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(Reuters) — A U.S. appeals court on Monday shot down Johnson & Johnson’s attempt to offload tens of thousands of lawsuits over its talc products into bankruptcy court. The ruling marked the first major repudiation of an emerging legal strategy with the potential to upend U.S. corporate liability law.
J&J is among four major companies that have filed so-called Texas two-step bankruptcies to avoid potentially massive lawsuit exposure. The tactic involves creating a subsidiary to absorb the liabilities and to immediately file for Chapter 11.
The court ruled the health care conglomerate improperly placed its subsidiary into bankruptcy even though it faced no financial distress. J&J’s two-step sought to halt more than 38,000 lawsuits from plaintiffs alleging the company’s baby powder and other talc products caused cancer. The appeals court ruling revives those lawsuits.
Monday's decision by the U.S. 3rd Circuit Court of Appeals in Philadelphia dismissed the bankruptcy filed by the J&J subsidiary in 2021. Before the filing, J&J had faced costs of $3.5 billion in verdicts and settlements.
The company said in a statement that it would challenge the ruling and that its talc products are safe.
Plaintiffs attorneys and some legal experts have argued the two-step could set a dangerous precedent, providing a blueprint for any corporation to easily avoid undesirable litigation. The appeals court decision could force companies considering the strategy to more carefully consider its risks, two legal experts said.
“It is a push back on the notion that any company anywhere can use the same tactic to get rid of their mass tort liability,” said Lindsey Simon, a professor at University of Georgia School of Law.
Bankruptcy filings typically suspend litigation in trial courts, forcing plaintiffs into often time-consuming settlement negotiations while leaving them unable to pursue their cases in the courts where they originally sued.
The 3rd Circuit ruling does not apply to three other Texas two-step bankruptcies, filed by subsidiaries of Koch Industries-owned Georgia Pacific, global construction giant Saint-Gobain, and Trane Technologies. Those cases fall under the jurisdiction of the 4th Circuit appeals court. 3M attempted a similar maneuver, which is currently pending in the 7th Circuit.
Johnson & Johnson, valued at more than $400 billion, said its subsidiary’s bankruptcy was initiated in good faith. J&J initially pledged $2 billion to the subsidiary to resolve talc claims and entered into an agreement to fund an eventual settlement approved by a bankruptcy judge.
“Resolving this matter as quickly and efficiently as possible is in the best interests of claimants and all stakeholders,” J&J said.
A three-judge panel on the appeals court rejected J&J’s argument, finding the company’s subsidiary, LTL Management, was created solely to file for Chapter 11 protection but had no legitimate need for it. Only a debtor in financial distress can seek bankruptcy, the panel ruled. The judges pointed out that J&J assured that it would give LTL plenty of money to pay talc claimants.
“Good intentions — such as to protect the J&J brand or comprehensively resolve litigation — do not suffice alone,” the judges said in a 56-page opinion. "LTL, at the time of its filing, was highly solvent with access to cash to meet comfortably its liabilities."
The decision could force J&J to fight talc lawsuits for years in trial courts.