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Pharmaceutical giant Johnson and Johnson recently attempted to skirt around paying out 38,000 lawsuits related to its famous baby powder and other talc-based products. Their strategy, dubbed “Project Plato” from internally signed confidentiality agreements, involved filing for bankruptcy right after shuffling their liabilities to a subsidiary, a strategy commonly known as the “Texas Two-Step.” These efforts were squashed when the Third Circuit Court of the United States ruled that Johnson and Johnson did not qualify for Chapter 11 bankruptcy.

Many other companies have used this strategy to avoid paying large debts, such as those related to lawsuits. These companies include Georgia Pacific, Saint-Gobain, Trane Technologies, and 3M. Since the Court has did not allow Johnson and Johnson to qualify for bankruptcy, this has raised questions about the future of the Texas Two-Step and whether this loophole will finally be sewn up.

To see what the Johnson and Johnson case could mean for the future of Product Liability, Personal Injury, and Bankruptcy law, we need to understand the case’s facts and how this loophole works in the first place. Then, we will look at how the Court closed the loophole and what this could mean for others who have used the Texas Two-Step in the past.

Facts of the Case

Johnson and Johnson is valued at $400 billion, and it is easy to see why considering the popularity of their products. One of their most famous is their baby powders and other talc-based products, which women commonly use to reduce thigh rubbing and other discomforts in the vaginal area.

However, these talc-based products have been shown to contain trace amounts of asbestos, which can lead to cancer. While Johnson and Johnson knew about the carcinogenic properties of their product, they kept that information from regulators and the public. Instead, they put out a public statement saying that their talc does not contain asbestos and, therefore, is not carcinogenic.

Since the truth has been revealed, the company has pledged to spend $2 billion on a subsidiary to help resolve these talc claims. They created LTL Management in 2021 to take these funds. However, internally signed confidentiality agreements have shown that this was part of “Project Plato.” The goal was to use the bankruptcy loophole famously nicknamed the “Texas Two-Step” to get around the over 38,000 lawsuit verdicts and settlements Johnson and Johnson would have to pay out.

What is the “Texas Two-Step”?

The “Texas Two-Step” is not just a popular dance move in country bars. In bankruptcy terms, the Texas Two-Step involves two steps: first, create a subsidiary that can take on your liabilities. Then, when you file for Chapter 11 bankruptcy, you are no longer responsible for those debts.

In this case, Johnson and Johnson attempted to create LTL Management to take on their lawsuit payment debts. Then, they filed for Chapter 11 bankruptcy. This would allow them to offload over 38,000 lawsuits through entirely legal means.

However, their bankruptcy has been challenged due to their high amount of assets and internal funds. The Third Circuit Appeals Court of the United States finally shot it down. However, many wonder how the Court could prevent Johnson and Johnson from completing the Texas Two-Step if it is legal.

Why Did the Court Shut Them Down?

The Third Appeals Circuit Court of the United States could not stop Johnson and Johnson from forming a subsidiary since there could be valid reasons for doing so. Additionally, there can be valid reasons to move liabilities to that subsidiary. However, the Court was able to get Johnson and Johnson on their bankruptcy filing.

Johnson and Johnson filed for Chapter 11 bankruptcy, which allows companies to push off their debts beyond the 5-year limit in Chapter 13 bankruptcy. However, Chapter 11 requires that the company be in financial distress, which the Court ruled was not the case with the $400 billion company.

Due to this ruling, Johnson and Johnson could be forced to fight cases related to their talc-based products for years in trial courts. These cases have already cost the company $4.5 billion in verdicts and settlements. The low public opinion due to this scandal and fears regarding money management have also pushed their shares down to 3.7 percent.

Now that there is a case on the books of a company being punished for attempting to use the Texas Two-Step, many wonder what this could mean for those who have used this tactic and what changes we expect to see.

What Does This Ruling Mean for Future Cases?

While Johnson and Johnson’s attempt to use the Texas Two-Step was overruled, this does not mean others who have successfully attempted the same in the past will be punished. The Third Circuit handled the Johnson and Johnson case. In contrast, Georgia Pacific, Saint-Gobain, and Trane Technologies cases fall under the Fourth Circuit jurisdiction. 3M could be prevented like Johnson and Johnson, as their case is pending with the Seventh Circuit.

However, it is unclear how this ruling on Johnson and Johnson could affect future cases being lobbied against the company. The Court has dismissed over 1,500 talc lawsuits, and most cases that went to Court ended in the company’s favor. While Johnson and Johnson may have been prevented from entering into Chapter 11 bankruptcy, it is unclear whether they will have to pay the settlements or verdicts of future cases lobbied against them. To learn more about these lawsuits, call the Law Offices of R.F. Wittmeyer, Ltd. today.