Johnson & Johnson is reportedly considering using what legal experts call the “Texas two-step” bankruptcy law, a maneuver that would allow the company to create a new entity housing talc liabilities that would then file for bankruptcy to halt litigation.
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Johnson & Johnson (J&J) is exploring a plan to offload liabilities from widespread baby powder litigation by creating a new business that would then seek bankruptcy protection, Reuters reported.
During settlement discussions over its talc-containing baby powder, a J&J legal representative told plaintiffs’ lawyers the company could pursue placing a subsidiary in bankruptcy as part of a strategy to settle thousands of claims linking the product to ovarian cancer.
If executed, the plan could result in lower payouts for cases that do not settle beforehand, according to people familiar with the matter.
According to the Wall Street Journal, bankruptcy can be a powerful tool for companies facing a large number of lawsuits over allegedly defective products, or other mass-tort claims. A chapter 11 filing can pressure claimants into accepting lower settlements by halting ongoing litigation and discovery proceedings, and by creating a centralized forum to value claims.
Plaintiffs’ lawyers would initially be unable to stop J&J from taking such a step, though they could pursue legal avenues to challenge it later.
A company spokesperson said Sunday that “Johnson & Johnson Consumer Inc. has not decided on any particular course of action in this litigation other than to continue to defend the safety of talc and litigate these cases in the tort system, as the pending trials demonstrate.”
J&J is considering using Texas’ “divisive merger” law, which would allow the company to split into at least two entities — creating a new entity housing talc liabilities that would then file for bankruptcy to halt litigation, according to Reuters.
Should J&J proceed, plaintiffs who have not settled could find themselves in protracted bankruptcy proceedings with a much smaller company.