Within the world of retail, bankruptcies are a dime a dozen with Bed Bath & Beyond, Party City, and David’s Bridal as recent examples. Despite the popularity of these retailers, the current rampant inflation continues to curb consumer spending and thus jeopardizes the operations of these businesses. According to Moody’s Investors Service, the defaults on retail and apparel are “expected to rise from 6% to 8.6$ in the next year due to weakening consumer spending.” Many well-known retailers have already fallen victim to decreased consumer spending such as Christmas Tree Shops, Rockport Group, and Amyris. Johnson and Johnson’s run to bankruptcy has a slight variation to the classic narrative of retail bankruptcy: a series of lawsuits involving talcum (talc) and asbestos in one of its most popular products, Johnson & Johnson’s Baby Powder. A 2016 lawsuit became the first major courtroom loss for Johnson and Johnson’s talc-containing products where the retailer was found liable for Jackie Fox’s ovarian cancer, awarding the plaintiff’s family $72 million of damages in a civil suit. This lawsuit gave rise to a $4.69 billion class action lawsuit by 22 women against Johnson & Johnson (J&J) for their ovarian cancer from daily use of J&J’s baby powder. And now, J&J is planning a new bankruptcy filing with new strategies after a judge rejected their Chapter 11 bankruptcy filing through an affiliate.
Many plaintiffs filed against J&J regarding their talc-containing products, alleging a connection between talc and cancer that J&J did not warn them of the known health risks. Due to the nature of the chemicals, asbestos was often found alongside talc naturally. As asbestos was found in products with talcum powder, this could cause users to have mesothelioma and ovarian cancer. Mesothelioma is a rare form of cancer that is typically caused by exposure to asbestos in one’s lungs and other organs, often contracted by miners who had “inhaled asbestos dust” and other blue-collar workers in industries like shipbuilding. According to Forbes Advisor, talc is commonly found in several cosmetic products such as makeup and baby powder, while asbestos is characterized as a carcinogen and has severe health implications. The presence of asbestos in products with talc has only become public in recent years, but has prompted manufacturers to have a “significant product liability issue.” However, a 2018 investigation conducted by Reuters revealed that J&J had purposely kept information regarding its products being contaminated with carcinogenic asbestos from regulators and the public. Reuters further revealed in its investigation that J&J had been made aware of the presence of asbestos in its products from “at least 3 tests by 3 different labs from 1972 to 1975—in one case at levels reported as ‘rather high.’” When Darlene Coker had filed a lawsuit against the retail giant for her mesothelioma in 1999, J&J had dodged the responsibility of proving its Baby Powder having talc since the plaintiff “have the burden of proof.” It was on Coker’s legal team to demonstrate that J&J’s Baby Powder contained asbestos in its talc and they “didn’t have it,” hence dropping the lawsuit ultimately. The information that J&J had sought to hide is now public as thousands of confidential documents have been released from a class action of 11,700 plaintiffs alleging that J&J’s talc-containing products have been the cause of their cancers. J&J has been made aware of asbestos in their talc-containing products for more than 30 years, their company memos and internal reports from executives trying to find ways to avoid liability from regulators and scrutiny from the public.
According to Reuters, most internal J&J asbestos test reports did not show a strong presence of asbestos but this did not mean that J&J was absolved from any liability. The news outlet found that despite J&J’s development of improved testing methods, there were limitations set in place that gave rise to “trace contaminants to go undetected” and a small percentage of the actual talc being tested. Notably, the World Health Organization and other officials “recognize no safe level of exposure to asbestos” as even tiny doses of asbestos can cause one to have cancer later on. In the class actions, the plaintiffs stated that they had already been exposed to asbestos and other carcinogenic risks from the “amounts they inhaled when they dusted themselves with tainted talcum powder.” According to the New York Times, safety testing is not required by the FDA for personal care products and cosmetics “before they are marketed” and only tests seldomly (“usually after complaints by consumers or advocacy groups”). J&J’s knowledge regarding asbestos in their products was suspected throughout decades, but became a reality once plaintiffs hired litigation lawyers with expertise in exposure to asbestos—“demand[ing] for J&J’s testing documentation.” This call for J&J’s documentation led the way for the realization that the carcinogen in J&J’s products was not inherently talc, but rather the asbestos in the talc (aided by the decades long scientific research of cancer research and its causes). The 2 cases in New Jersey and California found J&J responsible for giving mesothelioma to plaintiffs by respective juries, but the St. Louis case “broaden[ed] J&J’s potential liability” by demonstrating that J&J’s Baby Powder and Shower to Shower was tainted with asbestos which led to the 22 plaintiffs’ cancers. The jury in the St. Louis class action gave $4.69 billion in damages to the plaintiffs following plaintiffs’ claims of using J&J’s asbestos-tainted products for their feminine hygiene. This is not to say that all plaintiffs were successful in arguing that J&J’s products contained asbestos in its products as more than 3 juries rejected such claims and others did not reach any verdict.
