Johnson & Johnson’s (JNJ.N) strategy to use bankruptcy to resolve multibillion-dollar litigation over claims its talc products cause cancer was rejected by a federal appeals court on Monday, which dismissed a bankruptcy petition by its talc subsidiary.
The ruling by the U.S. 3rd Circuit Court of Appeals in Philadelphia removed from bankruptcy the company’s LTL Management unit, which was facing more than 38,000 legal claims tied to products such as its Johnson’s baby powder.
J&J, which maintains its talc products are safe, created and spun off LTL and assigned its talc liabilities to the unit and placed it in bankruptcy in 2021.
J&J shares were down 2.7% in midday trading on the New York Stock Exchange.
J&J had argued that bankruptcy provided a way to resolve tens of thousands of legal claims more efficiently and fairly than taking the cases to trial individually. The company pledged a funding “backstop” to ensure LTL could pay talc claimants.
The appeals court said it dismissed the LTL Chapter 11 petition because the unit was created solely to access the bankruptcy system, not because it was financially distressed.
“Applied here, while LTL faces substantial future talc liability, its funding backstop plainly mitigates any financial distress foreseen on its petition date,” said the 56-page opinion by the three-judge panel.