Jan 30 (Reuters) – A U.S. appeals court upheld Johnson & Johnson (JNJ.N) After tens of thousands of lawsuits over its talc products attempted bankruptcy, the healthcare conglomerate improperly placed a subsidiary in Chapter 11 proceedings, even though it was not facing financial distress.
The U.S. 3rd Circuit Court of Appeals in Philadelphia on Monday rejected a Chapter 11 petition filed by a recently formed J&J subsidiary in October to settle more than 38,000 lawsuits from plaintiffs who alleged the company’s baby powder and other talc products caused cancer.
Before filing for bankruptcy, J&J faced $3.5 billion in judgments and settlements, including one that ultimately awarded more than $2 billion to 22 women, according to bankruptcy court records.
Several large companies including J&J and 3M Co (MMM.N), have sought bankruptcy court to administer their massive tort liability. Plaintiffs’ attorneys have called the lawsuits an improper manipulation of the bankruptcy system, while the companies say Chapter 11 filings aim to compensate claimants fairly and equitably.
J&J’s maneuver is known as the Texas two-step, which uses state law to create a subsidiary that can withstand lawsuits and then declare bankruptcy. The Third Circuit’s opinion allows the company to sue again.
J&J said it will challenge the ruling and that its talc products are safe.
Its shares fell more than 3% — the biggest one-day percentage decline in two years.
The New Jersey-based company, valued at more than $400 billion, said its subsidiary’s bankruptcy was initiated in good faith and was designed to resolve talc claims in an equitable manner for the benefit of all plaintiffs. J&J initially pledged $2 billion to the subsidiary to settle the talc claims and eventually entered into an agreement to fund the settlement approved by a bankruptcy judge.
A three-judge panel at the appeals court rejected J&J’s argument that the company’s subsidiary, LTL, was formed only to access the bankruptcy system and not because it was facing financial distress.
“Good intentions — such as protecting the J&J brand or settling the case entirely — are not enough,” the justices said in a 56-page opinion.
It casts doubt on J&J’s long-planned strategy after it failed to overturn a watershed verdict that ultimately awarded more than $2 billion to 22 women who blamed ovarian cancer on baby powder and other talc products.
More than 1,500 talc cases have been dismissed without J&J paying anything, and most of the cases that went to trial were defense verdicts, mistrials or verdicts for the company on appeal, according to J&J subsidiary court filings.
A December 2018 Reuters investigation The company has for decades shown that tests of its talc sometimes showed traces of cancer-causing asbestos, but kept that information from regulators and the public.
“As we have said from the beginning of this process, it is in the best interests of claimants and all stakeholders to resolve this matter as quickly and efficiently as possible,” J&J said in a statement. “We continue to support the defense of Johnson’s Baby Powder as safe, asbestos-free and non-carcinogenic.”
Faced with relentless litigation, J&J enlisted the law firm Jones Day, which has helped other companies file Texas two-step bankruptcies to resolve asbestos cases.
J&J’s effort, described by Reuters last year, was dubbed internally “Project Plato,” and employees working on it signed confidentiality agreements not to tell anyone, including their wives, about the project.
Texas’ two-step strategy has drawn criticism from Democratic lawmakers, prompting legislation to severely restrict the practice.
Jones Day did not immediately respond to a request for comment.
Critics argue that the bankruptcy system is improperly used by solvent companies seeking to escape jury trials in state courts. Bankruptcy filings typically put litigation on hold, often forcing plaintiffs into time-consuming settlement negotiations while they are unable to pursue their cases in the courts where they originally litigated.
“Bankruptcy courts are for honest companies in financial distress, not billionaire corporations like J&J,” said attorney John Ruckdeschel, who represents the Dalk plaintiffs.
Plaintiffs and other legal experts last year urged U.S. Bankruptcy Judge Michael Kaplan to dismiss J&J Subsidiary’s bankruptcy filing, arguing it was filed in bad faith and risked becoming a blueprint for big companies avoiding unsavory lawsuits.
However, Kaplan denied the request, saying that the J&J division was facing financial difficulties and that bankruptcy court was an ideal forum to litigate the US tort case.
Reporting by Tom Halls in Wilmington, Delaware; Mike Spector in New York; and Don Levine and San Francisco; Additional reporting by Dietrich Knath and Chuck Mikolajczak in New York; Editing by Bill Bergrod
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