With regards to the damages being awarded to plaintiffs in many class actions, J&J had attempted to reconcile their smeared public image by appealing the recent verdicts. The retailer also stood behind its products, stating that the talc in its products was safe and the discovery process in these trials demonstrated their commitment to safety. To explain the verdicts against their favor, J&J blamed “juror confusion,” ‘junk’ science, unfair court rules, and overzealous lawyers looking for a fresh pool of asbestos plaintiffs.” As for the asbestos found in their talc, such talc was reserved for “industrial use” and that some company records referenced “non-asbestos forms of the same minerals that their experts say are harmless.” Ernie Knewitz, J&J’s vice president of global media relations, scathingly responded to Reuters’ investigation: “Plaintiffs’ attorneys out for personal financial gain are distorting historical documents and intentionally creating confusion in the courtroom and in the media… This is all a calculated attempt to distract from the fact that thousands of independent tests prove our talc does not contain asbestos or cause cancer. Any suggestion that Johnson & Johnson knew or hid information about the safety of talc is false.”
The effects of the U.S. lawsuits would spread internationally with Canada’s government agency, Health Canada, issuing warnings on talc in cosmetics and health products having a “potential risk of lung effects and ovarian cancer.” After the release of the Reuters investigation, the U.S. government began to take a deeper look into J&J’s operations and production. Meanwhile, J&J’s talc supplier, Imerys Talc America, filed for Chapter 11 bankruptcy to shield itself from more than 14,000 lawsuits alleging that its talc in various products caused cancer in February 2019. In October 2019, a batch of J&J’s Baby Powder was flagged by the FDA (Food and Drug Administration) as the government agency detected “trace amounts of asbestos in samples taken from a bottle purchased online.” This led to J&J publicly announcing that it will be recalling an estimated 33,000 bottles of its famed Baby Powder over asbestos concerns, implicitly confirming the public’s concerns and suspicions despite insistences of its products being safe. Considering that baby powder was a small fraction of overall J&J sales, the public image J&J has cultivated within families is “synonymous with their line of baby products” which launched a “damage control campaign” that will mitigate attention away from baby products and to other J&J offerings. “It’s about trust: If a mother could trust a Johnson & Johnson product for their children, then that product must be safe,” Ms. Valente continued, “But now, the dam is finally breaking, where consumers are saying that enough is enough.”
Regardless, J&J made the public announcement that would quietly confirm many health officials and plaintiffs’ suspicions: they would cease selling their talc-based baby powder in North America in 2020. Following their failures to overturn a few verdicts, J&J announced that it was facing upwards of 21,800 lawsuits over the talc in its products and its potential risk of cancer in November 2020. In one failed appeal, the Missouri Court of Appeals stated that J&J “disregarded the safety of consumers” in its drive for profit, failing to recognize the presence of asbestos and its effects on women’s reproductive health numerous times. Missouri Circuit Judge Rex Burlison’s ruling noted the “substantial evidence” of “particularly reprehensible conduct” by the hands of the retailer, further stating that J&J’s executives “knew of the presence of asbestos in products that they knowingly targeted for sale to mothers and babies, knew of the damage their products caused, and misrepresented the safety of these products for decades.” And so, by August 2022, J&J concluded that it will “discontinue global sales of talcum powder in 2023” and will substitute Baby Powder’s talcum powder with cornstarch in all future sales. With regards to J&J’s Shower to Shower line, the retailer sold the talc-based product line to Valeant Pharmaceuticals (now Bausch Health) in 2012 before the incoming lawsuits in 2016.
However, this did not mean that they did not stop appealing the verdicts as they went to the federal Supreme Court and asked the judges to consider their case. As the St. Louis jury found them liable on all plaintiffs’ claims, J&J was ordered to pay $4.7 billion in damages to 22 women. However, the amount was reduced to $2.1 billion following a state appeal and a dismissal of 2 plaintiffs for “jurisdictional reasons.” In the company’s petition to the Supreme Court, it stressed that the state court was “unfair”: lower courts erred in allowing “all the women to proceed in a mass trial and argued the size of the punitive damages award violated its constitutional right to due process.” The company also claimed that out-of-staff plaintiffs should not have been included as there were insufficient links to Missouri, but the Supreme Court ultimately rejected J&J’s petition.
