The Third Circuit rebuffs J&J's use of the Texas-Two Step

Yesterday, in a long-awaited decision, the Third Circuit closed the door on Johnson & Johnson's too-clever by half scheme to use the bankruptcy system to shut down all litigation against it and its subsidiaries concerning its talcum powder products. Others have already, and more still will write about the decision. So I don't feel much need here to provide an overview of the decision. I do, however, want to touch on one narrow but important issue.

One of the arguments J&J has repeated ad nauseam is that other than one case--the Ingham matter--it has either prevailed at trial or the judgments in favor of the plaintiffs have been reversed. Now, I believe that is technically true. But it obscures why that is so.

I have not kept track of all of the cases that have gone to verdict, but I know there have been a few, including my colleague Chris Placitella 's $787.2 million verdict (the punitive damages component was later reduced pursuant to New Jersey's statutory cap), which have resulted in wins for the plaintiffs but have not yet become final on appeal because of J&J's use of the Bankruptcy Code's automatic stay provision. Had J&J not been able to take advantage of Section 362(a)'s automatic stay (and as a non-debtor, it should not have been), by now, there likely would have been several more final verdicts against J&J.

It also obscures the real cost that J&J's Texas-Two Step ploy has had. While companies like J&J have a perpetual existence, those harmed by their products do not. They are real people whose life expectancies have tragically been cut short. Since J&J pulled the trigger on the divisional merger of its subsidiary Johnson & Johnson Consumer Inc. two years ago and the resulting bankruptcy of the made-for-bankruptcy LTL Management, more than a few plaintiffs have died or become incapacitated due to sickness, as a result. Unable to get their day in court, many of them have agonized about how they would support and care for their families who, in turn, have suffered and grieved. This all brings me to one last point that I want to make.

In its Opinion, the Third Circuit declined to reach the issue about the propriety of J&J's use of the automatic stay as the dismissal of LTL's Chapter 11 petition mooted the issue. I can go on and on about how the Bankruptcy Court was wrong to extend it to J&J, having litigated and prevailed on the issue before Judge Kaplan in the LTL bankruptcy proceedings and Judge Silverstein in the Imerys Chapter 11 proceedings so that a fraudulent concealment class action could be filed against J&J relating to its industrial talc. For now, though, I think it is enough to point out one part of February 25, 2022 Opinion extending the automatic stay to J&J. In it, Judge Kaplan wrote that LTL Management will "suffer irreparable harm" if cases were allowed to proceed against J&J. At the same time, he found that "the talc claimants will not be prejudiced through the issuance of a preliminary injunction, and will--in fact--benefit from the extension of the automatic stay to the Protected Parties and the handling of their claims through the bankruptcy process." Needless to say, I think this finding blinks reality, particularly now in hindsight with the Third Circuit having found that the LTL Chapter 11 petition was not filed in "good faith" as it never was in financial distress.