Johnson & Johnson Uses Bankruptcy Law to Block Baby Powder Lawsuits

Johnson & Johnson is drawing criticism after using a bankruptcy law to shield itself from liability.  One of the largest manufacturers of medical products in the U.S. is trying to block thousands of lawsuits that allege its baby powder contains asbestos that can cause cancer. Legal experts say the move limits how much the plaintiffs will be able to recover in court.

Dangerous Baby Powder

The scandal first came to light in 2018 when The New York Times and Reuters uncovered internal documents from Johnson & Johnson that showed the company knew its signature talc baby powder contained small traces of asbestos for decades but didn’t tell regulators.

J&J denied the claims and is currently one of the most valuable companies in the U.S. with over $25 billion in cash reserves. It has not yet filed for bankruptcy.

The company discontinued the talc baby powder last year.

There have since been 38,000 lawsuits filed in relation to the baby powder. In a move that’s been widely panned by critics, the company used an obscure Texas state law to create a new firm called LTL as a way of passing off these liabilities to another entity.

LTL filed for bankruptcy in North Carolina last week, which will limit the plaintiffs’ chances of recovering damages in court.

Lindsey Simon, a bankruptcy expert at the University of Georgia School of Law, said the move effectively shields J&J from any liability. 

“Johnson & Johnson doesn’t have this liability anymore. They pushed all of it into the company they created just to file for bankruptcy,” he said. “Consumers can’t recover [damages] against a big solvent company. They have to recover against this smaller fictional company created [by J&J].”

Consumers and politicians were equally enraged by the move.

“J&J knew asbestos laced some bottles but kept it a secret for decades,” Rep. Katie Porter, D-Calif., tweeted on Tuesday. “Tens of thousands of women with ovarian cancer are suing, and the company wants to shield its assets.”

“Another giant corporation is abusing our bankruptcy system to shield its assets and evade liability for the harm it has caused people across the country,” Sen. Elizabeth Warren, D-Mass., tweeted last week.

Defending the Move

CFO Joseph Wolk recently defended the company’s decision on a call with investors after referring to the baby powder as safe.

“There’s an established process that allows companies facing abusive tort systems to resolve claims in an efficient and equitable manner,” Wolk said. “It’s really the bankruptcy courts that will ultimately decide this. It’s not plaintiff attorneys. It’s not Johnson & Johnson.”

LTL released a statement that said J&J will transfer around $2 billion in assets to the new firm for future payouts related to the lawsuits.

“We are confident all parties will be treated equitably during this process,” said John Kim, chief legal officer of LTL.

Andrew Birchfield, an attorney that’s representing some of the plaintiffs suing the company for damages, said the move will make it much harder for the company’s victims to recover damages.

“Women and families would be devastated, and it would just be a get-out-of-jail-free card for Johnson & Johnson,” Birchfield said.

J&J has a mixed record when it comes to responding to the lawsuits, many of which have yet to be resolved. Last year, an appeals court in Missouri ordered the firm to pay $2 billion in damages to women that developed ovarian cancer after using the baby powder.

The American Association for Justice also criticized the maneuver while calling on the bankruptcy courts to block the move.

“There are countless Americans suffering from cancer, or mourning the death of a loved one, because of the toxic baby powder that Johnson & Johnson put on the market,” the group said in a statement. “Their conduct and now bankruptcy gimmick is as despicable as it is brazen.”

Critics say the country’s varying bankruptcy laws allow companies like J&J to choose where they file. This “venue shopping” gives them access to courts that are more friendly to corporations.

Simon said the move may give the company an advantage when setting the terms of the bankruptcy, however LTL will still be on the hook for large payouts.

“[J&J is] not completely wiping their hands of the issue, and I think probably awareness of how that would be perceived is the reason why,” Simon said.

J&J also asked a federal bankruptcy judge to temporarily pause the lawsuits related to the cancer-causing baby powder until the details of LTL’s bankruptcy have been settled.