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The Johnson & Johnson “Texas two-step”: corporate masterstroke or reputational checkmate?

Is separating personal injury liabilities from a solvent company a viable legacy solution?

For the best part of a decade, claims have been brought against global giant Johnson & Johnson, arising from asbestos which is said to have contaminated a number of their bottles of talc baby powder. Sources vary when referring to the quantity of such claims, but it is believed that in excess of 30,000 claims are currently being brought against Johnson & Johnson, and this number is only increasing over time. In 2014 less than 1,000 claims were brought, but as at October 2021, over 12,000 claims had already been brought in 2021 alone.

The damages awarded in these claims are significant. One claimant, Shawn “Val” Johnson, was awarded $27 million for his mesothelioma which he alleged was caused by Johnson & Johnson’s contaminated talc. To date it is estimated that Johnson & Johnson have paid over $4 billion in awards, settlements and third-party costs as part of the litigation arising from contaminated talc; that said, the company also maintains that it has successfully defended most claims which have been brought against it.

The history of talc litigation

Investigations have been carried out which suggest that Johnson & Johnson has been aware of potential talc contamination for many years, possibly even decades. It has been suggested that Johnson & Johnson may even have been aware of asbestos contamination in the 1970s, although this has not been confirmed.

It is alleged that due to lengthy usage of talc, individuals have developed ovarian cancer or mesothelioma; the former forming the basis of the majority of claims which are now being brought against the company.

Due to the nature of the justice system in the US, the damages awarded to successful claimants are significantly greater than they would be in England and Wales. The first claim was brought in 2014 and since then, as highlighted above, claim volumes have increased exponentially. In July 2018, a jury in Missouri awarded 22 women, who had allegedly developed ovarian cancer due to the use of talc, $550 million for their injuries, and an additional $4.1 billion in punitive damages; but this sum was almost halved in 2020 when the Missouri Court of Appeal found that some of the claimants ought not to have been included in the action as they resided outside of Missouri. By 2020 however, as a result of decreasing demand for the product across the US and Canada, Johnson & Johnson removed their talc products from sale in those territories.

In October 2021, it was announced that Johnson & Johnson had set up a subsidiary company to which it had transferred the liabilities arising from talc litigation, and that same company had filed for bankruptcy. This move was met with criticism from many commentators who saw the move as an effort by a large, profitable company, to separate itself from its moral and legal responsibilities to individuals who believed it had injured them with its products. Johnson & Johnson has denied that the purpose of its corporate manoeuvre was to avoid having to compensate consumers of its products and has referred to a $2 billion trust fund which it has established to compensate present and future claimants.

The corporate consequences

The actions of Johnson & Johnson are not novel or particularly unique. Georgia-Pacific made a similar arrangement in order to separate themselves from liabilities arising from exposure to asbestos, and Purdue Pharma has explored bankruptcy as a mechanism to detach themselves from claims linked with opioid addiction.

But if the process is used by corporate conglomerates, can it also be used by smaller companies, who arguably have less financial stability and resources to absorb any claims for damages which may be made against them in relation to historic liabilities?

Whilst this may seem like an appealing method of dealing with a company’s legacy liabilities and it appears that large US companies appear to favour this method, it is unlikely that this would be an acceptable method to adopt in the UK by large or small companies. This is because directors of a company owe various duties to a company that arise out of the Companies Act 2006. Whilst a company is solvent, the directors owe duties to its shareholders, but upon a company being insolvent, the directors duties shift and they owe their duties to the creditors of the company.

If the directors of a company were to set up a new subsidiary for the sole purpose of dealing with the claims and then proceeded to place the subsidiary into liquidation, it is very likely that the actions of the directors would be investigated by a liquidator. The directors could face being pursued by the liquidator for breach of fiduciary duties/misfeasance, which may result in the directors being personally liable to repay sums to the liquidator/subsidiary for the benefit of the subsidiary’s creditors.

The directors should also be alive to the fact that a liquidator is required to report on the directors’ conduct to the Secretary of State for Business, Energy & Industrial Strategy. The Insolvency Service on behalf of the Secretary of State will investigate the directors’ conduct, and disqualification action will be taken if it is in the public’s interest. The Secretary of State can apply to the court for a disqualification order; the period of disqualification is between 2 and 15 years. Alternatively, the directors can agree to a disqualification undertaking. The Insolvency Service on behalf of the Secretary of State can apply to the court for a compensation order if the directors are subject to a disqualification order or undertaking. This means that the directors could be ordered to repay sums to the Secretary of State for the benefit of the subsidiary’s creditors.

A more appropriate way forward for all types of companies to deal with legacy liabilities would be to sell the claims to acquirers, which would streamline the balance sheet and provide corporate simplification, separating old and new business.

If you require advice on this issue or on insolvency issues generally, please contact Kiri Hutton in our insolvency and recoveries team. If you require advice on legacy liabilities, please contact Richard Burrows or Jim Bryant in our disease team.