An untested legal maneuver could help Johnson & Johnson wipe out billions of dollars in claims over its allegedly cancer-causing talcum powder, but pending legislation and likely fraud allegations may block a move plaintiffs’ lawyers deride as a “Texas two-step.”

The company is facing pressure to shake up its legal strategy after losing a series of trials in cases alleging it concealed cancer risks, including a $2.1 billion verdict that the U.S. Supreme Court declined to review this summer. Attorneys for some plaintiffs have said J&J is considering what’s known as a “Texas two-step,” which would involve using the state’s “divisive merger” statute to split off its talc liabilities into a separate entity that would then file for bankruptcy.

The maneuver, which bankruptcy law professor Samir Parikh described as a “corporate mitosis,” could help J&J minimize payouts as it faces nearly 35,800 open claims in federal multidistrict litigation and even more cases in state courts. But it’s far from guaranteed to work.

Talc plaintiffs in various jurisdictions are doing what they can to stop it. A group of claimants in the bankruptcy of Imerys Talc America, a longtime J&J partner, unsuccessfully sought an injunction to block J&J from the move. A group of Missouri plaintiffs filed a similar motion before dismissing it voluntarily, while a third injunction bid was made in New Jersey state court.

The flurry of motions shows the plaintiffs “are scared,” said Parikh, and that’s likely what J&J wants. Just the threat of a Texas two-step can serve J&J by moving the plaintiffs closer to a settlement figure that the company could stomach.

The company last year set aside $4 billion for talc settlements and other legal costs.

A bedrock principle of bankruptcy law is that a company seeking the protections of bankruptcy cannot hinder, delay or defraud creditors. Moving money before bankruptcy in order to avoid paying back debts is the quintessential fraudulent transfer.

Observers agree there’s a good chance J&J will face such a challenge if it executes a Texas two-step. But the ultimate outcome is hard to predict because no two-step has yet been seen through to completion in the few years they’ve been tried.

Besides the energetic pushback from plaintiffs, J&J could see more trouble on another front.

A group of congressional Democrats has introduced legislation that, on its face, is unrelated to J&J. But in the bankruptcy context, it could make a difference, since the legislation would block “third-party nonconsensual releases.”

In English, it would mean that the bankruptcy process could not block litigation by people who were never part of the bankruptcy and never agreed to have their claims erased.

The legislation currently sitting in each chamber’s Judiciary Committee, and neither is currently showing a hearing scheduled on it.

At stake are the claims of a legion of cancer patients — and in some cases, their surviving family members — who used talcum powder and then, some time afterwards, were found to have cancer.

The company took talc powder off U.S. shelves, but it remains available in other markets.

J&J has not settled yet, and for the time being is content to keep fighting the litigation.

LAW360: https://www.law360.com/articles/1423468

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