Jan 30 (Reuters) – A U.S. appeals court upheld Johnson & Johnson’s ( JNJ.N ) bankruptcy filing for tens of thousands of dollars in losses over talc products, even as it ruled that the health care conglomerate improperly filed a bankruptcy filing in Chapter 11. He will not face financial problems.
A decision Monday by the U.S. 3rd Circuit Court of Appeals for the Circuit Court of Appeals in Philadelphia rejected a Chapter 11 petition filed in October by a recently formed J&J subsidiary of more than 38,000 plaintiffs who claim the company’s baby powder and other talc products caused cancer.
Before bankruptcy, J&J faced more than $3.5 billion in litigation and settlement costs, including one in which 22 women were ultimately awarded more than $2 billion in judgments, according to bankruptcy court filings.
Several major companies, including J&J and 3M Co ( MMM.N ), have turned to bankruptcy court to deal with their mass tort liabilities. Plaintiff attorneys say the cases are an unfair use of the bankruptcy system, saying the companies’ Chapter 11 filings aim to compensate claimants in a fair and equitable manner.
J&J’s maneuver is known as the Texas two-step, which is used to create a branch of state law that supports litigation and then declares bankruptcy. A third round opinion allows litigation against the company to continue.
J&J said it will contest the ruling and that its talc products are safe.
Its shares fell more than 3% — the biggest one-day percentage drop in two years.
The New Jersey-based company, which is valued at more than $400 billion, said the company’s bankruptcy was initiated in good faith and was designed to fairly resolve the talc claims for the benefit of all plaintiffs. J&J initially pledged $2 billion to the corporation to settle the talc claims and entered into a settlement agreement that was ultimately approved by a bankruptcy judge.
A three-judge appeals court rejected J&J’s argument that the company’s subsidiary, LTL Management, was created only to meet the bankruptcy system, not because it was in financial trouble.
“Good intentions such as protecting the J&J brand or resolving disputes comprehensively are not enough,” the judges said in a 56-page opinion.
The decision casts doubt on J&J’s long-planned strategy after it lost a bid to overturn a watershed ruling that ultimately settled more than $2 billion for 22 women who sued for ovarian cancer over baby powder and other talc products.
More than 1,500 lawsuits have been dismissed without J&J having to pay anything, and most of the cases that went to trial have resulted in a defense verdict, verdict or judgment for the company on appeal, according to J&J’s Subdivision Court filing.
‘Project Plato’
In the year A Reuters investigation in December 2018 revealed the company was aware of decades-old tests showing that talc sometimes contains traces of carcinogenic asbestos, but withheld that information from regulators and the public.
“As we have said throughout this process, resolving this matter as quickly and efficiently as possible is in the best interest of the claimants and all stakeholders,” J&J said in a statement. “We continue to stand behind the safety of Johnson’s Baby Powder, which is safe, asbestos-free and non-carcinogenic.”
Faced with unrelenting litigation, J&J enlisted the law firm Jones Day, which had helped other companies file Texas two-tier bankruptcies to settle asbestos lawsuits.
The J&J effort, which Reuters detailed last year, was internally dubbed “Project Plato,” and employees working on it signed a confidentiality agreement warning them not to tell anyone about the plan, including their spouses.
Texas’ two-tier strategy has drawn criticism from Democratic lawmakers, and prompted legislation that would severely restrict the practice.
Jones Day did not immediately respond to a request for comment.
Critics argue that the strategy is an abuse of the bankruptcy system by bankrupt corporations seeking to escape jury trials in state courts. Bankruptcy filings often stall litigation, force plaintiffs to engage in time-consuming settlement negotiations, and prevent them from pursuing their cases in the same court where they originally filed.
“Bankruptcy courts are for honest companies in financial trouble, not billionaire mega-corporations like J&J,” said John Ruckdeschel, an attorney representing the Talc plaintiffs.
Plaintiffs and other lawyers urged U.S. Bankruptcy Judge Michael Kaplan last year to dismiss the J&J subsidiary’s bankruptcy, saying it was caused by bad faith and risked becoming a blueprint for large corporations seeking to avoid unnecessary litigation.
However, Kaplan declined the request, saying that J&J’s division was in financial trouble and that bankruptcy court was a better forum for resolving disputes under the American tort system at the time.
Reporting by Tom Hales in Wilmington, Delaware; Mike Spector in New York; and Dan Levin and San Francisco; Additional reporting by Dietrich Knauth and Chuck Mikolajczak in New York; Editing by Bill Berkrot
Our standards: The Thomson Reuters Trust Principles.