Plaintiffs in thousands of lawsuits alleging that baby powder caused ovarian cancer are challenging the use of a Texas statute authorizing divisive mergers to consolidate potential liabilities in a subsidiary and then file for Chapter 11 bankruptcy protection.
Official Committee of Talc Claimants, et al. v. LTL Management, LLC arose from the ongoing mass litigation against the former Johnson & Johnson consumer products entity that for many decades sold baby powder. Some of the baby powder contained talc, which is mined and contains trace elements of asbestos. Although the scientific evidence linking talc and ovarian cancer is dubious to say the least, plaintiffs have prevailed in a few cases, particularly in the St. Louis, Missouri area, and won big verdicts. On the other hand, J&J has prevailed in multiple cases as well, but date, J&J has already spent up to $4 billion in settlements and defense costs, with no end in sight. The prospect of thousands of trials in carefully forum-shopped venues forced the company into a corporate reorganization aimed at managing claims liability through a subsidiary created for that purpose. To accomplish this, the company executed a “divisive” merger under Texas law, which permits a single entity to subdivide for any number of business purposes, including putting liabilities into a single subsidiary. Pursuant to this law, J&J created different entities, two of which are its old consumer products division, which sold baby powder, and an entity called LTL Management to take on the liabilities. LTL then filed for Chapter 11 bankruptcy.
This so-called “Texas Two-Step” has been used several times in the past in mass litigation contexts just like this one. LTL originally filed its Chapter 11 petition in North Carolina, but the case was transferred to J&J’s home state of New Jersey. When plaintiffs moved to dismiss the petition as filed in “bad faith” solely for the purpose of staying the litigation, the bankruptcy judge demurred and appointed a special master to conduct a valuation of the company. Plaintiffs, however, appealed to the U.S. Third Circuit Court of Appeals on the issue of whether a divisive merger can be used to deal with mass tort liability in this fashion.
This case could have very significant implications for businesses that become the target of mass tort litigation. In the talc cases, plaintiff’s firms have dusted off the asbestos business model and transferred it to a different product. They bundle claims and file them in favorable venues, such as St. Louis. They advertise heavily on television and on-line (just google “talc cases” and you can see for yourself). They don’t need to win every case to make this work, only enough of them to leverage settlement values for purposes of keeping up a cash flow to support the whole operation. This is the same drill that began with Johns Manville, put nearly 100 companies out of business, and culminated in years of litigation against peripheral premises defendants based on little to no evidence of impairment actually caused by the product. Plaintiffs argue that J&J has plenty of assets to satisfy the claims, but they admit that they don’t know how many there will be. Judging from our experience, an open checkbook elicits as many claims as it takes to spend it all, with billions going to a relatively small number of law firms. It’s hard to see that LTL Management can do anything else.
The tragedy of all this is three-fold. First, the science is so weak and inconclusive that given a fair chance to make its case in most jurisdictions, the company would prevail. Unfortunately, the sheer number of claims overwhelms the system and makes it impossible for real justice to be done in every single case. Second, as we saw in the asbestos litigation, as the money ran low, so did the ability to pay the people who really were sick. States like Texas had to step in and establish a process in which claimants had to provide actual impairment to proceed with their claims so that unimpaired claims would not vacuum up all the money. When things get to that point, they are already out of hand. Third, shareholders and employees occupy the last place in line when a business goes belly up. We hope that the court will consider their well-being as well, but it seems always to get short shrift once the lawyers take over.
Suffice to say that the civil justice system is not designed to handle an immense and expanding number of claims filed in multiple jurisdictions, especially when those claims involve complex scientific evidence. No business can defend itself everywhere at once, no matter how well resourced it may be. But that’s the point of mass litigation—to overwhelm the defendant and make it impossible for it to defend itself in the manner the civil justice system contemplates. How the Third Circuit will rule is anyone’s guess, but one way or the other, the fact that the court has to intervene clearly demonstrates the incompatibility of the mass litigation model with the concept of “justice.”
