To most people, Johnson & Johnson (J&J) is a respected company and the maker of popular consumer products. However, J&J has taken quite a hit lately with both its reputation and finances.

Specifically, J&J has been accused of causing cancer in thousands of individuals due to the alleged presence of asbestos in its baby powder products. As a result, tens of thousands of plaintiffs have sued J&J, with notable results amounting to billions of dollars.

Even though J&J has successfully survived or settled many of these cases, it only takes a handful of plaintiff wins to cause serious financial damage to the company. Because of this, J&J employed a sneaky and ambitious plan called Project Plato.

What Is Project Plato?

Project Plato worked by allowing J&J to create a new company (officially known as LTL Management) that would take on J&J’s talcum powder legal liabilities. LTL Management would then declare bankruptcy and treat any potential plaintiffs relating to the asbestos talcum powder lawsuits as creditors. This maneuver has been referred to as the Texas Two-Step.

Because LTL Management would have a relatively small amount of assets, these plaintiffs/creditors would likely receive less money than if they sued J&J directly. As for J&J itself, it would be free of the legal and financial risks from these talcum powder lawsuits.

It’s an ingenious plan, and you can read more about it in an earlier blog post I wrote. Yet the cleverness of the plan doesn’t stop it from being very unfair to potential asbestos baby powder victims. As you might imagine, plaintiffs weren’t happy about Project Plato and opposed its use.

Legal Opposition to Project Plato

LTL Management filed Chapter 11 bankruptcy in North Carolina, given the success of earlier schemes similar to Project Plato that were filed there. At the time of the filing, there were more than 38,000 lawsuits against J&J alleging its baby powder products contained asbestos which caused the plaintiffs’ ovarian cancers.

Fortunately for the plaintiffs, the North Carolina bankruptcy court moved the case to a bankruptcy court in New Jersey. Once the case got to bankruptcy court in New Jersey, the plaintiffs asked the court to dismiss LTL Management’s bankruptcy petition claiming it was not filed in good faith.

Turns out the “good faith” bankruptcy test that the New Jersey bankruptcy court would use was more generous to the plaintiffs than the equivalent test used by the North Carolina bankruptcy court. Coincidence? Probably not.

Despite this more lenient standard, the New Jersey bankruptcy court refused to dismiss LTL Management’s bankruptcy petition. The plaintiffs appealed the decision to the U.S. Court of Appeals for the Third Circuit (Circuit Court), which ruled in their favor and dismissed LTL Management’s bankruptcy petition.

Why the Circuit Court Struck Down Project Plato

If you’d like to get into the weeds and read about the nuanced legal arguments, feel free to take a look at the Circuit Court’s opinion. But in essence, the Circuit Court concluded that LTL Management did not file its bankruptcy petition in good faith because it was not in “financial distress.”

The Circuit Court recognized that a company can be in financial distress even though it wasn’t yet insolvent. By way of (strained) analogy, you didn’t have to be on the verge of death before you were allowed to go see a doctor.

But how much financial trouble did a company need to be in before it could file for bankruptcy in good faith? Answering that question was tricky, and in finding that LTL Management wasn’t in financial distress, the Circuit Court noted the key fact that despite LTL Management’s legal liabilities, it had access to $61.5 billion from J&J.

In other words, J&J was like a super-rich co-signer on a debt that LTL Management had to pay. So even though LTL Management’s creditors might not be able to get much from LTL Management, they could still recover money from J&J.

There was also the fact that despite a few notable legal losses, J&J handled many of the asbestos baby powder lawsuits against it. For example, J&J settled about 6,800 claims for a little less than $1 billion.

To put this in perspective, the $4.69 billion (later reduced to $2.1 billion) that ovarian cancer plaintiffs won against J&J was divided among 22 women. So while J&J was spending a lot of money to resolve the talcum powder lawsuits against it (J&J’s legal costs totaled between $10 million and $20 million per month), it wasn’t nearly as bad as J&J wanted the bankruptcy court to think.

What Happens Next?

J&J indicated that it would appeal, although it’s not clear if it will appeal to the U.S. Supreme Court or for an en banc review of the decision by the full Third Circuit Court of Appeals. Either way, J&J will face an uphill battle.

Assuming J&J’s appeal is unsuccessful, the dismissal of LTL Management’s bankruptcy petition is a major win for mass tort plaintiffs. However, things may not be over just yet.

For instance, despite ruling against the use of Project Plato, the Circuit Court left open the possibility of defendants in mass tort lawsuits using a variation of Project Plato. Any new approach would need to strike a delicate balance between giving the debtor company enough assets to avoid a fraudulent transfer claim, but not too much where it’s deemed to not be in financial stress.

Finally, we need to keep in mind that the Circuit Court’s decision, assuming it stands, only applies to federal cases in New Jersey, Delaware and Pennsylvania. Despite this limitation, the decision should still have some influence in other courts across the country.

For now, claims against J&J for alleged injuries caused by its baby powder products will likely continue. If you have any questions about bringing your own claim for injuries due to talc-based products containing asbestos, feel free to reach out to me.

Although talcum powder studies are ongoing, it has been established that some products that use talcum powder may contain small amounts of asbestos. And there’s a well-known link between asbestos and cancer (especially mesothelioma).

So where does Johnson & Johnson come in? Well, they’ve been one of the more prominent defendants in these talcum powder/asbestos cancer lawsuits. Let’s take a quick look at the baby powder litigation and then examine how Johnson & Johnson is planning to use something called “Project Plato” to deal with their recent legal and financial losses.

