The U.S. Court of Appeals for the Third Circuit’s decision on J&J’s “Texas two-step” could set the stage for a U.S. Supreme Court ruling in a case that’s drawn a great deal of attention in corporate legal circles. The case affects other companies, such as 3M, that are trying their own complex legal maneuvers in bankruptcy courts in order to limit liability.
In a company statement after the Third Circuit decision yesterday, Johnson & Johnson said it would immediately move for a stay on the opinion while it seeks Supreme Court review.
J&J faces a host of lawsuits from people who claim J&J’s talc-based baby powder caused them to develop cancer.
A New Yorker expose last year detailed how the Texas two-step worked for J&J. Johnson & Johnson created a new LLC called LTL Management and then moved the talc liability over to LTL. The new LLC then filed for Chapter 11 bankruptcy protection. Calling the bankruptcy a “shell game,” plaintiffs in the talc lawsuits appealed. (J&J also plans to spin off its consumer business into a new company called Kenvue in 2023.)
Thomas Ambro, the circuit judge, wrote in the ruling filed Jan. 30 that “only those facing financial distress can call on bankruptcy’s tools to do so.” Now, the full Third Circuit has declined to reconsider.
Said Johnson & Johnson: “Today’s ruling ignores the facts established during the Bankruptcy Court’s trial regarding the appropriateness of LTL Management’s (LTL) formation and filing, as well as the company’s intention to efficiently resolve the cosmetic talc litigation for the benefit of all parties, including current and future claimants.”
The company argues that its Johnson’s Baby Powder is safe, does not contain asbestos, and does not cause cancer.