Jan 30 (Reuters) – A US appeals court has turned Johnson & Johnson’s on its head (JNJ.N) In an attempt to bankrupt tens of thousands of lawsuits over its talc products, the healthcare conglomerate has ruled that a subsidiary was unlawfully involved in a Chapter 11 case even though it was not in financial trouble.
The decision of the US 3rd Circuit Court of Appeals in Philadelphia on Monday dismissed a Chapter 11 petition filed by a recently formed J&J subsidiary in October to address more than 38,000 lawsuits by plaintiffs alleging that baby powder and other talc products of the company caused cancer.
Prior to the bankruptcy, J&J faced $3.5 billion in judgment and settlement costs, including one in which 22 women were eventually awarded a judgment of more than $2 billion, according to bankruptcy court records.
Several large companies including J&J and 3M Co (MMM.N), have turned to the bankruptcy court to manage their mass tort liabilities. The plaintiffs’ attorneys have called the cases improper manipulation of the bankruptcy system, while the companies say the Chapter 11 filings aim to fairly and equitably indemnify the plaintiffs.
J&J’s maneuver is known as a Texas Two-Step Act for a state statute used to create a subsidiary that shoulders litigation and then files for bankruptcy. The Third Circuit’s opinion allows the Talk litigation against the company to be reopened.
J&J said it will appeal the verdict and that its talc products are safe.
Its shares fell more than 3% — the largest one-day percentage decline in two years.
The New Jersey-based company, valued at more than $400 billion, said its subsidiary’s bankruptcy was instituted in good faith and aimed at resolving talc claims fairly in favor of all plaintiffs. J&J has initially committed $2 billion to the subsidiary to settle talc claims and has reached an agreement to fund an eventual settlement approved by a bankruptcy judge.
A three-judge panel of the Court of Appeals dismissed J&J’s argument, finding that the company’s subsidiary, LTL Management, was formed solely to gain access to the bankruptcy system and not because it was in financial distress.
“Good intentions – for example to protect the J&J brand or to settle legal disputes comprehensively – are not enough on their own,” the judges said in a 56-page opinion.
The decision calls into question J&J’s long-planned strategy to resolve talc lawsuits after it lost an attempt to reverse a watershed judgment that eventually awarded more than $2 billion to 22 women who used baby powder and others blamed talc products for their ovarian cancer.
More than 1,500 Talk lawsuits have been dismissed without J&J paying anything, and most of the cases that went to court resulted in defense verdicts, mistrials or appellate verdicts for the company, according to the J&J subsidiary’s court filings.
And December 2018 Reuters investigation revealed the company had known for decades of tests showing its talc sometimes contained traces of cancer-causing asbestos, but withheld that information from regulators and the public.
“As we have said from the beginning of this process, resolving this matter as quickly and efficiently as possible is in the best interests of the applicants and everyone involved,” J&J said in a statement. “We remain committed to the safety of Johnson’s baby powder, which is safe, contains no asbestos and does not cause cancer.”
In the face of relentless litigation, J&J hired the law firm Jones Day, which had helped other companies file two-tiered bankruptcies in Texas, to tackle asbestos claims.
J&J’s efforts which Reuters detailed last yearwas internally dubbed “Project Plato”, and employees working on it signed non-disclosure agreements warning them not to tell anyone, including their spouses, about the plan.
Texas’ two-stage strategy has drawn criticism from Democratic lawmakers and inspired legislation that would severely curtail the practice.
Jones Day did not immediately respond to a request for comment.
Critics claim the strategy is an abuse of the bankruptcy system by solvent companies looking to avoid jury trials in state courts. Bankruptcy filings typically disrupt litigation, forcing plaintiffs into often time-consuming settlement negotiations while unable to pursue their cases in the courts in which they originally filed.
“Bankruptcy courts are for honest companies in financial distress, not for billionaire mega-corporations like J&J,” said Jon Ruckdeschel, an attorney representing Talk plaintiffs.
Plaintiffs and other legal experts last year urged US bankruptcy judge Michael Kaplan to dismiss the J&J subsidiary’s bankruptcy, saying it was filed in bad faith and risked becoming a blueprint for large companies trying to avoid unwanted litigation .
However, Kaplan denied the request, noting that the J&J unit was experiencing financial difficulties and that a bankruptcy court was a better forum for settling the dispute than the American tort system.
Reporting by Tom Hals in Wilmington, Delaware; Mike Spector in New York; and Dan Levine and San Francisco; Additional reporting by Dietrich Knauth and Chuck Mikolajczak in New York; Edited by Bill Berkrot
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