Johnson & Johnson and a New War on Consumer Protection

M.D.L. No. 2738 was formed on October 4, 2016, and assigned to the District of New Jersey, where Johnson & Johnson and many other pharmaceutical companies are headquartered. The litigation, which ultimately included more than thirty-eight thousand women with ovarian cancer, was assigned to Judge Freda Wolfson. She spent half a decade sorting through all the pretrial work and selecting what are called the bellwethers: a small sample of plaintiffs whose suits would go to trial, each verdict helping the parties gauge the likely settlement figure, and thereby moving the M.D.L. closer to a conclusion.

Alexandra Lahav, who teaches complex litigation at Cornell Law School, observes that, of the more than a hundred medical-related product-liability M.D.L.s since 2000, only four exclusively affected men. Twenty-two exclusively affected women, including the Johnson & Johnson case and others involving contraceptives such as Yaz and medical devices such as transvaginal mesh. In addition, the women’s cases over all involved far more plaintiffs per case than those affecting men. Lahav believes that these disparities reflect biases in the regulatory apparatus that tolerate greater risks for women than for men. “With women, especially women’s reproductive health, history demonstrates again and again that these products aren’t tested well, the side effects aren’t well known, and there appear to be more adverse events,” Lahav told me. “There’s this sense that it’s O.K. to experiment on women’s bodies in real time.” When such experiments go wrong, they cost companies, but not as much as they might: according to Lahav, lawyers on both sides report that women’s cases are less profitable than cases involving men.

Last summer, Johnson & Johnson reportedly offered somewhere between four and five billion dollars to settle the cases in M.D.L. No. 2738. That deal fell apart, but, in any case, it would not have ended all the litigation the company was facing. Not everyone suing Johnson & Johnson is part of that M.D.L., and not all of the plaintiffs have ovarian cancer. Some are suffering from mesothelioma, a rare and lethal form of cancer, associated with asbestos exposure, that eats away at the thin layer of tissue surrounding the body’s internal organs and often results in death within a year of diagnosis. One of those plaintiffs is Patricia Cook, a fifty-eight-year-old personal trainer and mother of two sons from Virginia Beach. She never lived or worked anywhere near asbestos, but her mother had been an employee of Johnson & Johnson and encouraged her daughters to use the company’s products. Cook began using baby powder when she was twelve—applying it, like Deane Berg, after every shower, and later, once she had children, after every diaper change. In 2020, when those children were grown, Cook found a lump on the lower right side of her abdomen. She went in for an ultrasound, and the technician found a nodule behind her cervix. Given the choice between a biopsy and a hysterectomy, she chose the latter, but during the procedure the surgeon found that her reproductive system was riddled with tumors and decided to biopsy as many as he could. “I got the results on MyChart,” she told me: malignant peritoneal mesothelioma.

Historically, mesothelioma has been associated with men who worked in mining or construction, although it sometimes affected their wives and daughters as well. Now, though, according to Michael Becich, a professor at the University of Pittsburgh School of Medicine who runs the National Mesothelioma Virtual Tissue Bank, “we’re seeing a much younger population and also more women.” The Centers for Disease Control and Prevention recently reported that in the past twenty years there has been a twenty-five-per-cent increase in the number of women who died of the disease: four hundred and eighty-nine in 1999 to six hundred and fourteen in 2020, with the highest number of deaths occurring among homemakers. As early as 1997, lawyers working on behalf of Johnson & Johnson to fight a Texas woman’s mesothelioma lawsuit against the company noted in an internal memo that “rare cases of mesothelioma among women with no other identifiable exposure might be related to exposure to cosmetic talc.”

“I was just in shock,” Cook said of her diagnosis. “I spent my life eating healthy and exercising.” She had just wed her second husband, and, she told me, “I hadn’t married him to be my caretaker. We had plans for a long life.” COVID restrictions kept him from being with her in the hospital, where she spent long stretches alone, having her uterus, omentum, gallbladder, appendix, spleen, part of her peritoneum, part of her diaphragm, and some of her intestines removed, then undergoing hyperthermic intraperitoneal chemotherapy, an intensive treatment in which drugs are poured directly into the abdomen.

Partly to cover medical bills and partly hoping to protect other women, Cook filed a lawsuit against Johnson & Johnson. Her lawyers said that her trial would likely begin in May, 2022. But, as her lawyers were preparing their case, Cook learned that it would not move forward. Nor would any of the other cases in state courts or the tens of thousands of cases that were part of the federal M.D.L. Like planes suddenly grounded at every airport in the country, those cases were all stayed when Johnson & Johnson filed for bankruptcy.

Johnson & Johnson’s lawyers would have it be known that their company—officially, Johnson & Johnson Consumer Inc.—never filed for bankruptcy. The company that did so was called LTL Management L.L.C. LTL, which stands for Legacy Talc Litigation, was created in Texas on October 11, 2021, and merged on the following day with—let’s call it Old J. & J. That same day, LTL Management was converted to a limited-liability company based in North Carolina, and two days after that, on October 14th, it filed for Chapter 11 protection in the U.S. Bankruptcy Court in Charlotte.

The L.L.C. that Johnson & Johnson created never had an office or any employees of its own in Texas or North Carolina. It never manufactured or sold talcum powder; for that matter, it never really conducted any business at all before going belly up. Still, in between its formation in one business-friendly jurisdiction and its bankruptcy in another, the new company took on all of Old J. & J.’s talc liabilities. It was suddenly responsible for some forty thousand talc cases, while a new company, also called Johnson & Johnson Consumer Inc., emerged with all of Old J. & J.’s assets—those tens of billions of dollars—and none of its talc liabilities, leaving it free to carry on with its operations.

