Bankruptcy is meant to provide a fresh start for businesses facing financial ruin. You would therefore think that Johnson & Johnson, one of the most valuable companies in the world, would not qualify.
But in recent months, the $470 billion pharmaceutical and consumer goods giant has bent bankruptcy law in a cynical bid to gain the upper hand in a fight with thousands of cancer-stricken customers. And unless Congress intervenes, more multinationals will surely follow suit.
Johnson faces 38,000 lawsuits from people claiming traces of asbestos in the company’s baby powder and other talc products caused ovarian cancer and another particularly cruel cancer known as mesothelioma.
To protect itself from the onslaught, the company deployed a maneuver known as “Texas in Two Steps”. First, the company shifted all prosecution liability to a spin-off called LTL. Then LTL filed for bankruptcy, immediately suspending baby powder cases, which could lead to years of delay. This means that some plaintiffs may die before they have had their day in court.
Johnson & Johnson is not the first company to use the two-step process, which relies on a provision of Texas bankruptcy law. Koch Industries’ Georgia-Pacific pioneered the maneuver in 2017. And a few other companies have since used it in an effort to protect themselves from asbestos-related claims.
But Johnson’s push sparked more outrage. And a ruling by a bankruptcy judge, backing the company’s decision, has increased the pressure for a legislative solution. Some lawmakers, like Senator Dick Durbin of Illinois, understand the urgency of the moment. “When you have massively profitable companies using this bankruptcy maneuver to avoid accountability for dying cancer victims,” he recently told the Financial Times“It is clear that corrective action is needed.”
Now his colleagues must get on board and ban both stages.
Johnson & Johnson argued that the standard jury trial system for resolving mass tort claims is flawed – with some plaintiffs winning big lottery-like decisions and others getting little or nothing. And the company is right. But as Jared Ellias, a professor at the University of California’s Hastings College of the Law and two-time Texas critic, said in an interview with the Globe’s editorial board, “Bankruptcy law is not not there to rewrite tort law when companies find it inconvenient.
If there is a problem with the tort system, it should be fixed by tort reform – not workarounds by the biggest multinationals with the most expensive lawyers.
It’s unclear how this will fare for Johnson, who stopped selling baby powder in the US and Canada in 2020 over what he called “unsubstantiated claims” about the product’s safety. . The company proposed a $2 billion settlement trust in the bankruptcy proceedings; plaintiffs’ attorneys say the claims could be worth much more.
But for now, the two-step stopped the drumbeat of bad titles on grand jury awards – curbing reputational damage and possibly paving the way for a global resolution that will cost the company less. That certainly seems to be Johnson & Johnson’s bet.
But companies shouldn’t be allowed to make that kind of bet. Judges should block the misuse of bankruptcy law. And if they don’t object, then Congress should.
Editorials represent the opinions of the Editorial Board of The Boston Globe. Follow us on Twitter at @GlobeOpinion.