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HomeMarketCourt Rejects Johnson & Johnson's Use of Bankruptcy in Talc Lawsuits

Court Rejects Johnson & Johnson’s Use of Bankruptcy in Talc Lawsuits

*** ONE-TIME USE *** A cashier holds a bottle of Johnson & Johnson’s brand baby powder at a pharmacy in Salt Lake City, Utah, U.S., on Thursday, Feb. 25, 2021.

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George Frey/Bloomberg

Johnson & Johnson
shares tumbled 3.7% on Monday after a panel of federal appeals judges rejected its effort to push lawsuits over its talc products into bankruptcy court.

The decision raises the possibility that
Johnson & Johnson
(ticker: JNJ) still does not have a handle on the more than 40,000 lawsuits claiming that its talc products caused cancer.

Those liabilities could be enormous: In a single state court case in Missouri, the company was ordered to pay $2.1 billion to 22 individual plaintiffs. The U.S. Supreme Court declined to hear Johnson & Johnson’s appeal.

The opinion published on Monday by the U.S. Court of Appeals for the Third Circuit amounts to a rejection of the controversial legal strategy Johnson & Johnson undertook in late 2021 to try to move the talc lawsuits into the bankruptcy court.

Johnson & Johnson at the time restructured its consumer products division into two separate entities: One to hold its portfolio of products, and one to hold the liabilities related to its baby powder products, plus a few other assets. That second entity, called LTL Management, promptly declared chapter 11 bankruptcy.

The bankruptcy declaration effectively froze all talc litigation against Johnson & Johnson. If LTL is allowed to continue in bankruptcy, the talc litigation would be resolved by the bankruptcy court, rather than in trial courts. After Thursday’s decision, however, the paused lawsuits will be permitted to proceed.

Johnson & Johnson has framed the bankruptcy maneuver as an effort to “achieve an equitable and efficient resolution,” as the company put it in 2021. Critics disagreed, and in a joint letter in late 2021, a group of Senate and House Democrats said that the company was “attempting to deny tens of thousands of people their day in court.”

The opinion from the appeals court upends the strategy, and says that LTL Management cannot declare bankruptcy.

“Our decision dismisses the bankruptcy filing of a company created to file for bankruptcy,” wrote Judge Thomas Ambro, writing for a three-judge panel. “It restricts J&J’s ability to move thousands of claims out of trial courts and into bankruptcy court so they may be resolved, in J&J’s words, ‘equitably’ and ‘efficiently.’”

Investors had turned their focus away from the talc litigation over the past year, as the automatic stay from the bankruptcy court stemmed what had been a steady flow of headlines on the issue. Now, with Johnson & Johnson planning to separate its consumer health division into a new publicly traded company under the name Kenvue this year, the company is likely eager to move on.

Monday’s decision reopens the issue, and for investors, could awaken unpleasant memories of last summer, when anxiety about litigation over Zantac, a heartburn drug effectively pulled from the market in 2020, erased tens of billions of dollars in market value from the stocks of
Sanofi
(SNY),
GSK
(GSK), and
Haleon
(HLN).

Those stocks recovered in December, when a federal judge threw out thousands of Zantac lawsuits. The future of Johnson & Johnson’s talc strategy, and what it means for the company, remains unclear. In a note out Monday, Cantor Fitzgerald analyst Louise Chen wrote that investors are asking, among other things, whether the development could impact or delay plans for the Kenvue spin out.

In a statement, Johnson & Johnson vowed to challenge the appeals court’s decision.

“LTL Management… initiated this process in good faith and our objective has always been to equitably resolve claims related to the Company’s cosmetic talc litigation,” Johnson & Johnson said. “As we have said from the beginning of this process, resolving this matter as quickly and efficiently as possible is in the best interests of claimants and all stakeholders.”

Write to Josh Nathan-Kazis at josh.nathan-kazis@barrons.com

Credit: marketwatch.com

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