Today, Explained - Johnson & Johnson’s “bankruptcy”

Episode Date: September 22, 2022

Thousands of people say Johnson & Johnson’s baby powder gave them cancer. They’re suing — but the consumer giant is using a bankruptcy strategy called the “Texas two-step” to limit its liability. This episode was produced by Avishay Artsy, edited by Matt Collette, fact-checked by Laura Bullard, engineered by Paul Robert Mounsey, and hosted by Noel King. Transcript at vox.com/todayexplained   Support Today, Explained by making a financial contribution to Vox! bit.ly/givepodcasts Learn more about your ad choices. Visit podcastchoices.com/adchoices

Attention, talcum powder users. If you or a loved one used talcum powder products like Johnson's Baby Powder or Shower to Shower Powder and were diagnosed with ovarian cancer, you may be entitled to substantial financial compensation. For years, lawsuits against Johnson & Johnson have piled up. For years, the company has denied its baby powder caused cancer. And eventually, it found a way to shunt off its legal liability. Just this week, a panel of judges in a Philly appeals court pressed J&J over the way it went about that. Facing tens of thousands of lawsuits,

the company spun off a new unit and siloed the suits into it. That unit then immediately filed for bankruptcy. Coming up on today explained what this might mean for people seeking justice. I hope no woman has to go through this. It really changes your life and your family and it should not happen to anybody. BetMGM, authorized gaming partner of the NBA, has your back all season long. From tip-off to the final buzzer, you're always taken care of with a sportsbook born in Vegas. That's a feeling you can only get with BetMGM. And no matter your team, your favorite player, or your style, there's something every NBA fan will love about BetMGM.

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Please play responsibly. If you have any questions or concerns about your gambling or someone close to you, please contact Connex Ontario at 1-866-531-2600 to speak to an advisor free of charge. BetMGM operates pursuant to an operating agreement with iGaming Ontario. It's Today Explained. I'm Noelle King. Tiffany Hsu is a reporter for The New York Times, and she has been covering the Johnson & Johnson's baby powder lawsuits. Tiffany, how did baby powder become so ubiquitous? How was it marketed? So it's a powder that was often used to alleviate diaper rash around infants' diaper area.

That's mostly how it was marketed by Johnson & Johnson, as pure and gentle enough for baby's bottoms, a product that mothers can trust. I put it on her after a bath. I put Johnson's all over her. Fragile. Handle with Johnson. But over time, Johnson & Johnson realized that it could also market to mothers. So it started to sell the product to women who themselves use these products to reduce feminine odors on their genitals. As long as I can remember, Johnson's baby powder has been making me feel soft, fresh and loved. It was also broadly popular with adults who applied it to other parts of their bodies to soothe rashes or ease chafing caused by friction on the skin.

The substance that is at the center of these lawsuits is something called talc. What's talc and what's the problem with it? Talc is, as we usually come into contact with it, a powder. But it's derived from talcum that is mined from geological deposits, usually deep in the earth. It is known as the softest mineral that is known to man. It's the softest there is. Don't you like how it makes my skin feel so smooth and soft? Uh-huh. How did we come to understand talc and cancer have a relationship? So researchers started raising concerns decades ago, some of them in the 1950s. Consumer advocates grew increasingly alarmed in the 1970s because there were studies that started to suggest that there might be a link between talc and the carcinogen asbestos.

So there are a few theories of how talc might lead to cancer. One, and this has gained traction with plaintiff's lawyers in recent years, is that talc can be contaminated with asbestos, which is a known carcinogen that is associated with mesothelioma, a cancer of the lining of the internal organs. So talc mines are often located near asbestos deposits. And as a result, the geologists that we've talked to have said that raw talc can be intermingled with asbestos. Cosmetic-grade talc is refined usually to remove impurities, but the government doesn't enforce whether or not that happens. The other theory is that when a woman applies talcum powder to her genital area, small particles can migrate up the vaginal canal and travel to the epithelial ovarian tissue or the fallopian tubes.

And the thought is that this could cause irritation that sets off chronic inflammation and that eventually contributes to cancer. Back in 2018, my colleague Ronnie Rabin and I reported that Johnson & Johnson had known for decades that asbestos was a potential concern while they were trying to discredit researchers who said as much. At the same time, Lisa Girion at Reuters found that the company didn't tell the FDA that at least three tests by three different labs in the 1970s had found asbestos in its talc, in one case that the levels were, quote, rather high. Is there any replacement for talc?

