Johnson & Johnson is drawing criticism after using a controversial bankruptcy maneuver to block roughly 38,000 lawsuits linked to claims that its talc baby powder was contaminated with cancer-causing asbestos.
The health products giant used a quirk of Texas state law to spin off a new company called LTL, then dumped all its asbestos-related liabilities — including the avalanche of lawsuits — into the new firm.
LTL filed for bankruptcy last week in a federal court in Charlotte, N.C., a move designed to sharply limit efforts to recover damages for those who say they were harmed by J&J's baby powder.
"Johnson & Johnson doesn't have this liability anymore. They pushed all of it into the company they created just to file for bankruptcy," said Lindsey Simon, a bankruptcy expert at the University of Georgia School of Law.
As a result, Simon said, "consumers can't recover [damages] against a big solvent company. They have to recover against this smaller fictional company created [by J&J]."
Johnson & Johnson filed in court last week to split its Baby Powder from the rest of the company. Why? J&J knew asbestos laced some bottles but kept it a secret for decades. Tens of thousands of women with ovarian cancer are suing, and the company wants to shield its assets.— Rep. Katie Porter (@RepKatiePorter) October 19, 2021
The move sparked outrage from lawmakers and consumer advocates.
"J&J knew asbestos laced some bottles but kept it a secret for decades," Rep. Katie Porter, D-Calif., tweeted on Tuesday. "Tens of thousands of women with ovarian cancer are suing, and the company wants to shield its assets."
In 2018, separate investigations by Reuters and The New York Times revealed documents showing Johnson & Johnson fretted for decades that small amounts of asbestos lurked in its baby powder, without telling regulators.
J&J has repeatedly denied the claim. The company remains one of the wealthiest corporations in the world, with more than $25 billion in cash reserves, and has not filed for bankruptcy.
Johnson & Johnson says the bankruptcy move is legitimate
During a call with investors on Tuesday, J&J CFO Joseph Wolk defended the bankruptcy maneuver and again said its talc baby powder products, discontinued last year, were safe.
"There's an established process that allows companies facing abusive tort systems to resolve claims in an efficient and equitable manner," Wolk said.
"It's really the bankruptcy courts that will ultimately decide this. It's not plaintiff attorneys. It's not Johnson & Johnson," he added.
In a separate statement, LTL said J&J had agreed to provide the new firm with $2 billion, along with other funds, for future payouts linked to baby powder asbestos claims.
"We are confident all parties will be treated equitably during this process," said John Kim, chief legal officer of LTL, in the statement.
But Andrew Birchfield, an attorney with the firm Beasley Allen who represents women who have sued J&J, said this legal maneuver could make it far more difficult for his clients to recover damages.
"Women and families would be devastated, and it would just be a get-out-of-jail-free card for Johnson & Johnson," Birchfield said.
J&J has had a mixed record defending itself against these talc-asbestos lawsuits.
The company has prevailed in many cases, but last year an appeals court in Missouri ordered the firm to pay $2 billion to women who say J&J's talc product caused their ovarian cancer.
Advocates are raising alarms about "bankruptcy grifters"
Critics say this is another instance of a growing trend: corporations and wealthy individuals using bankruptcy to block lawsuits without actually filing for bankruptcy themselves.
Here we go again. Another giant corporation is abusing our bankruptcy system to shield its assets and evade liability for the harm it has caused people across the country. We can’t keep letting this happen and I have a bill to stop it. https://t.co/OTKdBmomSZ— Elizabeth Warren (@SenWarren) October 15, 2021
"Another giant corporation is abusing our bankruptcy system to shield its assets and evade liability for the harm it has caused people across the country," Sen. Elizabeth Warren, D-Mass., tweeted last week.
The American Association for Justice, a coalition of trial lawyers, also blasted J&J's maneuver and called for legislation to block this kind of legal tactic.
"There are countless Americans suffering from cancer, or mourning the death of a loved one, because of the toxic baby powder that Johnson & Johnson put on the market," the group said in a statement. "Their conduct and now bankruptcy gimmick is as despicable as it is brazen."
In recent months, legal scholars, bipartisan members of Congress and consumer advocacy groups have raised alarms about the use of bankruptcy courts by wealthy and powerful entities seeking to block lawsuits.
Simon, at the University of Georgia, published a widely read paper in the Yale Law Journal in April that described wealthy companies like Johnson & Johnson as "bankruptcy grifters."
She argued such firms and organizations receive the benefits of Chapter 11 protection while "incurring only a fraction of the associated burdens."
Critics also say lax bankruptcy laws allow companies to "venue shop," choosing to file for bankruptcy in federal jurisdictions viewed as friendly to corporations.
In this case, Johnson & Johnson is headquartered in New Jersey, but these legal maneuvers have been executed in North Carolina and Texas.
