A federal bankruptcy judge has rejected Johnson & Johnson’s latest attempt to settle lawsuits that allege its talc baby powder caused cancer. This is the third time J&J has attempted to resolve thousands of legal claims through bankruptcy courts. 

Johnson & Johnson is not bankrupt. It’s a profitable company. But four years ago, it created a subsidiary to handle its liabilities related to baby powder lawsuits. 

“People have called this maneuver ‘the Texas Two Step,’” said Melissa Jacoby, a professor of law at UNC Chapel Hill. 

This strategy uses what’s called a “divisive merger” to create the subsidiary, she said — a move that’s accepted in Texas. The intent is to shield a company from litigation costs. But J&J was unique, Jacoby said, in its attempt to use the bankruptcy process to handle current litigation and protect itself from future legal claims over talc products.  

“Bankruptcy is not the intended venue for profitable companies to cap their liability for an alleged harm,” she said.

Federal courts rejected J&J’s bankruptcy claims — twice — because the company was not in financial distress, Jacoby added. 

This third attempt was rejected for different reasons. Plaintiffs were given a chance to vote on whether to accept a settlement, and the judge found irregularities in that voting process.

“It wasn’t entirely clear what those irregularities were, but they were enough to convince him that it shouldn’t go forward,” said Carl Tobias, a law professor at the University of Richmond.

In a statement, Johnson & Johnson said it won’t appeal the latest federal bankruptcy court ruling. Instead, it says it will litigate tens of thousands of claims in civil courts. 

Tobias is skeptical the courts can handle that. “That will be impossible in the system as it’s set up now, just could not take on that volume of cases,” he said.

J&J, Tobias added, might reach settlements, but that could take awhile. And plaintiffs have already waited four years as the company attempted to handle claims through bankruptcy court.