Indeed, there is. After consumer advocates began saying that talc can train traces of asbestos, Johnson & Johnson developed a cornstarch version in 1980 and began selling it. No baby powder absorbs better than Johnson's Baby Pure Cornstarch Powder. Okay, so 1980, they begin selling it. Why are we talking about this in 2022? What happened? It's more what didn't happen. Johnson & Johnson has always been adamant that its baby powder is asbestos-free and that there really is no reason why it And for it to remove talc from the shelves would suggest to many people that it was somehow at fault, that it was somehow admitting that there was something wrong with its product. All right, so let me ask you about how marketing changes over time. Cancer is something that scares people. People tend not to buy products that might give them cancer unless they are addicted to them, like cigarettes. So I imagine Johnson & Johnson has to start marketing its baby powder to people who are not aware of the complaints about cancer. How did Johnson & Johnson change who accused of targeting its marketing to Black women for decades, really, using free samples at beauty salons, radio campaigns, other efforts. In 1992, there is an internal memo that notes the, quote, high usage of baby powder among Black women and the, quote, opportunities to grow the franchise among the demographic, despite the fact that that same internal memo also notes the, quote,

negative publicity from the health community on talc. Well, big news from renowned civil rights attorney Ben Crump. He has filed a lawsuit on behalf of a group of Black women against Johnson & Johnson. I don't know a Black woman alive back in the day that didn't use Johnson & Johnson talcum powder. If you took a bath, you was going to put some talcum powder on your body at some point, even kids when we were kids as well. That's right. Last year in July, the National Council of Negro Women filed a lawsuit against Johnson & Johnson saying that the company had marketed its talc baby powder to Black people through promotions at concerts, churches, and barbershops. They doubled their efforts in marketing to Black women.

And that is what is so sinister about it. The company had considered signing Patti LaBelle or Aretha Franklin as a spokeswoman, despite the evidence that its products might contribute to cancer. 50 years of misinformation. That's what we're fighting for. This is infuriating. Where are the regulators? That is an excellent question. There are asbestos regulations at the federal, state, and local levels of government, but talc is not regulated by any government agency.

The cosmetics industry handles monitoring of its own use of talc, and by many accounts, it doesn't do a particularly rigorous job of it. Traces of asbestos have been found in talc makeup products that are marketed to kids and teens. The FDA is now warning parents to throw out three products from Claire's after new tests found they contained asbestos. As well as in some toys and crayons containing the powder. Play school crayons tested positive for asbestos. Tell me what we know about how many people claim they've gotten sick from using baby powder. And I imagine many of them are women, if not most of them.

And how many lawsuits have been filed? So at this point, we have more than 40,000 lawsuits. Many of them are from women with ovarian cancer or mesothelioma. There are some men as well. And they've accused Johnson & Johnson of selling talc baby powder while being aware of its links to health risks, such as possible asbestos contamination. Ronnie and I spoke to many, many victims. There's one example that stands out for me in particular. Pat Schmitz was a former school teacher who said she trusted baby powder because Johnson & Johnson told her it was safe.

And this is a common refrain from plaintiffs, that they trusted the company. And then Pat was diagnosed with mesothelioma. This is a cancer that's usually found among construction crews, shipyard workers and coal miners. I used body powder after every bath or shower. Baby powder or the body powder served the purpose of not chasing. How did you apply it? Sometimes I applied it to my hand and would apply it to my body. And she was angry. She was so angry that she decided to sue despite knowing that she didn't have much time left.

She used to be healthy and robust, but when I met her, she was frail and withered. A judge ordered the company to pay her $4.8 million and that same year she died. And she was 61. There's another woman named Deanne Berg who says that she turned down a $1.3 million settlement offer from Johnson & Johnson because she wanted to force the company to put warning labels on baby powder or stop selling it entirely.

She used talc baby powder for 40 years and she developed ovarian cancer in 2006. I am 100% certain that it caused my cancer. And what she told me was heartbreaking. You know, she said she endured, quote, brutal chemotherapy for six months. She said she sustained permanent hearing loss, nerve damage, anemia, and depression. And the last time I talked to her, she was in remission, thankfully. Surely Johnson & Johnson is no longer selling talc-based baby powder?

