Judge Gives Green Light to J&J’s Strategy to Resolve Talc Lawsuits in Bankruptcy Court

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Feb 25 (Reuters) – Johnson & Johnson can use the bankruptcy system to resolve a multi-billion dollar lawsuit claiming its talc products cause cancer, a U.S. judge ruled on Friday, approving a legal maneuver that allows the company to avoid fighting more than 38,000 individual lawsuits.

J&J used a strategy known as “Texas Two-Step,” which allows companies to separate valuable assets from liabilities through a so-called split merger. In October, J&J, which maintains its talc products are safe, filed the claims with a newly created entity called LTL Management LLC, which filed for bankruptcy days later.

The plaintiffs argued that this decision was an abuse of the Chapter 11 system.

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U.S. Bankruptcy Judge Michael Kaplan forcefully rejected that argument on Friday, saying J&J’s approach was “unquestionably” appropriate and that bankruptcy offers a faster and fairer alternative to decades of litigation in other courts.

Jon Ruckdeschel, an attorney for the plaintiffs pursuing the talc lawsuits, said the decision will be appealed.

“The bankruptcy code was never intended to be abused in this way by massively profitable corporations as a means of delaying or preventing cancer victims from having their day in court,” he said. said in a statement.

J&J stock closed 5% higher, its biggest one-day gain since the pandemic began in the spring of 2020. The company, which has a market value of more than $400 billion, also said on Friday that it planned to move forward with a $5 billion settlement to resolve claims by states and local governments that J&J contributed to the opioid epidemic in the United States. Read more .

Talc plaintiffs and some critics had warned the strategy could “open the floodgates” for other companies facing the risk of mass litigation.

Kaplan said “perhaps the doors should indeed be open”.

“There is nothing to fear in the migration of tort litigation out of the tort system into the bankruptcy system,” Kaplan wrote.

After Kaplan’s “extremely strong” defense of J&J’s bankruptcy strategy, other companies would be “negligent” if they didn’t consider a similar approach, said Jared Ellias, a professor at UC Hastings College of the Law. .

“This couldn’t have been a better view for people who think Texas’ two-step bankruptcy strategy is a good way for companies to deal with mass liability issues,” Ellias said.

The plaintiffs had alleged that J&J’s talc products contained asbestos and caused ovarian cancer and mesothelioma, a type of cancer linked to asbestos exposure.

J&J denies the claims, saying decades of scientific testing and regulatory approvals have shown its talc to be safe and asbestos-free.

Prior to filing for bankruptcy, the company was facing costs of $3.5 billion in verdicts and settlements, including one in which 22 women won a judgment of more than $2 billion, according to bankruptcy court records. .

J&J, in a statement, called the decision a positive development, adding that an independent investigation would establish that LTL’s formation and Chapter 11 filing was appropriate.

“LTL is prepared to work with plaintiffs’ counsel and the mediator to achieve a fair and effective resolution, as ordered by the bankruptcy court,” J&J said in a statement.

J&J has set aside $2 billion to settle talc-related claims, but LTL executives called that figure a starting point rather than a “ceiling” during court proceedings last week.

Kaplan said he believed there was a need for an “independent review” of the corporate restructuring and said he would consider appointing a reviewer at a March 8 hearing.

Reuters exclusively reported earlier this month that J&J secretly launched “Project Plato” last year to shift responsibility for its ongoing talc lawsuits to the newly created subsidiary, which was then to file for bankruptcy.

The strategy angered lawyers for the cancer plaintiffs, who in court called it “rotten to the core”.

It also alarmed lawmakers, including US Senator Sheldon Whitehouse, who said it was providing a plan for other well-heeled corporations to deny victims compensation and “hide the assets in plain sight.”

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Reporting by Tom Hals in Wilmington, Delaware; Additional reporting by Dan Burns; Editing by Noeleen Walder and Bill Berkrot

Our standards: The Thomson Reuters Trust Principles.

Tom Hall

Award-winning journalist covering US courts and law, from the COVID-19 pandemic to high-profile criminal trials and Wall Street’s biggest failures with more than two decades of international financial news experience in Asia and Europe.

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