The bankruptcy route taken by Johnson & Johnson, formally called a divisional merger, is better known as the Texas two-step. Greg Gordon, a partner at Jones Day, the law firm that has represented every company that has attempted the move so far, has observed that although some portray it as “the greatest innovation in the history of bankruptcy,” the two-step is more than thirty years old. It came into being in 1989, when the Texas legislature amended its Business Corporation Act, permitting a single corporation to divide into two or more entities, including when facing extremely expensive litigation.

No corporation was daring enough to try the two-step until 2017, when Koch Industries used it to shield a subsidiary, Georgia-Pacific, from asbestos claims related to its paper and building products. The parent company formed a Texas corporation called, improbably, Bestwall, which declared bankruptcy in North Carolina three months later, spinning off all the asbestos-related liabilities while allowing Georgia-Pacific to continue making billions of dollars in profits through its other products, among them Brawny paper towels, Quilted Northern toilet paper, and Dixie cups.

Johnson & Johnson is the fourth company to attempt the two-step and, thus far, the most brazen, having collapsed the interval between formation and bankruptcy from three months to seventy-two hours. According to a recent Reuters investigation, the two-step plan at Johnson & Johnson was known internally as Project Plato. As one of the lawyers involved wrote in a memo, “It is critical that any activities related to Project Plato, including the mere fact the project exists, be kept in strict confidence.”

Project Plato has succeeded in pausing Patricia Cook’s lawsuit, and the company will be protected from her case and all others in perpetuity if it is granted a non-debtor release, which extends the shield of bankruptcy to non-bankrupt parties. Non-debtor releases were a lightning rod in the Purdue Pharma bankruptcy, when members of the Sackler family sought to be spared future liability by contributing to the company’s opioid settlement fund. These releases were also part of the bankruptcies that followed sexual-abuse cases against USA Gymnastics, the Boy Scouts of America, and Catholic dioceses around the country. In all these cases, the bankruptcy of one entity was used by others—family members, training facilities, insurance companies, individual parishes—to try to minimize financial liability.

In the Texas two-step, such releases are particularly audacious, since they shield not only ancillary parties but also the party with the greatest liability, to say nothing of the greatest assets—in this case, Johnson & Johnson, which is seeking protection from both current suits and future talc litigation. (The company disputes this characterization, and said in a statement, “LTL’s Chapter 11 filing is intended to resolve all claims related to cosmetic talc in a manner that is equitable to all parties.”) Lindsey Simon, a professor at the University of Georgia School of Law, calls such corporate actors “bankruptcy grifters,” since they enjoy the benefits of bankruptcy but don’t suffer any of its burdens, such as transparency requirements, and they do so without, in any meaningful sense, going bankrupt. “They want the good parts of bankruptcy,” she told me, “without any of the bad parts.”

Michael Kaplan, a bankruptcy judge in New Jersey, inherited Johnson & Johnson’s Chapter 11 filing when, in the first sign of how unusual the case was, a bankruptcy judge in the Western District of North Carolina refused to hear it. In February, in response to plaintiffs’ objections, Kaplan ruled that there was “no impropriety” in the use of the Texas two-step. Allowing the bankruptcy to proceed, he appointed Kenneth Feinberg, who administered the September 11th Victim Compensation Fund and the BP Deepwater Horizon Disaster Victim Compensation Fund, to estimate the value of the talc litigation before the end of the year.

That estimate might not matter, though. Critics say that the point of Project Plato was to try to create an entity with limited assets: specifically, two billion dollars so far to settle current and future claims. That figure is less than half of what Johnson & Johnson reportedly offered the ovarian-cancer plaintiffs in the M.D.L. just last summer, to say nothing of what they could owe all the mesothelioma plaintiffs. And, needless to say, it is also far less than the company’s assets. Johnson & Johnson has already spent nearly a billion dollars—half the value of the settlement fund—on its own legal defense. The company’s bankrupt subsidiary, meanwhile, has its own legal costs, including fees paid to Neal Katyal, the former Solicitor General and a current partner at the law firm Hogan Lovells, who charged $2,465 per hour.

“Shameful,” “indefensible,” “complicated trickery that ordinary people don’t have access to”: thus have members of the Senate Judiciary Committee decried Johnson & Johnson’s bankruptcy maneuver. Earlier this year, the committee held a bipartisan hearing on the two-step loophole and whether it could become corporate America’s default way of avoiding consumer liability, letting companies with problem products squeeze through it with billions of dollars in assets intact. Among those who testified at the hearing was a single mother named Kimberly Naranjo.

Naranjo, who had been abused as a young girl, moved in and out of the foster-care system and struggled with addiction until an aunt helped her turn her life around. In 2021, fifteen years sober, she had bought her first house and was starting a new job as an addiction counsellor at the Salt Lake County Sheriff’s Office when she felt a pain in her side. A week later, she learned that the pain was caused by mesothelioma. Naranjo had no known exposure to asbestos, but at twenty, when she had her first child and was trying to be a better mother than her own had been, she began using Johnson & Johnson’s powder at every diaper change. She did the same for six more children, and all along she used baby powder in her underwear and in her shoes, to combat sweat and body odor in the Utah heat.

Her disease forced her to leave her job, and, unable to pay her mortgage, she soon lost the house. When she learned that she could file a lawsuit, she thought that a settlement might help with her medical expenses or provide for her children after her death. Then came the bankruptcy, which stalled cases like hers and kept other women from even filing.

“I am so grateful that you have listened to me,” Naranjo said to those who attended the congressional hearing. “I wish that Johnson & Johnson would listen, too, but they took away that right from me and thousands of other people who have their own stories, families, and lives that also deserve a right to be heard by a jury.”