When Joaquin Duato delivered his first annual results as chief executive and chair of Johnson & Johnson last month, he enthused about being “excited for the future” of the company, which is poised to spin off its consumer business this year in a big corporate transformation.
But a week later the Spanish-born executive’s ambitious plans are in doubt after a landmark court decision. The ruling could torpedo J&J’s controversial bid to use the US bankruptcy system to manage billions of dollars of legal claims from cancer sufferers who say its talcum powder caused their illness.
Executives at other US companies are anxiously studying the ruling by the Third US Circuit Court of Appeal, which experts say could prevent solvent corporations such as 3M and Koch Industries from using complex Chapter 11 bankruptcy schemes to manage mass litigation.
The 56-page judgment delivered by a panel of three judges on Monday dismissed a bankruptcy filing by a J&J subsidiary, which was spun out of the company in 2021 with about 40,000 of the talc cases following a corporate restructuring known as the “Texas two-step”.
If upheld on appeal, it will force the J&J unit named LTL management to fight these cases and potentially thousands more yet to be filed by claimants in jury trials, rather than have them managed by a bankruptcy judge. This process could take decades and ultimately cost hundreds of billions of dollars, according to court filings by LTL.
Judge Thomas Ambro, who wrote the ruling, said only a “debtor in financial distress” should file for bankruptcy and LTL was not in that position because of a $61bn financial backstop provided to it by J&J — one of the world’s biggest companies, with a market capitalisation of $430bn.
Analysts estimate J&J’s total liability well below the amount claimed by LTL in court and do not think the ruling will delay the spin-off of its consumer unit, which sells everything from talc to band aids. But they warn that the ruling casts a shadow over the company as it seeks to remodel itself as an innovator in the pharmaceutical and medical devices sectors.
“We see this ruling resulting in significantly longer timelines for talc litigation resolution,” said Chris Schott, analyst at JPMorgan, who estimates total liability at between $8bn-$10bn.
“It will require J&J to litigate talc claims on a state-by-state basis and leave talc as an ongoing overhang on shares.”
Moody’s Investor Service said the talc ruling was a “credit negative” for J&J but would not affect its triple A rating.
J&J, which began selling baby powder in 1894, denies its talc-based products contain traces of asbestos and cause cancer. It initially fought claimants in the civil courts, winning more cases than it lost. But when a Missouri court ordered J&J to pay more than $2bn to a group of nearly two dozen women who claimed their cancer was caused by its talc, the company adjusted its strategy.
J&J hired Jones Day, a Cleveland-based law firm and author of the “Texas two-step”. The scheme enables companies to split themselves into two separate entities and ringfence all their legal liabilities into one of them. In October 2021 J&J split itself into two and announced that LTL had filed for bankruptcy, a move that placed all talc-related litigation on hold.
J&J followed in the footsteps of Koch Industries subsidiary Georgia-Pacific, Trane Technologies and a US unit of France-based Saint-Gobain, which have all deployed the scheme. By spinning off separate units holding their legal liabilities, which then filed for Chapter 11, the parent groups have been able to operate normally and continue paying dividends to shareholders, while all court cases are halted.
The companies argue that the mass tort system is broken, poses a grave financial risk to companies and is no longer an efficient forum to deliver justice to victims. Settlements can be reached more equitably and quickly by managing the cases in bankruptcy courts, they say, rather than in front of juries — a process J&J described in court as a “lottery”.
Tort lawyers reject this. They argue that bankruptcy schemes deployed by solvent corporations are an abuse of bankruptcy courts and deny wronged people their right to trial by jury. Far from hastening a settlement, they argue, the bankruptcy process puts the tort cases on hold, thus removing an incentive for companies to come to the table to negotiate a settlement.
Critics say the strategy hands companies all the benefits of the bankruptcy system without the burdens. For example, last year Georgia-Pacific paid $2.5bn in dividends to Koch Industries even though it spun off a unit facing thousands of asbestos claims in 2017. Almost six years after the subsidiary filed for Chapter 11 halting all cases, no settlement has been agreed in the bankruptcy court or claimants paid.
Leigh O’Dell, a lawyer at Beasley Allen who sits on the plaintiff’s steering committee in the talc litigation, said the bankruptcy strategy is “cynical” and designed to slam shut the doors to the courthouse for victims.
She said the Third Circuit’s ruling sent a clear message to corporate America that a bankruptcy action must be “legitimately pursued in good faith” for the purposes of reorganisation, rather than solely to gain an advantage over consumers or other claimants in litigation.
Legal experts say the ruling does not automatically block use of the corporate restructuring tools based on state law which sit at the heart of the “Texas two-step” scheme. But by stipulating that companies must prove they are really in financial distress before benefiting from use of the bankruptcy courts, it would discourage their use.
“The ruling changes the risk profile for doing one of these bankruptcy moves,” said Jared Ellias, professor at Harvard Law School.
“I think boards of directors are going to say: ‘you know what — this whole ‘Texas two step’ thing — it really isn’t for us.”
The ruling follows public criticism of bankruptcy schemes used by companies to shield themselves from liability and proposals by politicians to outlaw them. Courts have also begun to scrutinise them more closely.

In August an Indiana judge refused a request by 3M to halt thousands of personal injury claims involving alleged faulty earplugs following a bankruptcy filing by a subsidiary. 3M is appealing the judgment.
On Friday plaintiffs filed a motion to dismiss a bankruptcy filing by the 3M subsidiary Aero, saying the Third Circuit’s ruling on LTL had “knocked the props out” from under the case and it should be dismissed.
J&J said it would appeal the Third Circuit’s ruling, adding that it was based on a “technical requirement” rather than the company’s belief that the strategy was in the best interests of all parties, including claimants.
Dan Prieto, a partner at Jones Day, which acts as legal counsel for LTL, said the ruling would not prevent companies from pursuing divisional mergers or a restructuring prior to making a bankruptcy filing. But it could create perverse incentives by preventing companies from ensuring they provided a financial backstop that is in the interests of claimants, he said.
“The potential ramification of the opinion is to incentivise companies to not be overly protective of claimants when implementing corporate restructuring because otherwise the court might conclude the company is not in sufficient financial distress to file for bankruptcy.”
But most legal scholars said increased risk will probably deter companies from pursuing such schemes. In addition, J&J faces a high hurdle in persuading either the Third Circuit Court or the Supreme Court to hear an appeal on a case involving such unique bankruptcy issues, they said.
“The risk is too great. J&J has spent a lot of resources and now has to return to the talc MDL (a multi district litigation court process aimed at speeding up resolution of cases) with a super bright spotlight on the company and its actions,” said Samir Parikh, a bankruptcy law professor at Lewis & Clark Law School. “It seems to have turned into a PR nightmare.”
For claimants, some of whom are terminally ill, a resolution of the talc cases cannot come soon enough. Shawn “Val” Johnson, who has mesothelioma, a type of cancer linked to asbestos, won a $27mn personal injury award from J&J just days before it deployed the “Texas two-step”. He is still waiting to be paid.
“I’ve been sick for three and half years now unable to do very much and a big effect on my family . . . they [my doctors] don’t expect me to live very long,” Johnson told the Financial Times.
Additional reporting by Michela Tindera