Johnson & Johnson's Texas Two-Step Bankruptcy Strategy Fails Again, Prolonging Talc Litigation Battle

On July 26, Johnson & Johnson's latest attempt to use the highly controversial Texas two-step bankruptcy strategy to address its talc litigation failed again., a federal appeals court upheld the previous dismissal ruling. Johnson & Johnson underwent a restructuring in 2021 and initiated a two-step legal strategy in Texas, where it transferred all talc liabilities to a newly established subsidiary, LTL Management, and then declared LTL bankrupt while seeking a large-scale settlement with the plaintiffs.

According to the financing agreement between Johnson & Johnson and LTL, the appellate court overturned the bankruptcy court's previous green light for the strategy. Last year, Circuit Judge Thomas Ambro referred to the agreement as an "ATM disguised as a contract" in a ruling. Now, the same court has again ruled that LTL's bankruptcy cannot be established.

Ambro explained in the new ruling: "There is no doubt that solvent companies may encounter serious financial difficulties when faced with large-scale tort litigation, which could lead to bankruptcy." "When future bankruptcy is a realistic possibility based on meaningful evidence — rather than just highly speculative 'worst-case' outcomes — defendants in mass tort cases have a viable bankruptcy case."In reviewing the case, the court clearly did not find that Johnson & Johnson's financial situation met the standards for a "viable" bankruptcy case.

This ruling was made on the eve of the July 26 deadline.On July 26, thousands of plaintiffs voted on Johnson & Johnson's $6.48 billion settlement proposal over 25 years, which would cover more than 50,000 lawsuits and resolve 99.75% of the company's talcum powder litigation in the United States.Although Johnson & Johnson argued that the settlement was in the best interest of the plaintiffs, the coalition of lawyers representing the plaintiffs claimed that the bankruptcy and the planned vote were a malicious attempt at settlement.

Lawyer Andy Birchfield said in an email statement that Beasley Allen, a lawyer at one of the law firms, hopes the new ruling will be "a warning to Johnson & Johnson and other companies basking in huge profits."

Birchfield added, "What Johnson & Johnson lacks in this case is simply the willingness and accountability to make up for the serious harm caused by its talc products."

However, Johnson & Johnson does not intend to abandon its legal strategy and plans to file a lawsuit directly with the U.S. Supreme Court.

Erik Haas, Vice President of Global Litigation at Johnson & Johnson, said in an email statement: "We believe that the new standard adopted by the Third Circuit Court is irreconcilable with the Bankruptcy Code and the recent Supreme Court ruling requiring strict adherence to the text and context of the Bankruptcy Code." "We will now proceed as planned to submit a petition for a writ of certiorari to the U.S. Supreme Court."

At the same time, Johnson & Johnson stated in its 2024H1 report, "Considering these (talcum powder) settlements and the comprehensive resolution achieved through the proposed plan, the company recorded approximately $3 billion in incremental expenses prior to the second fiscal quarter of 2024."

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