Johnson & Johnson: talc settlement shows virtues of Chapter 11 process

To paraphrase Winston Churchill, Chapter 11 bankruptcy is the worst way of resolving product liability — except for all the others. Late on Tuesday, an affiliate of Johnson & Johnson filed for bankruptcy protection. This represented a second attempt to resolve thousands of claims for the alleged carcinogenic properties of talc powder.

The first case was dismissed earlier this year. A federal appeals court said the bankruptcy process could not be used by an enterprise that was not facing “financial distress”.

J&J had attempted to ringfence the liability by placing it in a special vehicle. It was seeking bankruptcy protection as part of negotiating a settlement with alleged victims. Critics of this “Texas Two-Step” gambit said it was an improper way for a company worth more than $400bn to shirk responsibility.

This time round, J&J has attempted to avoid a technical violation of the financial distress requirement. More importantly, it has persuaded 60,000 plaintiffs to support a settlement worth $8.9bn, up $6.9bn from $2bn previously. The creation of this group of alleged victims is a seismic shift. It suggests that US bankruptcy may be a tolerable, if imperfect, forum for these cases to be sorted out.

J&J inevitably denies that the bankruptcy is a means of disadvantaging alleged victims. It has committed at least $61.5bn to this broader group. The bankruptcy, it says, was merely a way to substitute a single, focused proceeding rather than scattered trials across the country which could ramble on for years.

You might add that a narrow bankruptcy filing heftily funded by a wealthy parent company allowed the latter to continue to function with far less disruption to its business.

Alleged victims who have signed up for the settlement like the idea of a near-term resolution. Through negotiation they have earned a bigger payout pot that may still increase in order to attract holdouts.

Apart from sweetening the deal, J&J lawyers have done some gymnastics to create technical financial distress in the subsidiary. This should please the appeals court without reducing the cash contribution from J&J.

Judges have pushed back on “mass tort” bankruptcies involving 3M and Purdue Pharma. But when victims and companies strike compromises voluntarily, the US legal system should be prepared to go along with that.