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(Reuters) – People suing Johnson & Johnson (NYSE:JNJ) over the company’s talc products urged an appeals court on Monday to revive their claims, saying the profitable company should not be allowed to use a bankrupt subsidiary to block lawsuits alleging the products cause cancer.
They asked a panel of the Philadelphia-based 3rd U.S. Circuit Court of Appeals to dismiss the bankruptcy of J&J’s subsidiary LTL Management, saying that LTL is a “concocted” corporation set up solely to stop them from getting their day in court.
J&J, which maintains its talc products are safe, spun off LTL in October, assigned its talc liabilities to it and placed the newly created subsidiary into bankruptcy days later.
That restructuring strategy, known as the “Texas two-step,” paused about 38,000 lawsuits J&J was facing alleging that its baby powder and other talc-based products contain asbestos and caused mesothelioma and ovarian cancer.
Critics, including lawmakers and legal experts, say J&J’s bankruptcy maneuver could provide a blueprint for other big companies to avoid juries in mass tort lawsuits.
Circuit Judge Julio Fuentes at Monday’s arguments asked the cancer victims’ attorney Jeffrey Lamken whether the bankruptcy court could provide a more efficient resolution of the claims than trying cases one at a time in other courts.
Lamken said the court should not make a general ruling about whether bankruptcy is “better” because its protections should be reserved for companies that are in financial distress and need to reorganize.
He argued cancer victims should be allowed to sue because bankruptcy requires a comprehensive settlement to be reached through a lengthy court process before any individual case can be settled. LTL is under no pressure to move quickly, because it has no operations and suffers no penalty from remaining in bankruptcy, Lamken said.
David Frederick, representing a separate group of cancer plaintiffs, said the bankruptcy allows LTL to pay “less money, more slowly.”
“Not a dime will be paid until the last appeal of the last objector is resolved,” Frederick said.
But J&J countered bankruptcy court allows all current and future talc lawsuits to be settled together, which it says is the fastest and fairest way.
Litigating in other courts creates a huge variety of outcomes. Some plaintiffs will hit home runs and win large verdicts, while “most people won’t even get a turn at bat,” with some dying before their cases go to trial, LTL attorney Neal Katyal said.
Perpetual litigation also creates significant “dead weight” in attorneys’ fees and court costs, Katyal said.
The company has set aside $2 billion to settle talc claims, which LTL executives describe as a starting point rather than a “cap”.
Before the bankruptcy filing, J&J faced costs from $3.5 billion in verdicts and settlements, including one in which 22 women were awarded a judgment of more than $2 billion, according to bankruptcy court records.
But more than 1,500 talc lawsuits have been dismissed without J&J paying anything and the majority of cases that have gone to trial have resulted in defense verdicts, mistrials or judgments for the company on appeal, according to LTL’s court filings.
The cancer victims are asking the appeals court to overrule a New Jersey bankruptcy judge who allowed LTL’s bankruptcy to continue. LTL’s bankruptcy filing automatically stopped lawsuits from proceeding against it, and U.S. Bankruptcy Judge Michael Kaplan in Trenton, New Jersey ruled in February that LTL’s bankruptcy should also stop talc lawsuits from proceeding against parent company J&J.
In refusing to dismiss the case, Kaplan said the bankruptcy court is better equipped to handle mass tort litigation than other courts.