They've got like a new product on the market that they can point to? This has been a long road. It hasn't happened as quickly as one might think. In 2019, retailers like Walmart and CVS and Rite Aid pulled Johnson & Johnson's talc baby powder because the FDA had found asbestos in a container of the product. This was a part of a 33,000 bottle batch that Johnson & Johnson voluntarily recalled after the FDA made its discovery. In 2020, Johnson & Johnson said that it would discontinue sales of talc baby powder, but only in the U.S. and Canada. It said it would keep selling it elsewhere. In a statement, the company blaming declining sales, fueled by misinformation around the safety of the product and a constant barrage of litigation

advertising. In April of this year, Johnson & Johnson's shareholders voted against a proposal that would have stopped the sales of talc baby powder in global markets like Asia and South America. Then there was a campaign with nearly 200 organizations. It was led by the Black Women for Wellness to pressure J&J to strip the talc-based products from shelves worldwide. And finally, in August, the company said it would stop selling the product globally in 2023. The company maintains talc-based powder is safe, but says it's making a switch to cornstarch-based powder next year to meet customer needs and evolving global trends. There is nothing that forces the hand of a company like having to pay out money to people who claim their product has injured them. How much has Johnson & Johnson had to pay out in all these lawsuits?

So the verdicts have been varied. In 2018, there was a jury in Missouri that ordered Johnson & Johnson to pay nearly $4.7 billion to 22 women and their families. And those people had claimed that asbestos in the talc had caused them to develop ovarian cancer. But it should be said that Johnson & Johnson has been cleared in several cases and it's successfully appealed others. But the cases have still been very damaging financially and reputationally. In Johnson & Johnson's financial reports, it says that it faced $1.6 billion in talc-related litigation expenses last year.

And this was after setting aside $3.9 billion for legal bills the year before. Coming up, as the lawsuits mounted, Johnson & Johnson made a seemingly dubious, but still legal move to get itself off the hook. money back in your pocket. Ramp says they give finance teams unprecedented control and insight into company spend. With Ramp, you're able to issue cards to every employee with limits and restrictions and automate expense reporting so you can stop wasting time at the end of every month. And now you can get $250 when you join Ramp. You can go to ramp.com slash explained, ramp.com slash explained,

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Johnson's Baby Powder is a feeling you never outgrow. Pure Johnson's Baby Powder from Johnson & Johnson. It's a feeling you never outgrow. Pure Johnson's baby powder from Johnson & Johnson. It's a feeling you never outgrow. Never outgrow. Never outgrow. Never outgrow. It's Today Explained. Jamie Smith is the U.S. pharmaceutical correspondent for the Financial Times,

and he's been writing about how Johnson & Johnson is trying to get out of paying these big legal fees using the Texas two-step. So the Texas two-step is really the catchy name that lawyers and the media have come up with to describe what's a very complex and controversial bankruptcy maneuver. This is really at the center of J&J's response to the multi-billion dollar baby health problem that it faces. What can I tell you about the Texas Two-Step? I mean, it's a scheme that gets its name from the use of a statute which was passed in Texas back in 1989. You know, it was originally intended to make the process

of spinning off companies more efficient. And it was part of a push by local business leaders and lawyers at the time in Texas to make it a much more business-friendly jurisdiction. But it certainly is controversial, or has become controversial, even down in Texas. As the name suggests, there's really two parts to this scheme. The first is a corporate reorganisation, which enables a company to split itself into two separate entities.

Now, in J&J's case, it created a new subsidiary called LTL Management, and it stuffed it with all the potential legal liabilities related to the almost 40,000 personal injury claims that have been filed against it by plaintiffs LTL then when it was created through this process it immediately filed for bankruptcy protection in North Carolina Listen, I got the answer you declare bankruptcy All your problems go away a move that automatically halted all the personal injury cases that it faced, and it prevents claimants from moving ahead towards jury trials.

It's a fresh start. It's a clean slate. Like the Witness Protection Program. Exactly. Not at all. So that's the one part of this process. And the other part is that there's also the valuable parts of Johnson & Johnson, which has all its drug, pharmaceutical business, its medical device business, and its consumer business. And these were all placed into a separate entity

outside of the bankruptcy process. And so essentially, Johnson & Johnson was reborn without the threat of the talc litigation hanging over the good parts of its operations. I declare bankruptcy! And Johnson & Johnson and the good parts of its operations without the threat of the lawsuits, is that a profitable company? Is that a rich company? Oh, Johnson & Johnson is a hugely profitable and rich company. So Johnson & Johnson has a market capitalization of about $440 billion. So it's one of the U.S.'s biggest listed companies, one of the biggest health care products companies in the world. And that goes to the heart of the arguments that the

plaintiffs have been making in all the appeals we've had against this, is that Johnson & Johnson shouldn't be allowed as such a big, powerful, profitable company to use the bankruptcy system to handle these personal injury claims. Is the Texas two-step considered a shady move among business journalists and business professionals, or is this something that companies do all the time when they don't want to face the music? Well, the Texas two-step is a complex and certainly very controversial move. I don't think we can call it a shady move yet, certainly not until the legal processes are over dealing with this. The Texas two-step has already gone through one court case in the bankruptcy court of New Jersey.

