Newark, NJOn April 4, Johnson & Johnson made a new offer of $8.9 billion to settle tens of thousands of talcum powder lawsuits. The lawsuits allege that widespread asbestos contamination of the company’s talc products caused users to suffer from mesothelioma and various gynecological cancers.
There may be less than meets the eye here, though, since the offer depends on the approval the United States Bankruptcy Court for the District of New Jersey, which rejected a previous offer. On April 24 the Official Committee of Talc Claimants moved to reject the new offer, alleging that it had been filed in bad faith and was an abuse of the bankruptcy system.
Terms of the proposed settlement
The proposed settlement would be paid out over 25 years through a newly-created subsidiary, LTL Management, which has filed for Chapter 11 bankruptcy (more on that later). Under the proposal, plaintiffs diagnosed with cancer before April 1 would be paid within one year of court approval of the bankruptcy filing. Individuals diagnosed after April 1 will have access to money set aside in trust for the next 25 years.
The sole function of LTL Management is to pay out funds from the $8.9 billion trust. Not coincidentally, the creation of the subsidiary and trust will also insulate J&J from claims in excess of $8.9 billion. J&J is a multinational conglomerate with a market capitalization in excess of $400 billion.
A billion here, a billion there – how big is J&J’s potential liability?
J&J’s latest $8.9 billion offer dwarfs the company’s original settlement offer of $2 billion. It is difficult, however, to estimate the size of its potential liability.
Asbestos has been linked to various forms of cancer for decades. Some of these have extremely long latency periods, so the company’s total financial obligations may not be clear for years.
Asbestos and talc are minerals that often occur in the same geologic formations. The contamination seems to occur in the mining, rather than in the later manufacturing phases. The earlier the contamination occurs, the more widespread it may be.
J&J has also been marketing talc products for 130 years to a vast marketplace, some segments of which are already medically underserved. Beyond mothers and babies, recent reporting suggests that the company identified “curvy” Black and Hispanic women in “under-developed geographical areas” as a prime opportunity. The company distributed baby powder through a specially curated network of churches and beauty salons specific to those communities.
But legal liability depends on proof that the company either knew or had reason to know that its products were dangerous. A recent investigation by Reuters indicates that J&J has known for decades that its talc products were contaminated with asbestos, but continued to market them anyway.
The results of J&J talc lawsuits have been mixed, so far. J&J maintains that its talc products are safe and do not cause cancer. Nonetheless, it has discontinued sales of its talc-based baby powder in the United States and global markets.
The “Texas two-step”
The complicated bankruptcy tactic that J&J has tried to use to limit its potential future financial liability is known in financial circles as the Texas two -step. It involves using Texas state law to divide a company being sued into two, then shifting liability to one of the newly created entities. The newly-created entity holding the liabilities then files for protection under Chapter 11 of the federal Bankruptcy Code. Claimants can anticipate being paid from the new entity, but only to the extent of the assets it holds. LTL Management, the new subsidiary, filed for bankruptcy almost immediately after it was created in October 2021.
In connection of the spin-off of LTL Management made its initial settlement offer of $2 billion. A judge affirmed J&J’s ability to use this strategy in February 2022. But the Third Circuit overturned the ruling in January 2023, finding that neither LTL nor J&J had a legitimate need for bankruptcy protection. The new $8.9 billion offer uses the same strategy, but finances it more generously.
Mixed reaction
A group of lawyers who represent nearly 70,000 plaintiffs have reportedly described the deal as a “landmark” and a “significant victory.” The Official Committee of Talc Claimants has moved to reject it. The deal will need to be approved by 75 percent of the existing claimants.
The risk, however, is to those who have not made claims as of April 1. There is no real way to estimate whether the funds remaining in the trust for the next 25 years will be adequate to address their claims. The court may be susceptible to the argument that those individuals should have access to J&J’s considerable corporate assets, not limited by the Texas two-step maneuver.
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