Johnson & Johnson's legal strategy on cancer suits questioned by court in US

Published on Sep 20, 2022 05:51 AM IST

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.

The three-judge panel will decide whether the bankruptcy should be dismissed, which would allow the lawsuits to resume. (HT File)
The three-judge panel will decide whether the bankruptcy should be dismissed, which would allow the lawsuits to resume. (HT File)
Bloomberg | | Posted by Yagya Sharma

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

Also Read| Johnson & Johnson drops talc based baby powder in 2023, shifts to cornstarch

The three-judge panel in Philadelphia heard arguments about the Chapter 11 petition of LTL Management and will decide later whether the case was filed in good faith, or should be thrown out because J&J and its units do not face any immediate financial distress. Should J&J and LTL lose juries would once again hear talc cancer claims.

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 in order 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 in the Chapter 11 case of LTL Management, the unit J&J created two days before putting it into bankruptcy.

The three-judge panel will decide whether the bankruptcy should be dismissed, which would allow the lawsuits to resume. The judges asked LTL’s lawyers whether the case was really filed in order 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.

Also Read| After raids in Pune, FDA cancels production license of Johnson and Johnson’s baby powder unit

“The timing really suggest 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?”

If there is an advantage to bankruptcy, it is incidental, LTL lawyer Neal Katyal said. “I think it’s a byproduct, but that it isn’t the reason” for the bankruptcy. Should the judges conclude the bankruptcy was not filed in good faith, they are likely to dismiss the case, forcing J&J to battle each of the lawsuits in courts around the country.

J&J has argued the insolvency case of LTL is the only way of corralling talc litigation costs and ensuring all victims get a fair payment.

The judges also asked whether the ruling could set off a chain reaction of similar filings by otherwise solvent companies seeking to get all 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.

A bankruptcy judge in Trenton, New Jersey, not far from J&J’s headquarters in New Brunswick, ruled in February that the LTL bankruptcy was legitimate and a better solution than having jury trials in courts around the country.

Victim groups appealed the ruling and 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, which is 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 -- the 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).

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