Johnson & Johnson’s ‘Two-Step Texas’ Highlights America’s Bankruptcy Regime

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When cancer patient Shawn “Val” Johnson won a $ 27 million personal injury award against Johnson & Johnson this month, he was relieved that his family had no shortage of cash when he died.

But days after the jury’s verdict, the life of the 61-year-old engineer was turned upside down when the world’s largest healthcare company deployed an unusual legal maneuver to protect itself from 38,000 lawsuits alleging its gunpowder. baby talcum powder had caused cancer.

“My biggest fear is that I was long gone before this was resolved,” Johnson told the Financial Times, in an interview punctuated by coughing fits from lung damage from mesothelioma, a type of cancer linked to the asbestos he alleged. it was exposed through the lifetime use of J & J’s baby powder.

“It just doesn’t seem fair for a company worth almost $ 500 billion to feel like it can walk away from its obligations. “

Faced with a growing number of awards from an important jury, J&J is pursuing a corporate restructuring that could cap payments and increase pressure on plaintiffs to settle their cases. Using a complex process dubbed “two-step Texas,” he created a new subsidiary under Texan law, then split the company in two and confined all of its talc responsibilities to the new entity.

He then placed the subsidiary, LTL Management, under Chapter 11 protection of North Carolina bankruptcy law and asked a judge to stay all talcum cases against the new subsidiary and J&J.

“J&J has a reputation for pleading these cases to the end. But this is an entirely new strategy in which the company is trying to shed its responsibilities, ”said Carl Tobias, professor of law at the University of Richmond Law School.

“The Texas second leg has not been fully tested as few courts have ruled on the matter and J&J’s decision could explode,” he said.

Judge Craig Whitley will consider J&J’s claim at a bankruptcy hearing in Charlotte, North Carolina next week.

J&J’s rollout of “Two-Step Texas” highlighted the use by companies of some US bankruptcy courts to cap personal injury claims and increase leverage with claimants.

Georgia-Pacific of Koch Industries uses a similar maneuver in an attempt to limit its liability for asbestos-related claims. Purdue Pharma has filed for bankruptcy protection to cap future payments linked to its involvement in the nation’s opioid crisis, and members of the Sackler family who own Purdue have also been granted immunity from future related lawsuits. opioids under controversial regulations.

Critics also argue that companies are looking for favorable places to avoid claims.

The legal mechanism that allowed J&J to transfer talc claims to a new entity, a so-called division merger, is only permitted in Texas and Delaware. The bankruptcy court in Charlotte, North Carolina, has become a hub for major asbestos-related bankruptcies, including a recent complaint filed by DBMP, a subsidiary of Saint-Gobain.

“We’ve had a parade of laws passed over the past 30 to 40 years increasingly limiting liability,” said Lynn LoPucki, professor of law at the University of California, Los Angeles.

“My biggest fear is that I was long gone before this was resolved,” Shawn “Val” Johnson told the Financial Times.

Val Johnson, right, and his wife Holly © Photos provided by the Johnson family

“There are judges who want to do these cases and there are courts who want to do these cases for the lawyers who practice before them. It is primarily an industry for the city of the court.

The use of the maneuver by J&J, a well-known consumer brand, drew a deluge of criticism from politicians, academics and litigators. Analysts say Joaquin Duato, who succeeds Alex Gorsky as J&J chief executive in January, will need to act quickly to limit any damage to reputation. He has diverted $ 2.3 billion to the new entity to settle future talc claims and denies shirking his responsibilities.

J&J denies that its talc-based baby powder, a product that has been used for over a century, contains asbestos and can cause ovarian cancer and mesothelioma, as the plaintiffs claim. The company stopped selling it in the United States and Canada last year, citing declining sales.

He warned in court documents that he would face “relentless assaults” from trial lawyers based on false allegations and “well-documented abuses” in the justice system for major judgments handed down by the courts. juries.

J&J says he has won most of the talcum powder personal injury lawsuits that have been tried so far. But he has lost several high-profile cases, which have so far resulted in $ 4.5 billion in compensation, settlements and court costs.

J&J faces increase in cancer complaints

“If only a small fraction of the pending cases continued to result in such inconsistent and excessive compensation, the assets available to pay current and future claimants could have been depleted,” J&J said in court documents, saying the costs could become “unsustainable”.

The company did not respond to a request for further comment on the bankruptcy proceedings.

Financial analysts seem less concerned about the impact of talcum liabilities on J&J results. “They have a triple A credit score, $ 94 billion in annual sales, $ 20 billion in annual cash flow, they have $ 34 billion in cash on their balance sheet, and their market cap is $ 430 billion.” , said Ashtyn Evans, analyst at Edward. Jones, a financial services group. “So when you talk about total [talc] responsibility for them, we think it is manageable.

J&J’s decision to roll out “Two-Stage Texas” has also sparked growing calls for bankruptcy reform in Congress. “Another giant corporation is abusing our bankruptcy system to protect its assets and avoid liability for the damage it has caused to people across the country,” noted Elizabeth Warren, Democratic Senator from Massachusetts.

But leadership legislation if Congress is difficult. Bankruptcy reform has been on the political agenda for years, and critics warn that time is running out for thousands of talcans who suffer from ovarian cancer or mesothelioma.

The US Chamber of Commerce and other professional organizations are also pushing for change, arguing that excessive prices impose unsustainable costs on businesses and insurers.

“The Complainants Bar has continually pushed the boundaries of liability, evolving its strategies and tactics,” said Harold Kim, president of the US Chamber Institute for Legal Reform, saying there are many instances of fraudulent claims.

For now, the future of “two-step Texas” may depend on the progress of J & J’s bankruptcy case involving its talcum subsidiary. Shelley Abel, the bankruptcy administrator of the North Carolina bankruptcy court where the case is pending, has asked Judge Whitley to transfer the case to New Jersey, where the “overwhelming majority” of talc cases are filed .

Such a decision would be welcomed by litigants such as “Val” Johnson, although it could take some time to unfold in bankruptcy court.

“People like Val and her family are suffering because they now find themselves in such uncertainty,” said Mark Bratt, lawyer at Weitz & Luxenberg, who represented Johnson. “It is unacceptable that a company like J&J can use a legal maneuver to evade its responsibility or delay justice.”



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