WASHINGTON — A recent Supreme Court ruling may significantly alter the landscape for using bankruptcy to address widespread litigation. The decision against Purdue Pharma’s bankruptcy settlement highlights a shift in how courts handle claims against parties who haven’t filed for bankruptcy themselves. This change could have broad implications for companies facing mass tort litigation.
Bankruptcy courts have traditionally offered several tools to aid organizations in resolving these complex lawsuits, which include cases like the large-scale settlements involving the Catholic dioceses and the Boy Scouts of America. These courts can halt ongoing litigation, providing breathing space for debtors to reorganize or settle globally. Notably, bankruptcy can also bind claimants who reject a settlement and resolve future similar claims.
However, until the landmark decision involving Purdue Pharma, the manufacturer of OxyContin, bankruptcy could also shield third parties from litigation through non-debtor releases, often in return for their financial contributions to settlements. These tools aimed to facilitate a fresh start for entities overwhelmed by liabilities, but critics argue they have been leveraged by wealthy companies to avoid litigation rather than manage debt.
The Supreme Court’s decision unequivocally states that U.S. bankruptcy laws do not permit courts to dismiss claims against non-debtors without the plaintiffs’ consent. Purdue’s proposed settlement aimed to protect the Sackler family—who did not file for bankruptcy—from ongoing lawsuits accusing them of fueling the opioid crisis through aggressive marketing tactics. As part of the agreement, the Sacklers would have contributed up to $6 billion toward remedying the opioid epidemic’s fallout.
This judicial shift is expected to increase reliance on alternative mechanisms for managing mass tort claims, such as consolidating cases into federal multidistrict litigation or tackling them through lengthy individual trials. Some legal scholars and practitioners have expressed concern that resolving such cases outside bankruptcy will compromise compensation for victims. This is because third parties like insurers or the Sacklers might have been incentivized to contribute substantial sums to secure legal immunity from future claims.
Justice Brett Kavanaugh, dissenting with the ruling, argued that non-debtor releases were crucial for effectively managing mass tort bankruptcies. He cited the Purdue settlement as a prime example of the bankruptcy system successfully at work. Opposing Kavanaugh’s view, entities like community organizations and victims’ advocates fear significant financial losses due to the ruling, potentially losing billions in settlement funds destined to mitigate the opioid crisis’s impacts.
Supporters of bankruptcy’s broad usage, including entities like the Chamber of Commerce and the American Tort Reform Association, claim that bankruptcy courts are best equipped to aggregate the largest possible asset pool to compensate the maximum number of claimants. They argue that outside of bankruptcy, litigation becomes a competitive scramble where not all victims receive just compensation, and outcomes vary drastically.
Critics such as Melissa Jacoby, a law professor at the University of North Carolina, argue that companies can still achieve comprehensive settlements by offering fair compensation without relying on bankruptcy protections to force settlements. Justice Neal Gorsuch, writing for the majority, suggested that parties like the Sacklers might still contribute more to settlements to persuade holdouts, reinforcing the idea that negotiations can resolve without the strictures of bankruptcy law.
Several large cases, such as the 3M lawsuit involving defective military earplugs, have demonstrated that substantial settlements can be reached outside of bankruptcy. After efforts to use bankruptcy were rebuffed by the courts, 3M settled the massive litigation for $6 billion, showcasing that solutions can emerge even within what some critics describe as a “broken” legal system.
The Supreme Court’s decision marks a pivotal moment, possibly heralding a new era in how mass tort liabilities are handled, prompting both challenges and opportunities for legal strategies moving forward.