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A lawyer for Johnson and Johnson faced probing questions on Monday over the company’s use of a controversial bankruptcy maneuver that froze tens of thousands of lawsuits related to Johnson’s baby powder.
During the hearing, members of a three-judge panel for the United States Court of Appeals for the Third Circuit in Philadelphia questioned whether J&J used the legal strategy to gain “judicial advantage” over approximately 40,000 cancer patients who sued the company.
Applications were submitted mostly by women. They claim Johnson’s signature baby powder was contaminated with asbestos, which caused their mesothelioma or ovarian cancer.
J&J, wannounced last month he would suspend all sales of baby powder globally, denied any wrongdoing.
Attorney Neal Katyal, representing the company, responded by arguing that the bankruptcy maneuver – known as “Texas Two-Step” – would benefit victims by producing a faster settlement, worth up to reach $61 billion.
Katyal acknowledged criticism that “a big company that has all these profits is somehow trying to escape responsibility.”
But he said if the tsunami of baby powder cases were allowed to proceed in civil courts, it would create legal chaos and “reduce the number of dollars available to plaintiffs”.
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The “Texas in Two Steps” and How It Worked for J&J
Here’s how the legal maneuver known as “Texas Two-Step” worked in this case.
In October last year, J&J – headquartered in New Jersey – used a loophole in Texas state law to create a new subsidiary called LTL.
The healthcare giant has put all baby powder liabilities on the books of the new company.
Within days, LTL moved from Texas to North Carolina and filed for bankruptcy, ending the baby powder lawsuits.
US appeals for Third Circuit will eventually rule on whether LTL’s bankruptcy was filed in good faith and whether it should shield J and J from baby powder lawsuits.
During Monday’s session, lawyers representing women with claims against J&J criticized the healthcare giant’s legal strategy.
“Talc victims … are mired in bankruptcy as they die,” attorney Jeffrey Lamken said.
He noted that during LTL’s bankruptcy process, Johnson and Johnson shelled out billions of dollars to shareholders and for share buybacks – a practice forbidden to companies that are in fact bankrupt.
Meanwhile, women who have filed cancer lawsuits against the company have been forced to wait and “can only grow more desperate as they face medical bills and move closer to their own death”, explained Lamken.
Lawyers representing cancer patients say the civil court system, not bankruptcy court, is the proper place to establish societal liability.
This case that could reshape civil justice in the United States
The US Department of Justice also challenged J&J’s bankruptcy move.
On Monday, a DOJ lawyer argued that if this legal strategy were upheld by the courts, it would open the door for other non-bankrupt companies and wealthy individuals to use similar maneuvers to avoid liability.
“If Johnson and Johnson can get away with this bankruptcy, what’s to stop any other company in America from doing the same thing?” asked Sean Janda, an attorney representing the US Trustee, a division of the DOJ that oversees bankruptcy cases.
J&J’s strategy has also drawn criticism from some members of Congress as well as public outrage.
Speaking late last year, Hanna Wilt, who has mesothelioma, expressed her fury at the delay in her baby powder lawsuit against the company.
“What I see is who can play better,” Wilt told NPR. “Big corporations trying to make the system work in a way that they don’t have to take full responsibility for is not something new.”
Wilt died in February of this year at the age of 27.
It’s unclear how quickly the Third Circuit will rule, though judges tend to move quickly in bankruptcy-related cases. Legal experts have suggested that regardless of the outcome, an appeal will likely be filed with the US Supreme Court.