Jan 30 (Reuters) – A US appeals court on Monday struck down the Johnson & Johnson department store (JNJ.N) Attempting to offload tens of thousands of lawsuits regarding talc products to bankruptcy court. The ruling marked the first major rejection of an emerging legal strategy with the potential to change US corporate liability law.

J&J is among four major corporations that have filed a so-called two-step Texas bankruptcy to avoid potential exposure to a massive lawsuit. The tactic includes creating a subsidiary to absorb the liabilities and immediately filing for Chapter 11.

The court ruled that the healthcare giant had improperly filed its subsidiary for bankruptcy even though it was not facing any financial hardship. J&J’s two moves sought to stop more than 38,000 lawsuits from plaintiffs alleging that the company’s baby powder and other talcum products caused cancer. The Court of Appeals ruling revives those claims.

Reuters last year provided details of the secret state of Texas planning two moves by Johnson & Johnson and other big companies in series of reports Explore companies’ attempts to evade lawsuits through bankruptcies.

Monday’s decision by the 3rd Circuit Court of Appeals in Philadelphia dismissed the bankruptcy case J&J subsidiary filed in 2021. Prior to filing, J&J faced costs of $3.5 billion in judgments and settlements.

J&J shares closed down 3.7% — the largest one-day percentage drop in two years. The company said in a statement that it will appeal the ruling and that its talc products are safe.

Plaintiffs’ attorneys and some legal experts have argued that the two steps could set a dangerous precedent, providing a blueprint for any company to easily avoid unwanted litigation. Two legal experts said the appeals court’s decision could force companies considering the strategy to consider their risks more carefully.

“It’s a response to the idea that a company anywhere can use the same tactic to get rid of its liability for collective tort,” said Lindsey Simon, a professor at the University of Georgia College of Law.

Bankruptcy filings typically stall litigation in trial courts, forcing plaintiffs through often time-consuming settlement negotiations while leaving them unable to pursue their cases in the courts in which they originally filed.

The Third Circuit ruling does not apply to three other two-step bankruptcies in Texas, filed by subsidiaries of the Georgia Pacific Corporation owned by Global Construction Giant Koch. Saint-Gobain(SGOB.PA)and Trane Technologies (2IS.F). These cases fall under the jurisdiction of the Fourth Circuit Court of Appeals. 15:00 (MMM.N) Try a similar maneuver, which is currently pending in the seventh circle.

Saint-Gobain said in a statement that the Third Circuit’s ruling “has no direct bearing” on her Chapter 11 case. The company said it remained confident in the subsidiary’s legal ability to reach “final, full and fair settlement with the asbestos claimants”.

The other companies did not comment on the Third Circuit’s decision or did not immediately respond to inquiries. Everyone has previously advocated two-step bankruptcies as the best way to pay claims fairly. Plaintiffs’ attorneys countered that the two-step move in Texas is improper manipulation of the bankruptcy system. The strategy uses Texas law to split an existing company in two, and create a new subsidiary that is intended to withstand lawsuits.

New Jersey-based Johnson & Johnson, which is valued at more than $400 billion, said the bankruptcy of its subsidiary started in good faith. J&J initially pledged $2 billion to the subsidiary to resolve the talc claims and entered into an agreement to fund a final settlement approved by the bankruptcy judge.

“It is in the interest of the claimants and all stakeholders to resolve this issue as quickly and efficiently as possible,” J&J said.

A three-judge appeals court panel rejected J&J’s argument, finding that the company’s subsidiary, LTL Management, was created solely to offer Chapter 11 protection but had no legitimate need to do so. The committee ruled that only the debtor in financial distress could file for bankruptcy. The judges noted that J&J confirmed that it would give LTL plenty of money to pay its talc claims.

In a 56-page opinion, the judges said, “Good intentions — such as protecting J&J’s trademark or comprehensively resolving litigation — are not enough alone.” “LTL, at the time of its introduction, had a high cash solvency to meet its obligations comfortably.”

The Plateau Project

The decision could force J&J to fight the talc claims for years in trial courts. The company has had a mixed record fighting lawsuits so far. While the company experienced major rulings in some cases prior to filing for bankruptcy, more than 1,500 lawsuits against Talc were dismissed and the majority of cases that went to trial resulted in rulings in favor of J&J, rulings for the company on appeal, or mistrials, according to affiliated court filings. to her.

A December 2018 Reuters investigation revealed that Johnson & Johnson officials had known for decades about tests showing the company’s talcum powder sometimes contained traces of the carcinogenic asbestos, but withheld that information from regulators and the public. J&J said their talc does not contain asbestos and does not cause cancer.

Facing relentless lawsuits, J&J enlisted the law firm Jones Day, which has helped other companies implement two-step bankruptcies in Texas to handle asbestos-related lawsuits.

J&J’s effort, as Reuters reported last year, has been dubbed “Project Plato” internally, and the employees working on it have signed confidentiality agreements. The company’s lawyer warned them not to tell anyone, including their spouse, about the plan.

Jones Day did not immediately respond to a request for comment.

The two-step move in Texas drew criticism from Democratic lawmakers in Washington, and inspired proposed legislation that would severely restrict the practice.

Sen. Sheldon Whitehouse, a Rhode Island Democrat, welcomed the appeals court’s decision on Monday. Whitehouse presided over the first congressional hearing of the two-step bankruptcy case in February of last year.

“Bankruptcy is meant to give honest debtors in unfortunate circumstances a fresh start,” he said, so as not to allow “large, highly profitable corporations” to avoid accountability for wrongdoing through a legal “mock game.”

Additional reporting by Tom Hales in Wilmington, Delaware. Mike Spector from New York. and Dan Levine in San Francisco; Additional reporting by Dietrich Knuth and Chuck Mikolajczak in New York; Editing by Bill Berkrot and Brian Thevenot

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