New York — A recent Supreme Court decision could make bankruptcy a less favorable option for companies looking to settle massive legal battles. This landmark ruling rejected OxyContin manufacturer Purdue Pharma’s Chapter 11 settlement, impacting the way courts handle legal claims against third parties who haven’t filed for bankruptcy themselves.
Bankruptcy courts have historically provided several mechanisms that facilitate the resolution of large-scale litigation, such as the ability to halt ongoing lawsuits and force unwilling claimants to adhere to settlements. These tools have been used in a variety of cases, including those involving allegations of widespread sexual abuse and claims that consumer products have caused health issues.
In many instances, companies have relied on what are known as non-debtor releases to shield co-defendants and other associated entities from litigation, even if those entities have not filed for bankruptcy. Those releases have historically allowed outside contributors, like shareholders or other related parties, to fund settlements in exchange for protection from future lawsuits.
The new ruling dramatically alters this landscape by determining that U.S. bankruptcy law does not provide courts with the authority to extinguish the legal rights of those who have filed lawsuits against non-debtor entities without their consent. This decision comes in response to a highly publicized case in which the Sackler family, owners of Purdue Pharma, were shielded from individual lawsuits as part of Purdue’s bankruptcy settlement, even though they personally had not filed for bankruptcy. The family had agreed to contribute up to $6 billion to the settlement, aiming to mitigate harm caused by the opioid crisis attributed to their aggressive marketing of OxyContin.
Legal experts predict that this new ruling will put additional pressure on alternative litigation strategies, such as federal multidistrict litigation or prioritized individual trials. Outside of bankruptcy, these methods often see compensation disparities and can potentially result in lower settlement amounts for victims.
Dissenting opinions within the court, such as that of Justice Brett Kavanaugh, highlighted the historical value of non-debtor releases in managing complex bankruptcy cases. He posited that denying such releases could endanger significant funds earmarked for community healing and support, particularly pointing to the billions negotiated in the Purdue case.
Voices from institutions like the Boy Scouts of America and various Catholic dioceses have expressed concern, arguing that bankruptcy offers a unique forum that maximizes available funds for claimants by compelling contributions from liable third parties, thus ensuring more comprehensive victim compensation. Industry organizations, including the Chamber of Commerce and the American Tort Reform Association, have supported this view, emphasizing the effectiveness of bankruptcy in pooling resources to address claims.
Critics of this reliance on bankruptcy, such as UNC Law Professor Melissa Jacoby, argue that companies should focus on providing sufficiently attractive settlements to resolve lawsuits rather than depending on court-aided releases. They suggest that without the option of a bankruptcy release, organizations might need to offer higher settlements to persuade claimants.
In cases like industrial giant 3M, which faced about 300,000 lawsuits over faulty military-grade earplugs, the company initially sought to use bankruptcy as a shield through its subsidiary Aearo. However, after its attempt was rebuffed by a bankruptcy court, 3M settled outside of bankruptcy for $6 billion, exemplifying that substantial settlements can indeed be reached without resorting to bankruptcy protections.
With these evolving legal processes, companies facing extensive litigation may need to reconsider their strategies, and this Supreme Court ruling could significantly influence how large-scale legal disputes are resolved in the future.