A Brief History of Johnson & Johnson’s Baby Powder Litigation

In 2018, Reuters published a story claiming that Johnson & Johnson (J&J) knew its baby powder products used talc that contained asbestos. In 2019, J&J voluntarily recalled some of its baby powder being sold in the United States.

A lot of people sued J&J and/or related entities claiming the products they used containing talc (such as baby powder) caused their cancer. Many of these cases are currently in the Johnson & Johnson Talcum Powder Litigation MDL, or multidistrict litigation, which is currently in New Jersey federal court.

A few of the cases against J&J have resolved, resulting in massive verdicts in favor of the plaintiffs. One of the most notable was a case from St. Louis where 22 women successfully sued J&J in 2018 and were awarded more than $4 billion in damages. On appeal, this amount was reduced to about $2 billion. Still, a remarkable amount.

As of 2021, J&J faced approximately $3.5 billion in legal settlements and judgments relating to its baby powder. This was bad enough, but it was just the beginning for J&J, with tens of thousands of cases still remaining. Seeing the writing on the wall, J&J allegedly thought of a new strategy to handle these lawsuits and gave it the code name Project Plato.

How Project Plato Works

Project Plato is a very clever strategy that takes advantage of federal bankruptcy and state corporate laws. The goal is to pay off baby powder cancer litigants for pennies on the dollar and prevent J&J from having to worry about future plaintiffs. The plan is still ongoing and it’s unclear if it’ll work as J&J plans, but here’s a rough overview of the process.

For step one, J&J shifted its headquarters to Texas. The reason would be to take advantage of one of Texas’ corporate laws that allows a corporation to divide itself into two or more companies through a process called a “divisive merger.”

In step two, J&J created a subsidiary called LTL Management. This would take on J&J’s legal liabilities relating to the baby powder asbestos litigation. However, it would have a relatively small number of assets to pay any legal awards or settlements. The rest of J&J would continue operating as the second company, yet it would no longer have to worry about any lawsuits from the talcum powder litigation.

The third step required LTL Management to file Chapter 11 bankruptcy, which it did almost immediately after being created.

Project Plato is currently in step four, which involves getting the automatic stay to temporarily halt the talcum powder litigation against J&J. It’s also during step four that J&J hopes the bankruptcy judge will approve LTL Management’s Chapter 11 bankruptcy reorganization plan which has a few special terms.

Namely, all baby powder cancer plaintiffs against J&J would have to make their case in bankruptcy court (instead of regular court) and fight for their share of $2 billion that J&J would give LTL Management to compensate the almost 40,000 current plaintiffs.

J&J would also get a non-debtor release, which would immunize it from getting sued by any future plaintiffs claiming they got cancer from using J&J’s baby powder or talcum-based products. So the $2 billion wouldn’t just be split among the almost 40,000 in current plaintiffs, but it would also be all that’s available for future plaintiffs, too.

J&J reasons that this plan makes it more likely that plaintiffs who go to court for financial compensation for their injuries will get at least something. J&J contends that getting an almost guaranteed small amount of money is better for plaintiffs because they can avoid the risk of losing at trial. It would also give J&J finality to its baby powder legal woes. If successful, Project Plato would allow J&J to move on without constantly worrying about another talcum powder lawsuit decades from now.

Project Plato is a slight variation of something called the Texas Two Step, which has been successfully used by several companies (like Georgia-Pacific) looking to reduce and offload their mass tort legal claims.

Will J&J’s Plan Work?

No one knows for sure. Right now, the case isn’t going as well as J&J would have hoped. When LTL Management filed Chapter 11 bankruptcy, it chose to do so in North Carolina. Why? Because of that state’s history of favorable judicial rulings involving the Texas Two Step strategy. However, the North Carolina judge transferred the case to New Jersey.

As you can imagine, the plaintiffs aren’t happy about Project Plato and are doing everything they can to stop it. The New Jersey bankruptcy judge has scheduled a hearing for February 14, 2022 to listen to arguments from the plaintiffs (who are technically creditors in this bankruptcy proceeding) as to why the court should dismiss LTL Management’s request for bankruptcy.

Their primary argument would be that LTL Management filed Chapter 11 bankruptcy in bad faith. Specifically, that it was done as a way for J&J to avoid paying out the massive legal settlements and court judgments that have already been handed down, and with many more anticipated in the future.

A possible good omen for plaintiffs in the J&J litigation is what’s been happening with Purdue Pharma’s litigation involving its alleged role in the opioid epidemic. Late last year, a judge rejected Purdue Pharma’s proposed settlement and bankruptcy reorganization plan. The settlement and reorganization plan involved non-debtor releases that would have protected key individual defendants from personal liability. While Purdue Pharma’s strategy wasn’t the same as Project Plato, it was similar in that it tried to use the Bankruptcy Code to limit its legal liability in its civil lawsuits.

What Happens Next?

Over the next few months, we’ll see if Project Plato works for J&J. If it does, it would create a blueprint for any other company that faces mass tort lawsuits. This would make it much harder for plaintiffs to obtain compensation for their injuries. There’s even a proposed law in Congress to ban what J&J is trying to do.

In the meantime, if you have any questions as to whether you can receive compensation for injuries potentially related to using baby powder or other talc-based products, don’t hesitate to get in touch with me. And I’ll let you know if there are any major developments in J&J’s Project Plato.