COLUMN-3M foes act fast to capitalize on J&J’s talc bankruptcy defeat

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Alison Frankel

Feb 2 (Reuters) - When a U.S. appeals court ruled on Monday that Johnson & Johnson can’t use the U.S. bankruptcy system to offload vast litigation exposure from product liability claims, the people who reacted most quickly were undoubtedly J&J investors.

Within hours of the 3rd U.S. Circuit Court of Appeals decision, investors drove J&J’s share price down by nearly 4% -- its biggest one-day decline in years.

But another, albeit much smaller, group of people was also roiled by Monday’s ruling from the 3rd Circuit: appellate lawyers who were finishing up friend-of-the-court briefs due on Wednesday in a 7th Circuit appeal by 3M Co that presents issues similar to those in the J&J case.

The lawyers' quick response to the 3rd Circuit’s ruling – redrafting sections of their briefs to add quotations and references to the J&J decision – shows the deep significance of these cases for both plaintiffs and corporate defendants ensnared in mass tort litigation. If your appellate brief addresses an issue that could affect hundreds of thousands of people, it's worth rushing to beat a deadline.

The 3M and J&J appeals aren’t exactly the same, but both involve the big-picture question of whether corporations facing an onslaught of lawsuits can use the U.S. Bankruptcy Code to halt litigation and push for a global resolution via the Chapter 11 process.

At the 7th Circuit, 3M is appealing a bankruptcy judge’s ruling that tens of thousands of military veterans who allege hearing loss from 3M earplugs can continue litigating against the parent company, despite the Chapter 11 bankruptcy of the 3M subsidiary that originally made the earplugs. Like J&J, 3M shifted litigation liability to the subsidiary, Aearo Technologies, but also provided the bankrupt entity with an uncapped financial backstop to cover Aearo's liability.

I should note here that both 3M and J&J maintain that their products are safe and that the bankruptcy process is the best way to deliver a fair, efficient, global resolution of plaintiffs’ claims. J&J has said it will seek review of Monday's ruling by the full 3rd Circuit.

3M and its supporters from the U.S. Chamber of Commerce and other pro-business groups filed their 7th Circuit briefs in December, arguing, in essence, that because 3M and its bankrupt subsidiary are deeply intertwined in their exposure to the earplug lawsuits, the bankruptcy court erred by refusing to halt the litigation against 3M.

3M's brief to the 7th Circuit relied heavily on 2022 precedent from the federal district court in J&J's case, which held that J&J was entitled to a stay on litigation involving talc products because the subsidiary it had created to assume liability for talc litigation had entered Chapter 11.

That’s the ruling, of course, that was overturned on Monday by the 3rd Circuit, which concluded that the J&J subsidiary’s bankruptcy should have been dismissed because the subsidiary was not actually in financial distress, thanks to a funding backstop from J&J.

I asked a 3M spokesperson for comment on the 3rd Circuit decision, which the company will presumably address in a reply brief at the 7th Circuit. He said only that 3M is supporting its bankrupt subsidiary in a mediation process in the Chapter 11.

The 3rd Circuit’s ruling came too late to affect briefs at the 7th Circuit by two groups of plaintiffs who are suing 3M over the allegedly defective earplugs. In briefs last week, plaintiffs' lawyers from Kellogg, Hansen, Todd, Figel & Frederick and Quinn Emanuel Urquhart & Sullivan argued, in a nutshell, that the appeals court should not allow 3M to distort the bankruptcy process to channel lawsuits out of court and into a forum that will give the company extra leverage.

After Monday's 3rd Circuit decision, as you would expect, Kellogg Hansen and Quinn Emanuel immediately alerted the 7th Circuit. In a Feb. 1 notice, they noted that there were key similarities between the 3M and J&J maneuvers, including the parent company backstop for the bankrupt subsidiary. The 3rd Circuit’s reasoning, they said “is persuasive and relevant here.”

Their point was amplified in some of those hastily redrafted friend-of-the court briefs I mentioned. The trial lawyers’ group American Association for Justice, for instance, added a robust discussion of the 3rd Circuit ruling to its brief, arguing that it showed how a parent company had steered its subsidiaries into an unwarranted bankruptcy merely “to escape accountability and preserve their own assets by not filing.”

The lawyer who wrote the trial lawyer group’s brief, Jeffrey White, told me he had only a few hours, after the 3rd Circuit decision was published, to revise his 7th Circuit brief to highlight the 3rd Circuit’s conclusion that J&J’s subsidiary wasn’t really in financial distress. “That gave us the thread to tie the cases together,” he said.

Carl Cecere, who wrote a brief to the 7th Circuit on behalf of several U.S. senators and representatives who contend that bankruptcy law does not permit 3M’s strategy, said by email that he spent Monday afternoon reading the 3rd Circuit’s J&J decision. He then added a paragraph to his 7th Circuit brief, describing J&J’s “labyrinthine corporate restructuring,” but noting, “thankfully,” that “the 3rd Circuit rejected this attempted evasion.”

Counsel for the Veterans of Foreign Wars, Hyland Hunt of Deutsch Hunt, said by email that she also read the 3rd Circuit’s J&J decision as soon as it came out. The J&J ruling’s reasoning, she said, “dovetailed with one of the themes in our brief, that the Bankruptcy Code is not a litigation escape-hatch financially healthy corporations.”

Hunt pulled a quotation from the 3rd Circuit opinion to support her argument that 3M’s strategy is at odds with plaintiffs’ constitutional right to a jury trial. She revised the VFW’s brief on Tuesday, with time to spare before Wednesday’s deadline.

At least four other just-filed amicus briefs backing the 3M plaintiffs cite the 3rd Circuit’s decision. I doubt that the 7th Circuit needed a heads-up about the ruling’s significance in the 3M appeal, but the copious references in these briefs certainly provide it.

Read more:

Corporate lawsuit dodge imperiled after court rejects J&J bankruptcy tactic

U.S. court rejects J&J bankruptcy strategy for thousands of talc lawsuits

Surprise! U.S. Chamber backs 3M, argues bankruptcy is fix for mass tort ills (Reporting By Alison Frankel; editing by Leigh Jones)