Johnston and Johnson (J&J) is being sued because its talcum powder allegedly causes cancer. The company has lost many cases and is on the hook to pay out billions of dollars in settlements. They could do this but this would weaken the company but not materially. Nevertheless, the huge jury verdicts could jeopardize J&J’s AAA credit rating. There are only two companies with this, the highest rating possible–J&J and Microsoft. J&J is a huge company with a net worth of close to $80 billion.
The company could pay off these obligations but it has chosen instead to take advantage of a law in Texas referred to as the Texas Two Step. This strategy is derived from Jones Day, a major law firm. J&J has incorporated in Texas and then has split off its tort liabilities relating to talcum powder to another company which it has capitalized with $2 billion. It then put this second company into bankruptcy which in effect caps the amounts it can pay to consumers at $2 billion. In addition to the New Yorker article, this case is summarized in a new book entitled “Servants of the Damned” by David Enrich.
The Texas Two Step solution has been challenged in Texas courts but they have decided in favor of J&J. This decision is now on appeal. A bankruptcy lawyer friend of mine thinks this case may wind up in the Supreme Court. Should J&J prevail, this would have massive implications for any major tort obligations in the future. It is possible that Congress would pass laws disallowing these types of gimmicks. But this is not certain. This is a battle with an uncertain outcome.
