J&J in court over bankruptcy tactic

Hearing to weigh use of Chapter 11 to resolve liability suits

The contentious Johnson & Johnson bankruptcy strategy that’s drawn the ire of Congress faces a fresh trial this week, with the consumer products giant arguing that settling billions of dollars of talc liabilities in a single case is better for cancer victims than fighting thousands of individual claims.

Johnson & Johnson began a week-long court hearing Monday to decide whether it wrongly manipulated the bankruptcy system by putting a unit into Chapter 11 solely to force a negotiated end to more than 38,000 lawsuits. The case has come under fire from advocates for people harmed by corporate malfeasance and in Congress, where legislation is being considered that would ban the company’s tactics.

“This model of Chapter 11 cannot be what Congress had in mind when it enacted” the federal bankruptcy code, bankruptcy attorney Laura Davis Jones told the judge overseeing the hearing as it began in Trenton, N.J., 25 miles from Johnson & Johnson’s corporate headquarters in New Brunswick.

The core of Johnson & Johnson’s argument is that bankruptcy was a legitimate option because traditional jury trials are unfair to both victims and corporations. Nearly all of Johnson & Johnson’s alleged cancer victims disagree and their lawyers have filed motions seeking to dismiss the bankruptcy case. One group in Canada, however, took the company’s side.

“The motions raise the ultimate question of when a stampede to the courthouse, and piecemeal litigation, has ever led to a better result for all creditors than that which could be obtained before a bankruptcy court,” wrote lawyers for a class-action lawsuit against Johnson & Johnson in Canada.

Should Johnson & Johnson lose, victims would be free to resume jury trials, potentially exposing the company to billions in additional payouts. Over the past five years, Johnson & Johnson spent $4.5 billion to resolve talc claims, according to court papers. Although the company won many trials, there have been spectacular losses. Last year, about 20 people split $2.24 billion after a jury agreed that their cancers were caused by Johnson & Johnson’s talc products, including its iconic baby powder.

After repeatedly vowing to fight all baby powder lawsuits one at a time around the country, Johnson & Johnson adopted a business-friendly Texas law to create a new unit, LTL Management, to hold all its talc-related liabilities. LTL then filed for bankruptcy backed by a promise from Johnson & Johnson to pay at least $2 billion to end all current and future baby powder suits.

Under the Texas TwoStep, a small unit is set up to funnel all lawsuits into bankruptcy, allowing the parent company to benefit without having to put itself under court supervision.

Victim advocates point out that Johnson & Johnson is one of the biggest, most profitable companies in the world. As of Friday it was worth $444 billion. The company is simply trying to protect itself from big jury verdicts, advocates argue.