J&J Begins ‘Audacious’ Return to Failed Cancer Settlement Tactic

Johnson & Johnson’s first attempt at using bankruptcy to escape claims that its popular baby powder caused cancer was an expensive gamble that drew public scorn and ended in failure.

But on Tuesday, just hours after a judge officially ended that first effort, J&J tried the gambit again. The company put the same subsidiary that had been tossed out of bankruptcy court back into Chapter 11, this time with a plan to pay $8.9 billion to resolve the decades-old cancer claims. The move has already drawn the ire of some victim lawyers and raised eyebrows among legal scholars, who are asking why this time will be any different.

Johnson and Johnson baby powder.

Photographer: Justin Sullivan/Getty Images

“They are taking a massive gamble here,” said Lindsey Simon, a University of Georgia law professor who has studied how corporations use the US bankruptcy rules to resolve mass-tort suits. “This Chapter 11 case could very well go the same way as the first one did – kicked out of court.”

J&J faces two major hurdles: it must survive any new legal challenge from opponents who are likely to argue the second case is just as flawed as the first, and it has to convince 75% of all victims to vote in favor of the deal.

About two months ago, an appeals court rejected J&J’s first bid to use a unit’s Chapter 11 filing to settle more than 40,000 lawsuits alleging its talc-based powders contained toxic ingredients, ordering the bankruptcy to be dismissed. Tuesday that dismissal became official.

In the new case, J&J argues this one is different because they have support from many more cancer victims. That shows the company is acting in good faith, and the new case also meets a test set by the appeals court in Philadelphia, lawyers for the bankrupt subsidiary said in court documents filed Tuesday.

The effort may be worth it for J&J, which has struggled for years to manage claims that asbestos-tainted talc in its baby powder caused ovarian cancer and mesothelioma. In 2021, prior to LTL’s first Chapter 11 filing, the company unsuccessfully offered $4 billion to settle all talc litigation. Its last bankruptcy strategy resulted in more than $125 million in legal fees alone. At least one corporate credit grader has said the cancer claims are large enough to weigh on the company’s creditworthiness.

‘Significant Progress’

“The re-filing represents significant progress toward a plan for efficient and effective resolution that addresses the concerns raised by the Third Circuit, is consistent with the bankruptcy code and currently supported by roughly 70,000 claimants and numerous plaintiff law firms,” Allison Brown, a lawyer for J&J, said in an emailed statement.

J&J has steadfastly maintained its baby powder — sold in distinctive white bottles — never contained asbestos, is safe and doesn’t cause cancer. Company officials said they sought to settle suits to avoid hundreds of millions in legal fees and a wave of trials.

But since 2013, juries ruled against the company in nearly a dozen cancer suits — including one appealed all the way to the US Supreme Court — before J&J was forced to pay $2.5 billion to a group of 20 women who blamed their ovarian cancers on their baby powder use.

In 2020, J&J pulled its talc-based baby powder off the US market and replaced it with a cornstarch-based product. It’s also planning to take the talc-based powders off the market worldwide by the end of this year.

J&J first put LTL into bankruptcy in 2021 and within months convinced US Bankruptcy Judge Michael Kaplan to halt all talc trials and order victims into court-supervised mediation.

Victims challenged Kaplan’s ruling and in January, a federal appeals court ordered Kaplan to throw out the bankruptcy, concluding LTL Management never faced financial distress because it had an agreement with J&J to backstop any funding shortfall. The court found the backstop agreement meant LTL could pay claimants as much as $61.5 billion outside of bankruptcy and therefore the Chapter 11 filing was not made in good faith.

This time, LTL and J&J have a deal to pay only $8.9 billion and only as part of a bankruptcy case, according to court documents. That means LTL is “sufficiently distressed” to withstand appellate scrutiny, according to Tuesday’s filing.

“The ultimate question is, does this meet the test the appeals court applied in the first case?” said Anthony Casey, a law professor at the University of Chicago who has publicly backed J&J’s use of Chapter 11 to resolve product-liability cases. “I have to say I was surprised to see them try again.”

Some legal experts doubt the US Third Circuit Court of Appeals – which tossed the first case – will buy what they ridicule as cosmetic changes to LTL’s new Chapter 11 filing.

‘Audacious Ploy’

“This is a rather audacious ploy,” said Ralph Brubaker, a law professor at the University of Illinois. “Such cynical strategic machinations to manufacture self-inflicted financial distress hardly bolster the case for a legitimate, good faith resort to bankruptcy relief.”

Chuck Tatelbaum, a veteran Florida-based bankruptcy lawyer who isn’t involved in the LTL case, said the second filing could wind up being nothing more than a negotiating tactic. “If J&J can’t round up support of 75% of the cases, they’ll be forced to kick in more money,” he added. “They really are sliding down the razor blade of life by trying this.”

Others point to a footnote in the appeals court’s January decision that appeared to anticipate LTL’s second trip through bankruptcy. US Circuit Judge Thomas Ambro suggested creative lawyers might argue that if J&J dropped its $61.5 billion backstop agreement, LTL would face financial distress and therefore a new Chapter 11 could pass muster.

“Some might read our logic to suggest LTL need only part with its funding backstop to render itself fit for a renewed filing,” Ambro wrote. But that strategy would likely expose LTL to yet another type of legal challenge, he wrote.

The new bankruptcy filing is LTL Management LLC, 23-12825, U.S. Bankruptcy Court for the District of New Jersey (Trenton).

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:
Anthony Lin at alin364@bloomberg.net

Jeremy Hill, Claire Boston

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