Johnson & Johnson’s Talc-Related Bankruptcy Filing Is Rejected

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A federal appeals court on Monday rejected a bankruptcy filing by a Johnson & Johnson subsidiary, dealing a setback to the company’s attempt to limit its exposure to a flood of lawsuits over its talcum-powder products.

More than 40,000 plaintiffs have sued Johnson & Johnson, with some claiming that the company had known for decades that its baby powder and other talc-based products could have contained traces of asbestos, a carcinogen. Others claim the talc itself was an irritant that led to cancer. The plaintiffs include women who say their use of baby powder caused ovarian cancer, as well as people who say it led to mesothelioma, a disease of the lungs that can be caused by exposure to asbestos.

Johnson & Johnson could face billions of dollars in payouts from the cases it has lost, and in 2021 the company created a subsidiary, called LTL Management, that would be liable for those claims. Days after it was created, LTL filed for bankruptcy protection, a move that immediately faced legal challenges from plaintiffs who saw it as a way for the company to limit what it would ultimately have to pay out in the talcum-powder cases.

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On Monday, LTL Management’s Chapter 11 filing was dismissed by the U.S. Court of Appeals for the Third Circuit in Philadelphia, which said LTL Management’s ties to Johnson & Johnson meant it wasn’t facing the kind of distress that a bankruptcy was meant to address.

“Given Chapter 11’s ability to redefine fundamental rights of third parties, only those facing financial distress can call on bankruptcy’s tools to do so,” Thomas Ambro, the circuit judge, wrote in the decision.

Johnson & Johnson said on Monday that it would appeal the decision, and that its intention was to “efficiently resolve the cosmetic talc litigation for the benefit of all parties, including current and future claimants.”

The company’s shares fell 3.7 percent on Monday, a decline that began after the court’s ruling.

The decision could also discourage other companies from trying to use bankruptcy courts to limit what they would have to pay out after losing lawsuits, said Douglas G. Baird, professor of law at the University of Chicago and chair of the National Bankruptcy Conference.

The tactic, which has come to be known as the Texas Two Step because of its origins in a Texas business law, has rarely been used since its inception in 1989. A ruling favorable to Johnson & Johnson would have meant that “bankruptcy law could become the form of choice to deal with mass tort liabilities,” held by otherwise solvent companies said Mr. Baird, adding, “That pathway is now seriously less likely because of this opinion.”

Leigh O’Dell, a lawyer representing the plaintiffs, welcomed the decision and said it would allow the cases to be returned to federal and state district courts.

“The doors to the courthouse, which had been slammed shut by J.&J.’s cynical legal strategy, are once again open, as they should be,” Ms. O’Dell said. “Given that, we will immediately seek to return these cases to their rightful venues in federal and state district courts.”

Johnson & Johnson, which makes Band-Aids and Listerine mouthwash as well as vaccines and other pharmaceuticals, on Monday repeated its assertion that its baby powder “does not contain asbestos and does not cause cancer.” The company has stopped selling talc-based baby powder globally, after switching to cornstarch as the primary ingredient of the product.