5 min read.Updated: 23 Jul 2021, 02:43 PM ISTJonathan Randles, The Wall Street Journal
The company has told personal-injury attorneys it is considering filing a subsidiary for bankruptcy, which legal experts say could prompt injury claimants to settle
Johnson & Johnson has told personal injury attorneys it is considering putting a subsidiary into bankruptcy to corral thousands of lawsuits alleging its talcum-based baby powder caused ovarian cancer and mesothelioma, according to people familiar with the matter. A company spokesperson said it hasn’t decided on any course of action with respect to the talc lawsuits, except to defend the safety of talc and to litigate pending claims.
Here is how a chapter 11 filing could affect the legal fight between the healthcare giant and the thousands of people who blame one of its flagship products for their cancer.
Why would J&J use bankruptcy?
Bankruptcy gives companies several tools to resolve all of the liability claims they face now or in the future over products that cause injuries or are defective in some way. After a bankruptcy filing, lawsuits in every state and federal court are automatically paused and brought before a single bankruptcy judge.
Consumers have alleged in thousands of lawsuits against J&J that talcum powder in Johnson’s Baby Powder and Johnson’s Shower to Shower can cause inflammation that leads to cancer. Other complaints allege the talc products were contaminated with asbestos. J&J has denied the allegations and has for years been defending itself against talc-related litigation.
A bankruptcy filing by a J&J subsidiary would halt pending lawsuits, at least for a while. The publicly traded parent company could receive the benefit of the automatic stay even if only an affiliate filed for bankruptcy.
A chapter 11 filing would provide a centralized forum for personal injury claims to be evaluated and capped, possibly through an estimation that would ballpark the compensation they are due. That is attractive for J&J because litigation exposure can be hard for companies to price, said Alexandra Lahav, a professor at the University of Connecticut School of Law.
J&J has taken some talc-injury cases to trial, and while some juries have sided with the company, others have returned huge damage awards, including a $2.1 billion judgment in Missouri. There were 28,900 talc-related lawsuits pending against J&J as of April, according to the company’s most recent quarterly report.
“If I have a really wide variance, it makes it really hard to predict the next case," Ms. Lahav said. “So this is an attempt to put a cap on it through bankruptcy."
In a bankruptcy, J&J would get to choose its preferred venue, rather than defending claims in the courts where they are filed. Filing for chapter 11 also would pressure claimants to accept lower settlements, since they could otherwise be stuck in bankruptcy court for years, with no chance of advancing their claims elsewhere, Ms. Lahav said.
The company announced last year that it would stop selling Johnson’s Baby Powder made with talc in the U.S. and Canada, citing a decline in customer demand amid the safety concerns.
In bankruptcy, J&J has the opportunity to effectively resolve all the litigation in one chapter 11 proceeding and put the talc lawsuits behind it for good, legal experts said.
“When it’s done, it is done," said Lindsey Simon, an assistant professor of law at the University of Georgia School of Law.
How would a chapter 11 filing work for J&J?
In discussions with lawyers for personal-injury claimants, J&J has said it could split the talc-related liabilities of its Johnson & Johnson Consumer Inc. unit away from income-producing assets, people familiar with the matter said.
Dividing a corporate unit’s assets and liabilities into different affiliates is possible under a Texas statute that has been used by other companies facing large numbers of tort claims, legal experts said.
Koch Industries Inc.’s Georgia-Pacific LLC in 2017 used a Texas divisive merger to break off an affiliate that housed asbestos-related liabilities, which then filed for bankruptcy. In 2019, Saint-Gobain Group’s CertainTeed LLC similarly split off an asbestos affiliate shortly before placing it in bankruptcy.
In both instances, the bankrupt units were supported by commitments from their parent companies to cover asbestos claims that were determined to be valid in the course of the chapter 11 process. A similar arrangement would give injury claimants access to J&J’s assets.
“So long as the entity that’s producing value remains on the hook to pay the tort claims, dividing the company isn’t necessarily a bad way to manage a mass tort problem," said Ted Janger, a professor at Brooklyn Law School. “But here, they appear to be using it as a threat to coerce settlements."
Are there risks for J&J?
Chapter 11 is an expensive process that, in some cases, ends up costing large corporations hundreds of millions of dollars in professional fees. J&J also risks potential harm to its brand name and reputation if it initiates a bankruptcy, experts said.
If injury claimants are dissatisfied with settlement talks, they can challenge J&J by seeking to lift the stay on lawsuits against the company. If granted, that would allow proceedings in state courts to resume, once again exposing J&J to jury verdicts and defense costs.
The use of bankruptcy to resolve large-scale legal liability also can be controversial. OxyContin maker Purdue Pharma LP is currently in chapter 11 and has proposed a bankruptcy exit plan that would provide legal release to members of the Sackler family who own the company, a proposal that has attracted attention from Congress. J&J would be seeking a similar release from future liability, despite not filing for bankruptcy itself.
What would a bankruptcy mean for injury claimants?
Personal injury claimants may face more pressure to settle in chapter 11 and would lose the individual leverage they may have against J&J, proceeding instead in a collective fashion at the negotiating table, experts said.
However, claimants could be compensated faster through a chapter 11 process, though the amount they would ultimately get would depend upon what assets are placed in trust for them, and how the trust is administered.
A court-appointed representative generally looks out for the interests of people who will develop claims in the future, but haven’t yet shown any illness or injury. A supermajority of injury claimants could bind a minority to accepting a settlement offer from J&J.
All claimants would face the risk, however, that any trusts could run out of money to pay injuries that show up in the future, said Samir Parikh, a professor at Lewis & Clark Law School. Chapter 11 doesn’t provide personal injury claimants with a backstop in the event a bankruptcy trust runs out of money, Mr. Parikh said.
Though the speed of chapter 11 could present claimants with challenges, it also often provides a relatively fast resolution for personal injury claims, which can be especially important for those who are seeking compensation quickly so they can move on with their lives, Mr. Parikh said.
“Victims don’t want to sit and wait for 10 years while this slowly meanders its way through the court system," Mr. Parikh said.
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