreement requiring the assets of J&J’s consumer-products unit to be used to pay cancer claimants and other LTL creditors as part of the Chapter 11 case, Katyal told the court. That means the claimants have access to $61 billion and will collect more as part of LTL’s restructuring than if they tried their cases in state and federal courts, he said.

Under the Texas Two-Step, a profitable company restructures to shift mass-tort suits to a specific unit, which then files for bankruptcy in hopes of working out a comprehensive settlement of the claims. A handful of companies, including Koch Industries’ Georgia-Pacific unit, used the strategy before J&J. Those cases remain in bankruptcy court in North Carolina.

LTL’s bankruptcy is the first Texas Two-Step to reach an appeals court. After victim groups challenged Kaplan’s ruling, the federal appeals court in Philadelphia agreed to expedite the case. The judges that heard the arguments Monday gave each side more than an hour to make their case --more time than typically alloted for such presentations.

J&J’s strategy has been condemned by some legal scholars and members of Congress because the company is receiving a major benefit of Chapter 11 rules -- a halt to lawsuits -- without filing for bankruptcy, where the company would be subject to court oversight of its spending and other practices.

The handful of the companies that have used the strategy since it emerged in 2017 have faced suits targeting their use of asbestos, a toxic industrial material. The cases take advantage of special rules set up by Congress for companies threatened with insolvency by such suits.

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

(Updates with details of $4.7 billion talc verdict in 10th paragraph)

To contact the reporters on this story:
Steven Church in Wilmington, Delaware at schurch3@bloomberg.net;
Jef Feeley in Wilmington, Delaware at jfeeley@bloomberg.net

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

Michael B. Marois

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