Talc plaintiffs’ lawyers allege J&J put lawsuits in bankruptcy to protect brand

Lawyers for cancer victims accused Johnson & Johnson of pushing roughly 38,000 talc lawsuits into chapter 11 to stem damage to its corporate brand and gain unfair leverage, as a trial concludes on a bankruptcy strategy the company has defended as fair and reasonable.

"Bankruptcy is not an image improvement service," said David Molton, a lawyer representing injury claimants, during closing arguments Thursday on J&J’s decision to put the company’s talc-related liabilities in a new subsidiary that swiftly filed chapter 11.

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The bankruptcy filing by the affiliate, LTL Management LLC, was a calculated move to deliver overwhelming bargaining power to J&J, Mr. Molton said. The chapter 11 filing, if it proceeds, could unlock powerful tools to settle the mass litigation facing J&J, protecting it from further jury trials and capping its total liability.

Injury lawyers are seeking to dismiss the bankruptcy case LTL filed last year to drive a settlement of claims that the talc caused ovarian cancer and contained asbestos, which J&J denies. J&J executives have testified at trial that the chapter 11 case was meant to settle the talc claims equitably, not to gain an unfair advantage in litigation.

Judge Michael Kaplan of the U.S. Bankruptcy Court in New Jersey is scheduled to hear LTL’s closing arguments Friday and has indicated he will rule later this month.

LTL has a funding agreement with J&J in which it agreed to pay any amounts the subsidiary is deemed to owe on account of talc claims. Plaintiffs’ lawyers argued that because of that financial support from J&J, LTL isn’t in financial distress and therefore doesn’t belong in chapter 11.

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A government lawyer from the Justice Department’s bankruptcy division supported dismissing the bankruptcy on Thursday. Jeffrey Sponder of the Office of the U.S. Trustee said J&J had sought the benefits of chapter 11 without filing bankruptcy itself, which carries with it requirements of "equity, honesty, transparency and scrutiny."

After the hearing, a J&J spokeswoman said that LTL initiated the chapter 11 to reach a fair resolution for talc claimants and that statements by injury lawyers and the lawyer for the U.S. Trustee about the purpose of the bankruptcy filing are wrong.

Company officials have testified that moving the talc litigation to bankruptcy court will provide a fairer process to compensate injury claimants than the traditional tort system, in which a few talc plaintiffs could potentially win large financial awards while others lose at trial and collect nothing.

The closing statements cap a week-long trial over an emerging strategy J&J and a few other profitable companies have used to move about a quarter-million personal-injury lawsuits to bankruptcy court. Critics in academia, Congress and the plaintiffs’ bar have argued that the strategy is an abuse of the bankruptcy system’s core function of rehabilitating businesses in financial distress.

J&J used a Texas law to separate the talc liabilities from its consumer health business and place them in LTL, which filed chapter 11 two days after its creation in October.

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John Kim, LTL’s legal officer, testified that J&J was close to settling most litigation over its talc-based products last year for between $4 billion and $5 billion, more than double the $2 billion J&J has offered to resolve the liability through LTL’s bankruptcy. Mr. Kim also testified that the offer is a "starting point" and that the company could increase the offer to reach an agreement in chapter 11 with talc claimants if the bankruptcy is allowed to proceed.

Robert Pfister, an attorney representing a law firm with thousands of talc claimants, said the strategy J&J is pursuing represents a significant departure from how companies overwhelmed by lawsuits are supposed to use chapter 11.

Mr. Pfister said J&J instead is unilaterally opting out of the civil jury system because the company believes it has been treated unfairly, which isn’t a legitimate use of chapter 11.

"There is absolutely no need to make this the bankruptcy case that ate the tort system," Mr. Pfister said.

He said if J&J believes the civil jury system is unfair, the company should lobby Congress instead of trying to change the tort system through a bankruptcy, he said.

"I think it’s perfectly fine if the corporate folks at J&J want to write a letter to their Congressman or Senator," Mr. Pfister said. "I bet it would get read, I really do."

J&J has said its talc is safe and accused plaintiffs attorneys of sowing misinformation about talc-based products, which the company stopped selling in the U.S. and Canada in 2020 as the tort litigation grew. J&J executives testified that they stand by the safety of the company’s talc products.

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If Judge Kaplan dismisses the case, injury claimants would be free to move forward with lawsuits against J&J and its corporate affiliates. If he allows the bankruptcy case to proceed, LTL and J&J will likely have time to negotiate with injury claimants on a potential settlement of the litigation.

Write to Jonathan Randles at Jonathan.Randles@wsj.com