By: Donald L Swanson
Johnson & Johnson (“J&J”) sold baby powder for decades.
Today, J&J is facing tens of thousands of lawsuits alleging that its baby powder causes cancer. And the number of new cancer claimants is increasing daily—with many thousands yet to be identified over decades to come.
So, J&J turns to bankruptcy to address this litigation threat, to protect future claimants, and to protect the going concern value of its global operations. [Fn. 1]
In response, various cancer claimants ask the Bankruptcy Court to dismiss J&J’s case, alleging the bankruptcy filing to be abusive.
Bankruptcy Court denies the dismissal request, declaring that bankruptcy is not only a proper place for the cancer cases to be addressed—but it is the best place to do so! [Fn. 2]
What follows is a summary of the Bankruptcy Court’s explanation and rationale on why bankruptcy court is the best place.
Most Significant Question
In J&J’s mass-tort bankruptcy, the most significant question is this: which judicial system best serves the interests of the bankruptcy estate and its present and future tort claimants:
- the state/federal trial system; or
- a bankruptcy reorganization plan approved by the United States bankruptcy court?
Bankruptcy is necessary for J&J because, at the time of the bankruptcy filing:
- J&J has 40,000 pending tort claims, with thousands more expected annually for decades to come;
- Since June of 2018, 13 mesothelioma verdicts have awarded $320.6 million in punitive damages and $155.2 million in compensatory damages, averaging $36.6 million per claim;
- 430 mesothelioma claims are on file, with projected exposure of $15 billion;
- Debtor faces indemnification claims from talc suppliers, estimated between $25 billion to $118.2 billion; and
- In July of 2018, a jury awards 22 women with ovarian cancer a $4.69 billion verdict against J&J—reduced on appeal to $2.25 billion.
The entire bankruptcy system has had innumerable successes, where businesses are reorganized, business relationships are maintained, jobs are preserved and, most importantly, meaningful returns are distributed to creditors.
These successes occur in situations where, outside of bankruptcy, there would be fewer (if any) benefits and nothing but expensive and time-consuming litigation.
Mass-Tort Risks and Inefficiencies
Cancer claimants face substantial risks in the tort system:
- Trial results are inconsistent—of 49 cases tried, defendants prevail in 18, plaintiffs prevail in 17, 8 cases result in mistrials, and 6 settle during trial;
- Dismissals are common—over the years, J&J secures dismissals, without payment, of 1,300 ovarian cancer cases and 250 mesothelioma cases;
- Needs of future victims (whose claims might surface in the next half century, given the latency period for these types of cancer) are wholly ignored by the current rush to judgments in state and federal courts; and
- The tort system produces an uneven, slow-paced race to the courthouse, with winners and losers—this is unacceptable when a viable bankruptcy option exists.
Currently, many cancer cases have been pending against J&J for a half dozen or more years and remain years away from trial dates. After trial, appellate delays will follow.
Since 2014, only 49 trials have proceeded to verdict and only 6,800 cases have settled outside of court (with 10,000 new cases filed each year).
Other mass-tort inefficiencies include:
- In nearly six years of mass-tort litigation, there has been no progress toward a global resolution; and
- Given the pace of litigation and new lawsuit filings, the vast majority of plaintiffs will not see a penny of recovery for years to come.
This is “folly”: contending that the tort system is the only fair and just pathway for claimants and that the bankruptcy pathway should be rejected. Here’s why:
- Congress rejects this contention, by its authorization of asbestos trusts in §524(g);
- Migration of tort litigation into the bankruptcy system is nothing to fear;
- Chapter 11 provides justice to injured parties—producing comprehensive, equitable, and timely recoveries;
- Bankruptcy courts can compel participation by all interested parties (insurers, retailers, distributors, claimants, and debtors) to reach a fair settlement; and
- Bankruptcy provides for global resolution of liabilities by using current assets and future earnings to compensate all tort claimants equitably.
Such folly is demonstrated by cases showing that bankruptcy can effectively address mass-tort cases, such as:
- USA Gymnastics settlement, approaching $400 million;
- proposed Mallinckrodt $1.7 billion trust;
- Boy Scouts proposed settlement nearing $3 billion;
- settlement trusts in various stages of negotiation in more than 30 Catholic diocese cases; and
- asbestos bankruptcy trusts.
A trust in this case would establish a simpler and more streamlined process than what is available in the tort system. Such a bankruptcy trust would:
- establish fixed criteria and common parameters for payments to claimants;
- ensure a level playing field for all present and future victims; an
- preserve due process rights.
The bankruptcy system provides all present and future claimants an efficient way to equitably resolve their claims. A settlement trust in bankruptcy, with proper oversight and funding, can best serve the needs of J&J and cancer claimants, alike.
The Bankruptcy Court finds from the evidence:
- This Chapter 11 case is being used to bring about accountability and certainty—not to escape liability;
- Assets are not being ring-fenced, concealed, removed, limited or undervalued;
- No J&J affiliate is being released, or its assets placed out of creditors’ reach, absent a negotiated plan; and
- Limitations on payments by J&J are from the overwhelming nature of cancer liabilities, which far exceed J&J’s capacity to satisfy from current assets.
This Court must ensure justice for all the 40,000 current claimants, and for all future claimants (yet to be identified), who face years in litigation.
Leverage and Risk
The true leverage in this bankruptcy remains where Congress allocated it: with the tort claimants who must approve any plan employing a § 524(g) trust by a 75% super majority.
In filing this bankruptcy, J&J faces a risk: that its good-faith negotiations will fail to produce the consensus necessary to confirm a plan.
Notwithstanding such risk, the Court hopes and expects the parties to undertake a sensible, pragmatic and reasonable approach to negotiations.
The Bankruptcy Court finds that the J&J bankruptcy is not only a proper bankruptcy filing—but it is also the best way to deal with the mass-tort claims, both existing and future, against a company with global operations and limited resources.
Footnote 1. The Johnson & Johnson bankruptcy case is identified as In re LTL Management, LLC, Case No. 21-30589 in the New Jersey Bankruptcy Court.
Footnote 2. The Bankruptcy Court issues the opinion, that’s discussed in this article, on February 25, 2022 (Doc. 184)—an appeal is pending.
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