Johnson & Johnson is drawing criticism after using a controversial bankruptcy maneuver to block roughly 38,000 lawsuits linked to claims that its talc baby powder was contaminated with cancer-causing asbestos.
The health products giant used a quirk of Texas state law to spin off a new company called LTL, then dumped all its asbestos-related liabilities — including the avalanche of lawsuits — into the new firm.
LTL filed for bankruptcy last week in a federal court in Charlotte, N.C., a move designed to sharply limit efforts to recover damages for those who say they were harmed by J&J's baby powder.
"Johnson & Johnson doesn't have this liability anymore. They pushed all of it into the company they created just to file for bankruptcy," said Lindsey Simon, a bankruptcy expert at the University of Georgia School of Law.
As a result, Simon said, "consumers can't recover [damages] against a big solvent company. They have to recover against this smaller fictional company created [by J&J]."
The move sparked outrage from lawmakers and consumer advocates.
"J&J knew asbestos laced some bottles but kept it a secret for decades," Rep. Katie Porter, D-Calif., tweeted on Tuesday. "Tens of thousands of women with ovarian cancer are suing, and the company wants to shield its assets."
In 2018, separate investigations by Reuters and The New York Times revealed documents showing Johnson & Johnson fretted for decades that small amounts of asbestos lurked in its baby powder, without telling regulators.
J&J has repeatedly denied the claim. The company remains one of the wealthiest corporations in the world, with more than $25 billion in cash reserves, and has not filed for bankruptcy.
Johnson & Johnson says the bankruptcy move is legitimate
During a call with investors on Tuesday, J&J CFO Joseph Wolk defended the bankruptcy maneuver and again said its talc baby powder products, discontinued last year, were safe.
"There's an established process that allows companies facing abusive tort systems to resolve claims in an efficient and equitable manner," Wolk said.
"It's really the bankruptcy courts that will ultimately decide this. It's not plaintiff attorneys. It's not Johnson & Johnson," he added.
In a separate statement, LTL said J&J had agreed to provide the new firm with $2 billion, along with other funds, for future payouts linked to baby powder asbestos claims.
"We are confident all parties will be treated equitably during this process," said John Kim, chief legal officer of LTL, in the statement.
But Andrew Birchfield, an attorney with the firm Beasley Allen who represents women who have sued J&J, said this legal maneuver could make it far more difficult for his clients to recover damages.
"Women and families would be devastated, and it would just be a get-out-of-jail-free card for Johnson & Johnson," Birchfield said.
J&J has had a mixed record defending itself against these talc-asbestos lawsuits.
The company has prevailed in many cases, but last year an appeals court in Missouri ordered the firm to pay $2 billion to women who say J&J's talc product caused their ovarian cancer.
Advocates are raising alarms about "bankruptcy grifters"
Critics say this is another instance of a growing trend: corporations and wealthy individuals using bankruptcy to block lawsuits without actually filing for bankruptcy themselves.
"Another giant corporation is abusing our bankruptcy system to shield its assets and evade liability for the harm it has caused people across the country," Sen. Elizabeth Warren, D-Mass., tweeted last week.
The American Association for Justice, a coalition of trial lawyers, also blasted J&J's maneuver and called for legislation to block this kind of legal tactic.
"There are countless Americans suffering from cancer, or mourning the death of a loved one, because of the toxic baby powder that Johnson & Johnson put on the market," the group said in a statement. "Their conduct and now bankruptcy gimmick is as despicable as it is brazen."
In recent months, legal scholars, bipartisan members of Congress and consumer advocacy groups have raised alarms about the use of bankruptcy courts by wealthy and powerful entities seeking to block lawsuits.
Simon, at the University of Georgia, published a widely read paper in the Yale Law Journal in April that described wealthy companies like Johnson & Johnson as "bankruptcy grifters."
She argued such firms and organizations receive the benefits of Chapter 11 protection while "incurring only a fraction of the associated burdens."
Critics also say lax bankruptcy laws allow companies to "venue shop," choosing to file for bankruptcy in federal jurisdictions viewed as friendly to corporations.
In this case, Johnson & Johnson is headquartered in New Jersey, but these legal maneuvers have been executed in North Carolina and Texas.
Similar legal strategies have been used in bankruptcy courts by members of the Sackler family who own OxyContin-maker Purdue Pharma, as well as by the U.S. Olympic Committee and the Boy Scouts of America, which face a barrage of sex abuse-related claims.
Simon said this bankruptcy maneuver offers J&J significant advantages in negotiations that are likely to follow over a final settlement.
But she said the company may still be on the hook for sizable payouts to victims as determined by the bankruptcy court.
"[J&J is] not completely wiping their hands of the issue, and I think probably awareness of how that would be perceived is the reason why," Simon said.
Johnson & Johnson, meanwhile, has asked a federal bankruptcy judge to halt progress on talc-asbestos claims while LTL's bankruptcy filing is under review.
Judge Craig Whitley will hold a hearing on that request on Friday in Charlotte.