A U.S. appeals court on Monday rejected Johnson & Johnson’s attempt to use bankruptcy to resolve claims that its talc products, including baby powder, caused cancer.

The decision to dismiss the bankruptcy filing of J&J subsiduary LTL Management affects around 40,000 claimants who sued Johnson & Johnson on those grounds — which the company disputes — and leaves it exposed to billions of dollars in potential payouts.

The case also has implications for how corporate America uses the bankruptcy system to deal with lawsuits and the future of a legal tactic, known as the “Texas two-Step, deployed in the case.

The Texas two-step has been used successfully in recent years by a handful of corporations facing accusations of wrongdoing.

“They take advantage of a Texas state law that allows companies to take the company apart, and put all of the liabilities in one new corporation and all the assets in a different new corporation,” said Harvard Law School professor Jared Ellias.

Then comes the “two-step” part: “The bad company — the company with all the problems — files for bankruptcy,” Ellias said.

In 2021, Johnson & Johnson placed its talc liabilities into the new subsidiary, LTL Management, which promptly entered bankruptcy protection. The company argued the approach would help victims could get paid more quickly.

The filing brought those lawsuits to a halt. The company had argued that LTL was in financial distress, hence the bankruptcy filing. But the court disagreed, said Melissa Jacoby, a law professor at the University of North Carolina at Chapel Hill.

“It’s backstopped by Johnson & Johnson, one of the most profitable companies in the world,” she said.

The dismissal of LTL’s Chapter 11 filing sets boundaries on who can use the nation’s bankruptcy system, Jacoby added. “You don’t just get to opt out of jury trials or other parts of the civil justice system that you don’t like simply by saying, ‘But we could do something more efficient here.’”

The ruling also marks the first major challenge to the Texas two-step strategy, according to Reuters.

In an email, Johnson & Johnson said the appeals court decision doesn’t reflect the facts established during the bankruptcy trial about the “appropriateness of LTL’s formation and filing.”

“Resolving this matter as quickly and efficiently as possible is in the best interests of claimants and all stakeholders,” the company added.

David Frederick, an attorney for claimants in the talc lawsuits, said the decision allows his clients’ cases to move forward.

“It’s a huge moment for these victims to be able to get their day in court,” he said.

The company said it will challenge the ruling.