New York — In a substantial blow to Johnson & Johnson’s strategic legal defenses, an appeals court has once more turned down the healthcare giant’s controversial ‘Texas two-step’ bankruptcy ploy. This financial maneuver, which has sparked public and legal controversy, was designed to compartmentalize potentially billions of dollars in liabilities linked to claims that its talcum powder products caused cancer.
The U.S. Third Circuit Court of Appeals ruled that the subsidiary created for the sole purpose of filing for bankruptcy did not demonstrate the appropriate financial distress required to qualify for such protection. This decision echoed the findings of earlier lower court rulings, highlighting the court’s critical view of Johnson & Johnson’s attempt to use Chapter 11 not merely as a shield from burgeoning lawsuits but also as a strategic tool for liability management.
Originally, Johnson & Johnson had formed a subsidiary, LTL Management, which promptly filed for bankruptcy in October 2021. This action temporarily halted thousands of lawsuits alleging that its baby powder and other talcum products contained asbestos and caused cancer. The use of bankruptcy was aimed to consolidate all lawsuits in a single federal court, potentially reducing the legal variability and financial unpredictability of facing numerous trials across different state courts.
However, this legal strategy attracted criticism for potentially manipulating the bankruptcy system. Critics argue that Johnson & Johnson, which reports tens of billions in annual revenue, used the subsidiary as a loophole to unjustly shield assets while claimants, many grappling with serious health issues, seek compensation.
The appeals court has criticized the maneuver for what it perceives as an absence of good faith, a prerequisite for bankruptcy protection. Courts have increasingly scrutinized such tactics by large corporations, examining whether bankruptcy filings are genuinely rooted in financial need or are strategically employed to cap liabilities and manage public relations crises.
Legal experts suggest that this latest ruling could set a significant precedent that may influence how large corporations handle mass tort liability in the future. This decision underscores the judiciary’s role in scrutinizing corporate behaviors that might skirt ethical boundaries.
The ruling could compel Johnson & Johnson to re-evaluate its approach to legal defenses and liability management concerning its talcum powder litigation. This includes potentially facing each lawsuit individually in state courts, which could prove more costly and less predictable than a collective bankruptcy proceeding.
For plaintiffs, many of whom have awaited years for their day in court, the ruling brings a deeper sense of justice being served. It reinstates their right to pursue their claims in court, potentially leading to trials where they can present their individual cases.
Johnson & Johnson has expressed disappointment with the court’s decision and is reportedly considering its options, which might include an appeal to the U.S. Supreme Court. On the other hand, advocates for plaintiffs view the rejection of the bankruptcy claim as a pivotal victory for consumer rights and corporate accountability.
As the legal battles continue, this court ruling will undoubtedly be seen as a landmark in the ongoing scrutiny of corporate legal strategies in managing product liability crises. It throws into sharp relief the broader ethical and financial debates surrounding corporate responsibilities and consumer protections.