A federal judge has allowed a company spun off by Johnson & Johnson to proceed with a controversial bankruptcy, despite complaints from thousands of people who say they were harmed by the consumer product giant's baby powder and who could now be denied a chance to sue.
J&J created the spinoff company, LTL Management, under a Texas law last fall, while facing some 38,000 lawsuits from people who say its baby powder was contaminated with asbestos, causing cancer and other ailments.
J&J, which also makes products such as Tylenol and Band-Aid, assigned legal liability for the complaints to the spinoff company, which immediately filed for bankruptcy — a maneuver dubbed the "Texas two-step."
Critics challenged the bankruptcy as a bad-faith effort to shield J&J itself from responsibility for an allegedly harmful product.
"The bankruptcy code was never intended to be abused in this way by massively profitable corporations as a means to delay or prevent cancer victims from having their day in court," said Jon Ruckdeschel, an attorney who represents some of the people pursuing J&J.
Judge acknowledges the ruling will frustrate plaintiffs
Judge Michael Kaplan ruled Friday that LTL can proceed with the bankruptcy, leaving individual lawsuits on hold.
Kaplan acknowledged the frustration that would cause, but concluded bankruptcy offers a more efficient remedy for those who claim they were harmed by J&J.
"The Court is aware that its decision today will be met with much angst and concern," Kaplan wrote in his decision. "The Court remains steadfast in its belief that justice will best be served by expeditiously providing critical compensation through a court-supervised, fair, and less costly settlement trust arrangement."
Johnson & Johnson called the ruling "a positive development and a step forward to reaching a global resolution" of the lawsuits.
"We continue to stand behind the safety of Johnson's Baby Powder, which is safe, does not contain asbestos and does not cause cancer," the company said in a statement.
J&J stopped selling baby powder made with talc in the U.S. and Canada in 2020, saying consumers in those countries preferred a version made with corn starch. The company still sells talc-based baby powder in other countries.
The controversial Texas two-step maneuver
While the bankruptcy process has been used for years to resolve large-scale product liability cases involving asbestos, silicone breast implants and birth control devices, the Texas two-step process is relatively new.
It's controversial because it allows a company to limit which of its assets are available to settle complaints.
"In an extreme case, a company that's facing a lot of litigation could stick all the litigation exposure — all of those liabilities — into one entity and stick everything else into the other entity, and the [Texas] statute doesn't do anything to stop that," said David Skeel, a bankruptcy expert at the University of Pennsylvania.
Appeals to the judge's ruling are likely
Plaintiffs pursuing J&J promised to appeal Judge Kaplan's ruling.
"We are disappointed that J&J's stooge 'bankruptcy' filing for its fall-guy subsidiary LTL Management was not dismissed," Ruckdeschel said. "Americans suffering from cancer caused by J&J's asbestos-tainted talc have a constitutional right to have a jury decide their case."
Skeel notes that J&J has a market valuation of more than $430 billion and a credit rating higher than the U.S. government's. He suspects if the company is successful at limiting its liability through bankruptcy, copycats will soon follow.
"You could see companies start to push the envelope," Skeel said. "Companies that don't have thousands of lawsuits but maybe 10 lawsuits. It does have enormous implications for liability exposure going forward."
Some members of Congress want to rewrite the bankruptcy code to limit maneuvers like this.
"We need to close this loophole for good," Sen. Dick Durbin, D-Ill., said earlier this month. "Bankruptcy is supposed to be a good-faith way to accept responsibility, pay one's debts as best you can, and then receive a second chance, not a Texas two-step, get-0ut-of-jail-free card for some of the wealthiest corporations on earth like Johnson & Johnson."