US court rejects J&J’s bankruptcy strategy for lawsuit settlements

In a significant ruling, a US court has prohibited Johnson & Johnson from using the bankruptcy of one of its subsidiaries as a means to coerce thousands of cancer patients into dropping their cases and accepting a settlement offer.

The appeals court made it unequivocal that a company must be genuinely facing “immediate, imminent, and clear” financial distress before seeking bankruptcy protection.

Following the court’s decision, Johnson & Johnson’s stock experienced a decline of approximately two per cent in after-hours trade.

The lawsuits against Johnson & Johnson stem from allegations that their baby powder and other talc products were contaminated with a harmful chemical known to cause cancer, resulting in multiple cancer victims taking legal action against the company.

Talc litigation saga: product withdrawal to bankruptcy

Since 2016, Johnson & Johnson (J&J) has grappled with a barrage of lawsuits regarding the use of talc in its products, especially after losing three cases that resulted in over $100 million in damages. The ongoing litigation led the company to pull all talc products from the market in 2020, citing poor sales.

Estimating that around 100,000 claims related to talc were either pending or expected to be filed against the firm, J&J sought to safeguard its other products and offerings by creating a subsidiary named LTL Management in 2021. In a bid to avoid lawsuits, J&J proposed that LTL Management, which had already filed for bankruptcy, pay a staggering $8.9 billion to resolve all talc-related claims. Subsequently, J&J transferred its talc liabilities to LTL Management and sought bankruptcy protection for the subsidiary.

J&J’s legal manoeuvre aimed to settle the lawsuits through an $8.9 billion deal orchestrated via LTL Management. However, numerous plaintiffs rejected the offer, claiming that J&J was attempting to coerce them into accepting the settlement by leveraging the threat of bankruptcy.

The United States Bankruptcy Court for the District of New Jersey, presided over by Judge Michael Kaplan, delivered a verdict on Friday, rejecting LTL’s bankruptcy petition. Judge Kaplan cited that the lawsuits against the subsidiary did not demonstrate “imminent or immediate financial distress,” leading to the rejection of the bankruptcy appeal.

Similarly, earlier this year, the United States Court of Appeals for the Third Circuit in Philadelphia had turned down the first bankruptcy filing for the same reason.

This marks the second time within six months that federal courts have denied J&J’s bankruptcy lawsuit for its subsidiary. 

Legal Community responses 

While Kaplan’s rejection of J&J’s bankruptcy case signifies a setback for the company, he also expressed concern about the growing backlog of lawsuits in the court system, which may cause further delays for cancer victims awaiting resolution of their cases.

Moshe Maimon, a lawyer representing talc victims, commended the courts for their independence and integrity in preventing J&J from evading legal scrutiny through bankruptcy.

On the other side, Andy Birchfield, one of the attorneys advocating for the dismissal of the second bankruptcy, celebrated the court’s decision, stating that J&J’s attempt to force a settlement on cancer victims through the bankruptcy court had been thwarted.

Furthermore, in response, J&J’s worldwide vice president of litigation, Erik Haas, issued a statement affirming the company’s commitment to pursue a resolution for the talc claims with the counsel representing approximately 60,000 claimants, as the bankruptcy court urged in its decision.

J&J has consistently maintained that its bankruptcy approach is intended to ensure a fair and equitable settlement of damage claims. The firm firmly stands by its stance that its talc-based products are safe, even though they have been at the centre of numerous lawsuits.

(With inputs from agencies)

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