Big Pharma’s Latest Bankruptcy Scam

Profits over Justice

After a federal appeals court last week rejected an elaborate ploy by Johnson and Johnson to avoid billions in potential liability over its baby powder products, the company is taking its case to the Supreme Court.  It is the latest in a series of highly controversial bankruptcy schemes deployed by drug companies to do an end run around massive civil litigation for personal injuries caused by their defective products. The hotly debated strategies also allow the companies pay only a small fraction of the pending claims, and in some instances permits their wealthy owners to retain billions in profits from the very products that caused the injuries.  

J&J wants to cap its liability from about 40,000 lawsuits that charge its baby powder products contained asbestos residue that led to ovarian cancers and mesothelioma.  A Missouri jury in 2018 awarded $4.7 billion to 22 female plaintiffs who blamed their ovarian cancers on years of using talcum powder. Internal memos produced during the trial revealed that J&J executives had debated for decades about what, if anything, to do about traces of asbestos in the talc used in their products. Despite knowing about the dangers of asbestos, J&J launched campaigns to discredit researchers and scientists whose studies raised health concerns. The company opted not to switch out talc for cornstarch in its powder because it was too costly.

A Missouri appeals court eventually reduced the $4.7 billion jury judgment by more than half. That was still far too much for J&J. It had asked the court to vacate the jury’s decision. “Decades of independent scientific evaluations confirm Johnson’s Baby Powder is safe, does not contain asbestos, and does not cause cancer,” said a company statement issued after the appeals court decision.  Belying that public bravado was that J&J quietly stopped shipping all talc-based products in the U.S. and Canada in May 2020.

What J&J did next is to try and cap its potential damages by utilizing a seldom used and highly controversial legal maneuver called the “Texas Two-Step” (named after a Texas statute that created the legal dodge). A company splits itself into two separate corporations and then segregates all its legal liabilities into the one without any assets. J&J created LTL Management LLC as a subsidiary, transferred to it all of its talcum-related liabilities, and then LTL filed for Chapter 11 bankruptcy protection. It is a move that Senate Judiciary chairman, Dick Durbin, calls a “get out of jail free card.” Plaintiffs rejected an LTL offer to settle all the pending litigation for $2 billion, an amount that would be paid from a J&J trust.

Plaintiffs also immediately challenged the LTL bankruptcy as a bad faith filing. J&J had $400 billion in assets, about $31 billion in cash, and had paid almost $13 billion the previous year in dividends to shareholders. But all that money was out of reach if the courts ruled the creation of LTL and the transfer of the litigation liabilities was legally permissible. While a lower court upheld the LTL bankruptcy filing, last month a three-judge panel of the Third Circuit Court of Appeals unanimously dismissed it, ruling that: “Good intentions—such as to protect the J&J brand or comprehensively resolve litigation—do not suffice alone.”

Clay Thompson, a mesothelioma lawyer, hailed the Third Circuit decision, saying it had “rejected J&J’s greed-fueled attempt at abusing the bankruptcy system to trample on the rights of its victims.”

J&J sought a rehearing from the entire Third Circuit, but the court declined that motion last week. That left J&J its last option, an appeal to the Supreme Court.

Gaming the bankruptcy system is nothing new for the pharmaceutical industry. The precedent was set in 1985 by the A.H. Robins Company, the manufacturer of the Dalkon Shield, an IUD contraceptive device. About 3.5 million women in dozens of countries used the Dalkon Shield. Although the FDA and Robins had started getting reports in 1970 of serious pelvic infections, blood poisonings, and a laundry list of gynecological complications, the company did not suspend sales for four years. Only after 200,000 women had sued Robins did it declare bankruptcy. The plaintiffs contended that the Robins family, the company’s owners, had fraudulently concealed evidence of their IUD’s dangers. None of the very wealthy Robins family filed for bankruptcy protection.

Instead, the Robins asked the bankruptcy court for an unprecedented accommodation: they would contribute some money to an overall settlement plan so long as the bankruptcy court discharged them of all liability. The court went along. The Robins family obtained broad releases that went so far as to prohibit some injured women from suing their doctors for medical malpractice claims.

OxyContin maker, Purdue Pharma, and its billionaire owners, the Sacklers, are the most recent egregious example of a company and family gaming the system. Since I had written about the Dalkon Shield and the Robin’s family in my 2020 book, Pharma, I was concerned the Sackler family would use the Robins precedent to shield themselves from civil liability. In a Los Angeles Times OpEd in May 2020, “How to Hold Purdue Pharma Accountable for its Role in the Opioid Epidemic,” I warned, “[t]hat the Sacklers might succeed in hiding the full extent of their wealth and that any settlement the bankruptcy court ultimately sanctions will forever leave unanswered the many troubling questions about the full extent of the family’s role in igniting and fanning the opioid epidemic for its own profit. A bankruptcy-approved settlement means no further discovery, trial, or any admission of responsibility by any Sackler.”

In July, in a New York Times OpEd, “The Sacklers Could Get Away With It,” I was joined by Ralph Brubaker, a bankruptcy law professor.  We warned of the consequences should the Sacklers get liability releases from a court to which they were not even parties. “Protection from all OxyContin liability for the Sackler family would be an end-run around the reckoning that justice requires.”

Five months later, in December 2020, I wrote another OpEd in The New York Times, “The Sacklers’ Last Poison Pill,” this time with Temple Law School bankruptcy professor, Jonathan Lipson. Our conclusion? “For many victims of the opioid crisis, and the legitimacy of the bankruptcy system itself, the ‘it’ here — a plan that exonerates the Sacklers without any meaningful disclosure or accountability — may be Purdue’s most poisonous pill.”

None of those high-profile commentaries made a difference in the outcome for the Sacklers and Purdue. On September 1, 2021, the bankruptcy judge approved the plan that freed the Sacklers from any civil lawsuits. All claims against the Sacklers, even by families who lost loved ones to OxyContin, were forever extinguished. While the Sacklers contributed $6 billion of their OxyContin profits to the overall settlement, they kept billions more that were put out of reach from any court. Remarkably, the releases given the Sacklers gave them more immunity than they would have obtained if they had themselves filed for bankruptcy. Under the plan approved by the judge they were protected from legal actions for fraud, willful and malicious personal injury, and even punitive damages.

Pharmaceutical companies are not the only corporations in America that weaponize the bankruptcy system against the victims of defective products. Koch Industries subsidiary Georgia-Pacific used variations of the Texas Two-Step in lawsuits claiming it concealed the dangers of asbestos in its products. 3M has done the same in massive litigation over claims its defective Combat Arms earplugs caused hearing loss. But the drug industry, more than any other financial sector, has perfected the art of denying those injured their day in court.  Once deployed, the bankruptcy schemes mean the companies have no incentive to negotiate a fair settlement. Putting litigation on hold works to the advantage of the corporations and against the interests of the victims. 

The Supreme Court will hopefully uphold the Third Circuit dismissal of the J&J bankruptcy dodge.  However, it should not be something left to the courts to decide.  The Constitution gives the power to enact bankruptcy laws only to Congress. It is long overdue that our elected officials in Washington finally pass legislation that permanently closes the abusive bankruptcy loopholes employed by J&F and Purdue and other drug firms. The current system means that victims of bad drugs and medical devices are victimized again through the schemes that allow some of America’s richest companies and their billionaire owners off the hook. It is time for justice to be put back into the bankruptcy system.