Judge backs Johnson & Johnson in bankruptcy ploy for talc litigation, clears way for settlement

It appears that Johnson & Johnson’s use of a controversial strategy to establish a holding company for talc litigation cases and then declare the firm bankrupt is likely to save the pharma giant billions.

Friday in federal bankruptcy court in Trenton, New Jersey, Judge Michael Kaplan affirmed the ability of J&J’s use of Chapter 11 to hasten a settlement that would free the company from roughly 38,000 claims against its talcum products, which contain cancer-causing agents.

J&J disputes the claims, but it has taken its iconic Johnson & Johnson’s Baby Powder off the market in the U.S. and Canada.

Kaplan’s ruling freezes all outstanding talc litigation while J&J pursues a settlement.

“The court is aware that its decision today will be met with much angst and concern,” Kaplan wrote in his opinion. “The court remains steadfast in its belief that justice will best be served by expeditiously providing critical compensation through a court-supervised, fair and less-costly settlement.”

RELATED: As Johnson & Johnson fights for bankruptcy ploy in talc litigation, Congress is weighing in 

Last week, a lawyer for J&J’s bankrupt subsidiary, LTL Management, said the parent company was close to a talc settlement last year that would have cost between $4 billion and $5 billion, which was more than double the figure J&J offered to resolve the liability through the bankruptcy procedure. 

J&J has already paid $4.5 billion to resolve talc claims over the last five years, the company said in court papers. Lawyers for the company argued it was impossible to litigate cases individually.

“Today’s ruling is a positive development and a step forward to reaching a global resolution of the cosmetic talc litigation," J&J said in a statement. "We continue to stand behind the safety of Johnson’s Baby Powder, which is safe, does not contain asbestos and does not cause cancer. We look forward to resolving this matter as quickly and efficiently as possible."

The business-friendly tactic, dubbed the Texas two-step and established more than three decades ago, allows companies to separate their assets from their liabilities then add them to a newly established firm.

Last week, former Texas lawmaker Steven Wolens, who wrote the bill, told the Financial Times he believes the bill now is being misused.  

“Had we known in 1989 that provisions could be dubiously interpreted for entities to avoid known liabilities such as those causing severe and permanent injuries and deaths, it would never have passed with the ‘Texas two-step’ provision,” Wolens said. “Never, never, never.”

RELATED: Johnson & Johnson puts talc headache into bankruptcy; plaintiffs will contest the ploy

Also last week, as the bankruptcy trial got underway, the case drew the attention of Congress as Sen. Dick Durbin, D-Illinois, lambasted the move, highlighting the experience of one of his constituents, a mesothelioma victim, who has been denied the ability to take her case to court.

“There’s a justice system for rich people and powerful corporations—and there’s the system for everyone else,” said Durbin. “And many days, it seems that the gulf between those two systems of justice is getting wider and deeper.”