Similar legal strategies have been used in bankruptcy courts by members of the Sackler family who own OxyContin-maker Purdue Pharma, as well as by the U.S. Olympic Committee and the Boy Scouts of America, which face a barrage of sex abuse-related claims.
Simon said this bankruptcy maneuver offers J&J significant advantages in negotiations that are likely to follow over a final settlement.
But she said the company may still be on the hook for sizable payouts to victims as determined by the bankruptcy court.
"[J&J is] not completely wiping their hands of the issue, and I think probably awareness of how that would be perceived is the reason why," Simon said.
Johnson & Johnson, meanwhile, has asked a federal bankruptcy judge to halt progress on talc-asbestos claims while LTL's bankruptcy filing is under review.
Judge Craig Whitley will hold a hearing on that request on Friday in Charlotte.
An earlier version of this story misstated the name of Craig Whitley as Frank Whitney.
ARI SHAPIRO, HOST:
More than 38,000 women have sued Johnson & Johnson, claiming the company sold baby powder contaminated with asbestos. Many women claim that powder caused devastating cancers. J&J has denied any wrongdoing. And now the company is using a controversial bankruptcy maneuver to try to block the lawsuits. NPR's Brian Mann joins us now. Hey, Brian.
BRIAN MANN, BYLINE: Hey, Ari.
SHAPIRO: Johnson & Johnson is one of the richest corporations in the world, valued at more than $400 billion. So explain how it could use bankruptcy court to block these lawsuits from more than 38,000 women.
MANN: Yeah, it sounds kind of crazy. So let me walk you through it, Ari, step by step. So J&J is this super-rich health products company headquartered in New Jersey. And as you say, they're about as far from bankrupt as you can get. So (inaudible) went to Texas, and using a quirk of that state's laws, they created a completely new company called LTL. Then Johnson & Johnson dumped all the liability for these baby powder asbestos lawsuits, you know, tens of billions of dollars of legal risk, all of that got offloaded into this new firm. Then the new company, LTL, quickly filed for bankruptcy. And here's Lindsey Simon, an expert on bankruptcy law at the University of Georgia.
LINDSEY SIMON: Johnson & Johnson doesn't have this liability anymore. They pushed all of it into the company that they created just to file for bankruptcy.
MANN: So J&J isn't off the hook entirely, but Simon says this will make it a lot harder for all those women suing J&J to get their day in court.
SIMON: Consumers can't recover against a big solvent company. They have to recover against this smaller, fictional company that they created.
MANN: It's kind of remarkable, Ari. You know, these women who bought and used Johnson & Johnson's iconic baby powder now find themselves entangled legally with this completely different company. The new firm does say it has assets worth around $2 billion to pay any settlements set by the bankruptcy court, but critics are telling me that damages could run 10 times higher than that.
SHAPIRO: This sounds like a shell game. What does Johnson & Johnson say about it?
MANN: Yeah. Johnson & Johnson has long denied any wrongdoing in all this. They say their baby powder, which they discontinued selling in the U.S. last year, they say it was always safe. They say they stopped selling it just because demand had dropped, though public health groups had urged them to take their talc off the market. The company says they've been persecuted through all this by greedy attorneys pushing all these lawsuits. And in a conference call with investors this week, one of J&J's top executives, Joseph Wolk, defended the use of this bankruptcy maneuver as a way to basically protect the company.
(SOUNDBITE OF ARCHIVED RECORDING)
JOSEPH WOLK: There's an established process that allows companies facing, you know, abusive tort systems to resolve claims in an efficient and equitable manner. It's really the bankruptcy courts that will ultimately decide this.
MANN: And as part of this, Johnson & Johnson has asked a federal judge to freeze all those baby powder lawsuits while the bankruptcy maneuver is reviewed.
SHAPIRO: I know this has made a lot of people angry. What are you hearing?
MANN: Yeah. The idea that this rich company with tons of assets is using a bankruptcy maneuver to shield itself does make people furious. Senator Elizabeth Warren, the Democrat from Massachusetts, tweeted about this, saying - and I'm quoting here - "another giant corporation is abusing our bankruptcy system to shield its assets and evade liability." And I also spoke with Andrew Birchfield. He's an attorney representing some of the women with ovarian cancer who have filed lawsuits against J&J. And he says if this legal strategy works, it will set a dangerous precedent for people harmed by big companies.
ANDREW BIRCHFIELD: Women and families would be devastated. And it would just be a get-out-of-jail-free card for Johnson & Johnson here.
SHAPIRO: Well, Brian, are other companies using this kind of tactic?
MANN: Yeah. A lot of companies are starting to do this, as well as rich individuals. Lawmakers in Congress from both parties say they want to reform the bankruptcy system, but, Ari, that's not likely to happen in time to affect this case involving Johnson & Johnson.
SHAPIRO: NPR's Brian Mann. Thank you.
MANN: Thank you, Ari. Transcript provided by NPR, Copyright NPR.