As for the current ongoing litigation with plaintiffs on the remaining talc-based J&J products, J&J concluded that it will pay a $8.9 billion settlement over claims of its talc products causing cancer in early 2023. This billion-dollar settlement will span over the next 25 years with J&J creating a subsidiary, LTL Management LLC, in October 2021 to be “responsible for holding and managing North American legal claims related to the Company’s cosmetic talc.” On a website owned by J&J, Facts about Talc goes into further as to why the retailer has chosen to create a subsidiary since LTL could file for Chapter 11 bankruptcy, “activating a process designed to resolve these claims in a way that would be reasonable for all parties, including current and future claimants.” In early 2023, a U.S. appeals court quickly shot down J&J’s attempt to relinquish accountability by offloading thousands of lawsuits into bankruptcy court. This particular legal tactic, dubbed the Texas Two-Step, allows businesses to conduct operations as usual while dealing with mass lawsuits by “loading one business entity with its assets and another with its legal or financial liabilities.” Several companies have done this in light of various class action lawsuits against them like paper company Georgia-Pacific placing its “Bestwall unit along with asbestos-related liabilities under Chapter 11 [bankruptcy].” What makes the Texas Two-Step such an attractive tactic is its allowance for the business to “move litigation to bankruptcy court without the loss of equity value that would come from filing for Chapter 11 themselves,” shielding corporate defendants from a jury rapidly. The Wall Street Journal reports that this tactic ultimately gives these companies a “final resolution of their legal abilities in a single forum.” Businesses can resolve mass lawsuits more efficiently in bankruptcy courts compared to dealing with one-by-one, having the business entity carrying on a “funding commitment from its affiliates to pay creditors through the bankruptcy process.”
However, plaintiffs’ lawyers and others state that the Texas Two-Step “amounts to an abuse of Chapter 11 by wealthy corporate defendants, meant to pressure injury victims and other claimants into accepting settlement offers.” After all, the Texas Two-Step allows for companies to transfer their legal liability “for pending and future injury litigation before those units filed for Chapter 11,” giving rise to “pending lawsuits either against the parent companies or their U.S. affiliates, locking injury claimants out of the tort system and preventing them, at least for now, from putting their claims to juries.” Furthermore, critics of J&J stated that the very creation of LTL was made to “benefit” J&J and diminish “tort claimants’ negotiating leverage.” Northwestern Pritzker School of Law professor and retired bankruptcy judge Bruce Markell deemed J&J’s strategy of the Texas Two-State as “an attack on the American tort system,” urging a bankruptcy judge to dismiss this bankruptcy case. In the case of J&J, the legal strategy was put on trial in a New Jersey bankruptcy court by the newly created J&J subsidiary, LTL Management LLC, to finalize the settlement of an estimated 38,000 cancer lawsuits over its talc products.
According to the court, J&J had “improperly placed its subsidiary into bankruptcy even though it faced no financial distress.” The U.S. 3rd Circuit Court of Appeals in Philadelphia dismissed the bankruptcy filed by LTL with legal experts saying that the abuse of the two-step “could set a dangerous precedent” for “any corporation to easily avoid undesirable litigation.” J&J, valued at more than $400 billion, said that LTL’s bankruptcy was done in “good faith” and pledged $2 billion to settle talc claims. However, this is not the only attempt of filing for bankruptcy by J&J as LTL Management filed for a second time on April 2023 “with the intent to present a reorganization plan containing the proposed settlement to a judge as soon as May 4.” According to a J&J statement, there is an estimated 60,000 talc claimants who have agreed to this. According to Mikal Watts, one plaintiff lawyer who had a hand in negotiating the second bankruptcy agreement, J&J’s board conducted meetings and agreed on bigger settlements for plaintiffs with cancer. Under the second bankruptcy filing and settlement, plaintiffs with cancer before April 1 “would be paid from a bankruptcy trust within 1 year of a judge approving the Chapter 11 plan creating it.” Meanwhile, plaintiffs diagnosed with cancer after April 1 will be paid from “money set aside in the trust for the next 25 years.” At the same time, LTL’s filing for bankruptcy was once again thought to be an abuse of bankruptcy laws as J&J’s market capital is more than $400 billion and “in little danger of running out of money to pay cancer victims.” In bankruptcies related to asbestos, a company requires “75% of plaintiff-creditors to approve a restructuring plan for a judge to approve it” which makes it an extremely difficult bar to pass.
