Johnson & Johnson Pretended To Be Bankrupt To Avoid Paying Cancer Victims

The company made nearly $18 billion last year.

Today brings important good news about efforts to hold corporations accountable.

In 2018, the world learned that executives at Johnson & Johnson had known for decades that the company’s Baby Powder included cancer-causing asbestos. A jury subsequently found that J&J’s talcum products had given people cancer.

Rather than compensating the cancer victims, Johnson & Johnson tried to play a get-out-of-litigation-free card. Management used a legal trick to claim that the company is bankrupt even though it clearly isn’t — J&J made nearly $18 billion last year alone.

But a federal judge has just rejected J&J’s maneuver in what could be a blow to this broader corporate legal strategy to evade responsibility for wrongdoing. Our business reporter Eric Gardner breaks it all down:

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Judge Rejects Johnson & Johnson’s Attempt to Abuse Bankruptcy Court to Protect Stockholders

By Eric Gardner, Business Reporter, More Perfect Union

A federal bankruptcy judge has rejected Johnson & Johnson's $8.9 billion plan to claim strategic bankruptcy to avoid paying tens of thousands of cancer victims who allege that the company’s talcum powder caused their cancer. Johnson & Johnson’s controversial legal strategy, if allowed to proceed, would have shielded stockholders from the consequences of investing in companies that knowingly sell harmful products.

Their legal maneuver, known as the Texas two-step, is named after a quirk of Texas law that allows a profitable company to split itself into two, placing all its future liabilities (such as a multi-billion dollar payment to cancer victims) into a Texas-based subsidiary. The liability-ridden company then declares bankruptcy, leaving the profitable part of the company and the investors whole.  “It violates the fundamental principle of bankruptcy,” Sen. Sheldon Whitehouse (D-RI) said at a 2022 hearing on the topic.

The Texas two-step was pioneered in 2017 by manufacturer Georgia-Pacific, owned by the Koch brothers, the right-wing activists and megadonors. The company faced thousands of lawsuits after an appeals court found that management intentionally downplayed cancer dangers from its building products. Faced with billions of dollars of potential claims, management shifted all of the company’s assets to a new subsidiary named “New Georgia-Pacific.” Then they placed all of the liabilities in an entity named “Bestwall,” declaring bankruptcy a few months later. 

In the four years since New Georgia-Pacific has delivered $3 billion in dividends to Georgia-Pacific — three times what Bestwall has offered plaintiffs. 

Last week’s ruling was J&J’s second attempt at the Texas two-step. In early 2021, the company transferred all of the company’s cancer claims to a subsidiary named LTL Management. Three days later, the new entity declared bankruptcy, pausing any ongoing litigation. In January 2023, an appeals court threw out that bankruptcy. They effectively said you at least have to pretend you’re in financial distress — pointing out that the new entity wasn’t insolvent, having access to $61.5 billion from J&J. 

J&J management tried again but has now achieved the same result. They adjusted the paperwork and increased the payout by nearly $6 billion. The judge was not impressed, finding that with support from its parent company, LTL Management had enough money to defend against the claims. When dealing with bankruptcies, “observing smoke may not be enough, one must see flames,” Judge Michael Kaplan wrote. Johnson & Johnson plans to appeal the ruling.

Management argues that the Texas two-step benefits victims, allowing one bankruptcy judge to administer an orderly approach to paying out claims to tens of thousands. Private emails tell a different story. Michelle Ryan, a now-retired treasurer for the company, described the motivation behind the two-step to Moody’s: “Capping our talc liability,” she wrote, “especially with the recent disappointing Supreme Court inaction.” (More on the Supreme Court later.)

How J&J’s Case Fell Apart

J&J has long faced questions about the safety of its talcum-based products. Despite asbestos naturally occurring alongside talcum, the company had denied any link between cancer and its baby powders.

Until the last ten years, most asbestos legal claims against Johnson & Johnson failed. The World Health Organization says there is no safe level of contact with asbestos, but the substance has different impacts on different people. Most individuals exposed, even to large amounts, never develop cancer. For some, a small amount can lead to mesothelioma or ovarian cancer, sometimes years later. 

To this day, the company argues the lawsuits are over a problem that doesn’t exist. “Our talc products do not contain asbestos,” Erik Haas, the vice president of litigation, told investors on last week’s earnings call. “Our talc products do not cause cancer.” 

Again, Johnson & Johnson’s internal documents tell a different story.

Internal memos and reports, first published by Reuters, showed that management was aware its flagship baby powder had tested positive for small amounts of asbestos since at least the late 1950s. Rather than reformulate its product, the company denied and questioned the test results—something executives continue to do to this day. 

In the last ten years, those memos came to light in a string of lawsuits from cancer victims. Patients no longer need to prove the direct link between Johnson & Johnson’s baby powder and cancer to juries. “The culprit wasn’t necessarily talc itself,” Reuters wrote, “but also asbestos in the talc.” The scientific community accepts that asbestos causes cancer. The company’s internal testing showed a direct link to asbestos. 

In 2018 the dam broke. A Missouri jury ordered J&J to pay $4.7 billion to 22 women after it found the company’s products caused their ovarian cancer. The damages were eventually reduced to $2.1 billion on appeal—nearly $100 million per claimant. Johnson & Johnson believes it could face upwards of 100,000 claims in the future. If the judge would have approved the plan, the $8.9 billion agreement would cap the company’s liability.

The Missouri case made it all the way up to the Supreme Court, where justices declined to hear the issue, upholding the previous court’s ruling and prompting the former treasurers’ email to Moody’s.

Interestingly enough, Justice Brett Kavanaugh recused himself from the case.

The reason? 

His father lobbied against warning labels for talcum-based products.