Johnson & Johnson is using a Texas law and bankruptcy court to resolve legal liabilities tied to its talc products, placing a new subsidiary holding the claims in Chapter 11 protection.
The new unit, LTL Management LLC, filed for bankruptcy in North Carolina on Thursday. In court documents, it listed as much as $10 billion of assets and as much as $10 billion of liabilities.
Johnson & Johnson itself did not file for bankruptcy.
“While we continue to stand firmly behind the safety of our cosmetic talc products, we believe resolving this matter as quickly and efficiently as possible is in the best interests of the company and all stakeholders,” Michael Ullmann, executive vice president of Johnson & Johnson, said in a statement.
Before filing for Chapter 11, J&J used a legal process known as a Texas divisional merger. Texas law allows a company to create a new business entity to house its liabilities while its main company continues operations as normal. The new company is given a name not associated with its main brand and is then housed in a state with favorable bankruptcy judges, like North Carolina, so it can declare bankruptcy and pay out significantly less to victims.
The bankruptcy filing shows that in 1979, what J&J refers to as “Old JJCI,” took on all liabilities associated with Johnson’s baby powder cosmetic talc litigation (even though J&J continued to be named as a defendant in these cases). After the divisive merger, Old JJCI ceased to exist, and LTL Management LLC and New JJCI were created with LTL taking on talc-related liabilities of Old JJCI and certain assets. New JJCI was allocated the remaining assets and liabilities of Old JJCI.
Once the new company is formed in Texas, it can be moved. J&J said LTL, which it refers to as “The Debtor,” is now based in New Jersey.
Attorneys estimate that without the benefit of a Texas two-step law, J&J would have needed to set aside $25 billion for payouts to victims, considering ovarian cancer treatment carries an average cost of $500,000. However, in its bankruptcy filing, the company said it will establish a $2 billion trust to pay amounts the bankruptcy court determines its talc-claim subsidiary owes, and will divert royalty payments worth $350 million to the unit.
It’s a disappointing but not unexpected development for tens of thousands of women who haven’t yet had their day in court with J&J. In an annual filing, J&J said it set aside about $4 billion for litigation, an indicator it had no plans to pay out anywhere close to $25 billion.
Last year, J&J reported annual revenue of $82 billion.
To help with the Texas divisive merger, J&J retained Jones Day law firm in Dallas, which has handled previous Texas two-step cases. Texas is the only state where the divisive merger option is possible. Delaware allows divisive mergers, but only for limited liability companies. In Texas, any company is allowed.
U.S. bankruptcy court gives companies facing big legal liabilities a central forum for working out a settlement with claimants. Filing for bankruptcy typically halts all pending lawsuits against a company.
Now that J&J has filed for bankruptcy, all litigation stops and will be on hold for years.
J&J’s bankruptcy filing on behalf of LTL blamed trial lawyers.
“The unfortunate reality is that this filing is necessitated by an unrelenting assault by the plaintiff trial bar, premised on the false allegations that the debtor’s 100+ year old talc products contain asbestos and cause cancer,” the filing said.
J&J continues to stand behind the safety of its products and contends there isn’t scientific evidence linking its powder to ovarian cancer. J&J says the timing of the allegations proves that the “booming” cosmetic talc litigation industry is a money grab.
Prior to the 2010s, only a “small number of isolated cases” had been filed and were “rarely” taken seriously, according to the filing. But in the mid-2010s, lawyers were “looking for a new solvent ‘asbestos’ defendant after most had left the tort system” and “revived the decades-old allegations.”
The company said it has spent nearly $1 billion to defend itself in litigation. Settlements and verdicts have cost it an additional $3.5 billion.
In 2018, Houston lawyer Mark Lanier won the largest jury verdict to date on behalf of J&J victims with a record-setting $4.69 billion for 22 women and their families. Earlier this year, J&J, valued at $435 billion, lost its bid to overturn the verdict, but the payout was reduced to $2.2 billion.
In the bankruptcy filing, the company calls the Lanier verdict “extraordinary” and “the fifth-largest personal injury verdict in the history of the United States.” It said that payments like this were “unsustainable” even for a small fraction of the lawsuits and that forced the Chapter 11 filing.
The company said it has gotten about 1,300 ovarian cancer and over 250 mesothelioma cases dismissed without payment.
“In sum, the debtor undeniably has more than sufficient funding to pay any legitimate cosmetic talc claims,” the filing said.
The case is LTL Management LLC, 21-30589, U.S. Bankruptcy Court for the Western District of North Carolina (Charlotte).