J&J begins trial in bankruptcy case challenged by Congress
Johnson & Johnson’s controversial bankruptcy strategy that has angered Congress faces a new lawsuit this week, with the consumer products giant arguing it’s better off settling billions of dollars in debt-related liabilities. talc in a single case for cancer victims than fighting thousands of individual claims.
J&J begins a week-long court hearing on Monday to decide whether it wrongfully manipulated the bankruptcy system by placing a unit in Chapter 11 only to force a negotiated end to more than 38,000 lawsuits. The case has been criticized by advocates for those harmed by corporate wrongdoing and in Congress, where legislation is being considered that would ban the company’s tactics.
“This Chapter 11 model cannot be what Congress had in mind when it enacted” the federal bankruptcy code, bankruptcy attorney Laura Davis Jones told the judge overseeing the hearing as it started in Trenton, New Jersey, 25 miles from the J&J company. head office in New Brunswick.
The core of J&J’s argument is that bankruptcy was a legitimate option because traditional jury trials are unfair to victims and businesses. Almost all of J&J’s alleged cancer victims disagree, and their attorneys have filed motions to dismiss the bankruptcy case. A group in Canada, however, sided with the company.
“The motions raise the ultimate question of when a courthouse rush and piecemeal litigation ever led to a better outcome for all creditors than could be achieved in bankruptcy court,” wrote the lawyers of a class action against J&J in Canada.
If J&J lost, victims would be free to resume jury trials, potentially exposing the company to billions in additional payouts. Over the past five years, J&J has spent $4.5 billion to resolve talc claims, according to court documents. Although the company has won numerous lawsuits, there have been dramatic losses. Last year, around 20 people split $2.24 billion after a jury found their cancers were caused by J&J’s talc-based products, including its signature baby powder.
After repeatedly promising to fight every baby powder lawsuit one by one across the country, J&J adopted the so-called two-step Texas strategy last year, in part in response to the 2.24 verdict. billion, the company said in a court filing.
The company used a business-friendly Texas law to create a new unit, LTL Management, to manage all of its talc-related liabilities. LTL then filed for bankruptcy, backed by a promise from J&J to pay at least $2 billion to end all current and future baby powder suits.
Under Texas Two-Step, a small unit is set up to channel all bankruptcy lawsuits, allowing the parent company to benefit without having to place itself under court supervision.
Victim advocates point out that J&J is one of the largest and most profitable companies in the world. As of Friday, he was worth $444 billion. The company is simply trying to protect itself from grand jury verdicts, defenders say.
“Specifically, this case was filed to shield J&J from liability for decades of producing, marketing and selling carcinogens,” a committee representing baby powder victims said in a court filing. Because J&J is profitable and not bankrupt itself, it should not be allowed to use a small unit to get rid of talc lawsuits, the committee argues.
Several prominent legal scholars have argued that allowing bankruptcy to go ahead would create a major loophole that other companies would use to avoid similar problems.
At a US Senate committee hearing this week, Sheldon Whitehouse, a Democrat from Rhode Island, pledged to find a way to block those bankruptcy filings after hearing from a mother of seven with deadly form of cancer.
J&J argues that bankruptcy is better for victims because it avoids a lottery-like trial system in which one jury can hand out tens of millions of dollars and another dismisses claims altogether. Creating a trust funded by billions of dollars would reduce the cost of these jury trials and ensure a more even distribution, according to research by J&J expert Charles H. Mullin.
“A trust established through bankruptcy reorganization can ensure payment of comparable amounts to similarly situated persons by consistently taking into account claimant characteristics such as age, alleged exposure, alternate sources of exposure, loss of income, living status and dependents,” Mullin wrote in an October. report.
Only a handful of companies have used the Texas Two-Step strategy, including the Georgia-Pacific unit of Koch Industries. The traditional method of using bankruptcy to resolve a massive number of lawsuits is to put the company being sued into bankruptcy. This is the model used by many asbestos producers, such as specialty chemical manufacturer WR Grace and auto parts manufacturer Federal-Mogul. Asbestos is an industrial product that can cause fatal lung disorders.
At the start of the hearing, J&J’s top bankruptcy attorney, Greg Gordon, argued that dismissing the Chapter 11 case would be good for attorneys representing alleged victims, but not for most victims.
“It may be good for the plaintiffs’ bar, but it’s not good” for their clients, Gordon said, “most of whom won’t get anything.”
About the photo: The Johnson & Johnson logo is displayed outside the company’s headquarters in New Brunswick, New Jersey, U.S., Saturday, August 1, 2020. Photographer: Mark Kauzlarich/Bloomberg
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