December 12, 2024
Over the past few decades, talcum lawsuits against pharmaceutical giant Johnson & Johnson (“J&J”) have emerged as a significant focal point at the intersection of consumer safety and corporate accountability. Allegations linking talc-based products to serious health concerns like ovarian cancer and mesothelioma have sparked widespread public concern and legal scrutiny.
J&J has filed for bankruptcy in relation to talc lawsuits three times, most recently in September 2024, and the company’s controversial legal strategy has drawn criticism. Amid ongoing lawsuits, settlement talks, significant media attention, and thousands of cancer-stricken claimants, J&J maintains that the suits against the company are meritless.
A Brief History
The first successful talcum-related suit against J&J was filed in 2009, alleging its talc products caused ovarian cancer. In 2018, a court ordered J&J to pay $4.69 billion to cancer victims. This historic ruling ushered in a swell of lawsuits against the company, prompting its initial attempt to sidestep its liability for allegedly toxic baby powder through a controversial “Texas two-step” strategy. This approach, permitted under U.S. bankruptcy law, involves a solvent parent company offloading its liabilities to a new subsidiary, setting the stage for the new company to then declare chapter 11 bankruptcy.
Such a maneuver shields assets from litigants by leveraging the protections afforded to bankrupt organizations, effectively shifting legal liability to the newly established subsidiary while safeguarding the solvent parent company’s assets. This is precisely what J&J attempted in 2021 when it restructured: creating LTL Management (“LTL”), assigning all of its talc liabilities to the subsidiary, and transferring operating assets to another new entity. Just a few days later, LTL filed for chapter 11 bankruptcy in the District of New Jersey.
The Texas two-step has been widely criticized by legal scholars and is, at times, disfavored by the courts. On appeal, the Third Circuit rejected J&J’s first attempt at engaging the maneuver. The court found that, because J&J had agreed to a funding scheme to assist LTL with bankruptcy and talc-related costs (to the tune of up to $61.5 billion), LTL was simply not financially distressed and therefore ineligible for bankruptcy. This result was unusual in that it carved out a new “financial distress” component of evaluating whether a bankruptcy filing is legally in good faith, as required by U.S. bankruptcy law.
This case was dismissed as a bad faith filing. LTL shortly thereafter filed a second case with some modifications to the funding scheme. In July 2023, this second case, too, was dismissed in the District of New Jersey.
Today’s Two-Step
J&J remains loyal to its two-step strategy and, in September 2024, broached the dance floor again. This time, LTL reincorporated in Texas, likely in an attempt to secure a more sympathetic venue. The company proposed a prepackaged plan of reorganization, stating the plan would resolve all current and future ovarian cancer claims related to talc products by establishing a trust funded by more than $8 billion in payments over 25 years. Unlike the previous two-step attempts, this plan does not include several hundred mesothelioma claims arising from the same talc products.
Under the proposed scheme, LTL would undergo another corporate restructuring and chapter 11 filing for a new entity, Red River Talc LLC (“Red River”). Red River’s plan would create a personal injury trust payable to ovarian cancer claimants. The trust would be front-loaded with a $2 billion contribution, and Red River would supply a one-year $400 million note to the trust on the effective date. According to court filings, 83% of claimants gave the scheme a nod of approval, exceeding the 75% required threshold.
J&J states the deal is fair and equitable to all parties, and some lawyers agree—if it proceeds, the settlement will be one of the largest mass tort litigation settlements in history, and the vast majority of claims will be resolved. Further, proponents argue claimants are much more likely to receive payments through the chapter 11 strategy than they would be through non-bankruptcy litigation. Opponents of the two-step, however, argue that J&J is forum shopping and attempting to shirk adequate tort liability by hiding out in bankruptcy court. Some have also questioned the voting methods used to secure the 83% approval touted by J&J.
What’s Next for J&J and the Texas Two-Step
On September 30, the U.S. Trustee—a Department of Justice official who oversees bankruptcy cases to bolster transparency and fairness in the process—accused the company of attempting to secure an advantageous venue by filing through Red River in Texas. U.S. Bankruptcy Judge Christopher Lopez, in the Southern District of Texas, imposed a stay on all talc litigation until the venue issue is decided.
The venue dispute may not be the only remaining hurdle for J&J. A June SCOTUS decision, Harrington v. Purdue Pharma L.P., in which SCOTUS overturned Purdue Pharma’s oxycontin-related chapter 11 bankruptcy scheme, could have an impact on J&J’s legal battle. Following the Purdue ruling, Senators introduced a bipartisan bill aimed at killing the Texas two-step, and politicians in both chambers and across the political spectrum have signaled that they would like the maneuver’s days to be numbered.
A trial is scheduled for late January, during which Judge Lopez will rule on the bankruptcy plan. In the meantime, the baby powder suits are on hold until at least mid-March.
Allegra Abramson, Esq. (LAW ’24) is the Postdoctoral Fellow at Temple Law’s Center for Compliance and Ethics.