News that a federal appellate court ruled that Johnson & Johnson can’t use a corporate bankruptcy to protect itself from liabilities stemming from lawsuits over its baby powder products sent shares of the company down as much as 4% Monday, erasing about $17 billion in market value.
Johnson & Johnson faces about 40,000 cancer lawsuits that allege tainted talc in the company’s baby powder formula caused cancer for its users. The company has already been forced to pay billions of dollars in damages, and one lawsuit was appealed all the way up to the US Supreme Court.
Johnson & Johnson continues to stand by its baby powder formula and has denied that it contains cancer-causing asbestos.
To combat the financial overhang from the cascading pile of lawsuits, Johnson & Johnson embarked on a legal strategy called the “Texas two-step” to shield itself from those losses.
The consumer healthcare company formed a new unit, called LTL Management, and transferred the liabilities related to its baby powder lawsuits to that unit. Then, LTL Management voluntarily filed for Chapter 11 bankruptcy, in a bid to gain some legal protection from the bankruptcy courts.
But the appeals court in Philadelphia said LTL Management’s bankruptcy strategy is not allowed because Johnson & Johnson has never said that it was in immediate danger from the lawsuits.
“What counts to access the Bankruptcy Code’s safe harbor is to meet its intended purposes. Only a putative debtor in financial distress can do so. LTL was not. Thus we dismiss its petition,” Judge Thomas Ambro wrote.
Johnson & Johnson said it would appeal the ruling.
“As we have said from the beginning of this process, resolving this matter as quickly and efficiently as possible is in the best interests of claimants and all stakeholders,” Johnson & Johnson said in a statement. “We continue to stand behind the safety of Johnson’s Baby Powder, which is safe, does not contain asbestos and does not cause cancer.”