And that court found that it was a perfectly legitimate move for Johnson & Johnson to use the bankruptcy process in this way to handle its personal injury claims. However, we have an appeal against that by the TELC claimants and we'll get a decision on that and that will certainly get to the heart of whether it is a legitimate process to use. During my reporting on the Texas Two-Step, I went down to Texas and tracked down a lawmaker who introduced the divisional merger scheme into the state legislature back in 1989. And he said he was appalled at J&J's use of the scheme to try and manage its exposure to these TAL claims. So that was Stephen Wallins, a former Texan lawmaker, and he told me that J&J had dubiously interpreted and misused the divisional merger law to avoid liabilities.

And they would never have proposed this divisional merger law in the first place if they had known that it would have been used in such a way. What are some other companies that have used the Texas two-step to avoid litigation? Any household names? Yeah, well, there are three other Texas two-step cases. Koch Industries, Georgia Pacific, first deployed this scheme back in 2017, train technologies, and a US unit of the France-based company Saint-Gobain followed suit. All these cases are actually linked to asbestos-related lawsuits, and none of them have yet been finalized or settlements successfully paid out to claimants. So it's a scheme that it's just got four sort of examples of it taking place

at the minute. But most experts believe that if J&J are successful in their efforts to use it, that it could actually draw in many other companies to go ahead and use it. And I wonder, are these companies just individually deciding to do this or is there a connection among and between them? The Texas Two-Step has really been driven by a bunch of smart lawyers at the law firm Jones Day. It's one of the biggest law firms in the country. It turned over just over 22.2 billion in revenues in 2020. And each of its equity partners took home on average about $1.3 million that year. So its lawyers really devised and marketed this complex scheme. And one of them, Greg Gordon, who's a Jones Day partner at the

firm's Texas office, described this year in a public forum, the Texas two-step as, I quote, the greatest innovation in the history of bankruptcy. And it's not surprising that Jones Day believed that because, you know, they've been reaping millions of dollars in bankruptcy fees through this. You said that earlier this year a federal judge in New Jersey essentially said Johnson & Johnson can do this. What was the judge's justification? That's right. Judge Michael Kaplan of the New Jersey Bankruptcy Court argued that the bankruptcy courts were the best venue to handle these mass tort claims because they could provide an expeditious, fair and less costly method of settling the claims. So he argued J&J did not file in bad faith, but rather for the legitimate purpose of settling these types of mass litigation. And how did the lawyers for the victims or the alleged victims and their advocates

respond to this? I imagine they were disappointed. Yes, the victims were very disappointed and the advocates were very angry. So actually what we're seeing is they have already filed an appeal against Judge Kaplan's ruling and they are challenging this at the Federal Appeals Court. If this case is thrown out, then I think companies will really think twice about going down the bankruptcy route. But if J&J and LTL are able to win this case, I think it really will set a precedent for the future. Let me ask you lastly, Jamie. Johnson & Johnson does have a reputation. For a long time, it was a reputation for trustworthiness, and surely it wants to protect its reputation.

Does something like the Texas two-step, with all of the dubiousness therein, hurt its reputation? Or has it already been damaged enough by the lawsuits, the thousands of lawsuits against it? J&J talks a lot about its credo, you know, a set of values that it conducts its business by, and which actually stipulates that its first responsibility is towards its customers. And I think inevitably, by resorting to a complex, controversial legal scheme to handle these types of sensitive claims over the baby talc, well, that means it is enduring some reputational damage. Whether this is any worse than having thousands of cases coming to court, decided by a jury with huge awards, gathering media attention, is really anyone's guess. I think the big danger for J&J is that if it loses its appeal or the

appeal against this Texas two-step case, it may have to go back into the mass tort system and face these jury trials anyway after already enduring the reputational damage from going down the route of the Texas two-step. So I think the company will certainly be suffering some sort of reputational hit through this. Today's show was produced by Avishai Artsy. It was fact-checked by Laura Bullard and engineered by Paul Robert Mouncey. Matthew Collette edited the show. I'm Noelle King. It's Today Explained.