On July 28, 2023, U.S. Bankruptcy Judge Michael Kaplan of New Jersey declared that LTL’s second bankruptcy, similar to its first, was dismissed since the mass lawsuits it faced did not put it in urgent “financial distress.” Judge Kaplan wrote in his dismissal: “In sum, this Court smells smoke, but does not see the fire… Therefore, the emphasis on certainty and immediacy of financial distress closes the door of chapter 11 to LTL at this juncture.”
Many attorneys representing cancer-ridden patients as well as the U.S. Justice Department’s bankruptcy watchdog had urged the second bankruptcy claim to be dismissed. In J&J’s second attempt at filing for bankruptcy, the retailer had likened recent trials to a “lottery” where some plaintiffs receive large rewards and others nothing, calculating the cost to be $4.5 billion. Meanwhile, plaintiffs’ lawyers who rejected the second bankruptcy offer stated that J&J had faked the “illusion” of support by “signing deals with plaintiffs’ lawyers who quickly signed up large numbers of clients without ever filing any lawsuit against J&J.” Fortune reports that J&J now faced “at least a 28% surge in new lawsuits” over its talc products following the dismissal of the second bankruptcy filing. Torts law professor Carl Tobias at the University of Richmond said to Fortune, “J&J has dug themselves quite a hole in the talc litigation, and it just keeps getting deeper and deeper… They need to seriously think about adding some significant money to their settlement offer so they can get these cases off the books.”
J&J’s appeals on the lawsuits have a mixed record, winning some and losing others. According to Bloomberg Intelligence analysts, Holly Froum and Negisa Balluku, the cost of J&J’s talc liability after the two unsuccessful attempts of bankruptcy could be “as much as $10 billion,” ranging from $8 to $10. As for major developments, U.S. District Judge Michael Shipp—“overseeing federal-court talc cases consolidated for pre-trial information exchanges and test trials”—stated that he anticipates cases to be tried in 2024: “It appears that the earliest the parties will be prepared to proceed to a bellwether trial will be either late 2024 or early 2025.”
In a recent earnings call to investors, Erik Haas, J&J’s lead litigation partner, stated that J&J is considering another try at filing for bankruptcy. However, Haas maintained that J&J will continue to “vigorously defend itself” in upcoming trial cases. J&J’s legal team is fully aware of the stakes this third bankruptcy filing has and so, the strategy will be more focused on “delaying trials.” Tobias continues to elaborate on the “head-scratching move” and its legal consequences in the courtroom: “J&J could face court sanctions if they take this blatant step of defying the appellate courts and having a unit file for bankruptcy once again.”
Johnson & Johnson’s journey towards a potential bankruptcy is a complex and contentious one, driven by a series of lawsuits related to their talc-containing products, particularly the iconic Johnson & Johnson’s Baby Powder. The legal battles and revelations about J&J’s knowledge of asbestos contamination have seriously tarnished the company’s reputation. The company faced multiple lawsuits, with varying outcomes, and even attempted to use the legal strategy known as the “Texas Two-Step” to transfer its legal liability to a subsidiary, LTL Management LLC, to resolve the cases through bankruptcy. However, this tactic was ultimately deemed an abuse of Chapter 11 bankruptcy laws by the U.S. 3rd Circuit Court of Appeals, setting a potential precedent for other corporations to avoid undesirable litigation. J&J’s attempts at bankruptcy filings were met with skepticism, and the second filing was dismissed by U.S. Bankruptcy Judge Michael Kaplan, who found that LTL was not in financial distress. Despite these setbacks, J&J’s legal battles are far from over, with the company potentially facing a significant financial burden. Some estimates suggest that their talc liability could cost as much as $10 billion. Looking ahead, J&J is considering another attempt at filing for bankruptcy, although it is a move fraught with risks and legal consequences. The company’s legal strategy may now focus more on delaying trials rather than seeking bankruptcy protection, as they continue to vigorously defend themselves in the upcoming trial cases. The Johnson & Johnson bankruptcy saga is a cautionary tale about the legal and financial challenges faced by large corporations when confronted with product-related health risks and the potential harm these risks can pose to consumers.