Plaintiffs lawyers need to keep pace with mass torts defense moves

We know the Charleston, the West Coast Swing and the Harlem Shuffle. When it comes to mass torts and multidistrict litigation (MDL) in 2022, defendants have resorted to the Texas Two-Step to tie up the proceedings.

If corporations in certain high-profile torts continue to successfully dodge or delay liability by busting out this exploitative move, plaintiffs lawyers will need to anticipate this legal maneuver for the foreseeable future.

Let's discuss how the Texas Two-Step is being used by companies in other states and how it can impact the landscape for torts and MDL.

And It Goes Like This

Defendants often file for Chapter 11 protection when caught up in mass torts. This in itself may not be new or unique, as various religious organizations and companies have used the tactic over the past few decades.

But when a company follows the bankruptcy filing with a "divisive merger," it then creates a new legal hurdle for plaintiffs lawyers and countless would-be claimants.

For example, earlier this year, Johnson & Johnson (J&J) was facing tens of thousands of lawsuits related to its talcum powder, which has been linked to health problems, including ovarian cancer. J&J knew the mass tort would cripple them financially, so the New Jersey-based company created a small entity known as LTL Management, which was responsible for the talc lawsuits and tort liabilities.

Similar to a risk transfer, this "divisive merger" is permitted under Texas law, which defines a "merger" to include the division of a domestic entity into two or more new domestic entities or other organizations. Sometimes in Texas, up is also down.

LTL pooled more than $2 billion into a fund to settle 38,000 pending claims and then filed for bankruptcy, which stays the litigation and halts all future claims. This marks the second move of the Texas Two-Step. Given single Talc verdicts exceed the billion marker, the amount left in the pool would be grossly disproportionate to outstanding claims leaving most victims without recourse.

In February, Chief Judge Michael B. Kaplan surprisingly allowed the legal promenade in the United States Bankruptcy Court in the District of New Jersey.

In its memorandum opinion, Judge Kaplan quoted LTL as saying it used the Texas Two-Step to "produce an equitable resolution of both current and future talc claims by means of a settlement trust, established pursuant to § 105 or § 524(g) [of the Bankruptcy Code], that can promptly, efficiently, and fairly compensate claimants."

Though the case is still pending, when justification like that is used you can imagine the eye rolls of plaintiffs lawyers.

The good news, for now, is that in July, a credible bankruptcy watchdog claimed Johnson & Johnson abused the bankruptcy system in order to delay its litigation and abdicate moral and financial responsibility.

The Department of Justice's Office of the U.S. Trustee filed an amicus brief with the 3rd U.S. Circuit Court of Appeals, advocating for the dismissal of the LTL bankruptcy case in New Jersey. Whether the Court actually dismisses the case is another matter.

An Invitation Across the Nation

The Texas Two-Step is catching on in other areas of the U.S. as well. Just look to Indiana, where Aearo Technologies, one of 3M's subsidiaries, is tied up in a massive MDL with more than 230,000 hearing injury claims.

The suit relates to allegedly faulty earplugs produced by the 3M company and used by the U.S. military. The Combat Arms Earplug Version 2 products were designed to block out explosive noises while simultaneously allowing users to hear commands during combat, but did not properly fit into the ear canals of service members and caused irreparable damage.

A $1 billion trust has been set for those plaintiffs found to be entitled to compensation, but some analysts say that valuation is too conservative, and could run higher than $10 billion.

Aearo filed for Chapter 11 protection in the 7th Circuit federal bankruptcy court in Indianapolis. In its informational brief, filed in July, Aearo claims that it must rely on Chapter 11 in the wake of what it calls "the failure of the largest MDL in U.S. history to successfully advance the resolution of tort claims."

The company further stated publicly: "Make no mistake, the Chapter 11 cases are not about walking away from responsibilities, and it will not be used to deprive claimants of a fair recovery or deny them their day in court."

Many legal experts agree that mediation would have been a better strategy for 3M, especially considering that the plaintiffs are the men and women who serve our country.

In late August, the Indiana bankruptcy judge rejected 3M's bid to temporarily halt the lawsuits it faces via Aearo. 3M responded to the court's action by stating that it will appeal and "continue in the Chapter 11 proceedings," which it believes will "offer a more efficient, equitable and expeditious pathway to resolution of these matters for all parties."

That the plaintiffs in the 3M MDL are veterans might have swayed the judge to proceed with the lawsuits, the first of which is scheduled for late October in federal court. Make no mistake, although not a Texas Two-Step, it is certain that 3M will come up with their own "line-dance" to avoid exposure to almost a quarter of million claimants.

Will It Catch On In A Flash?

Just because the Texas Two-Step is a desperate move for debtors to use in court doesn't mean plaintiffs' counsel should scoff at it. Given it gained so much traction in itself provides reason to strategize and lean into it.

The Johnson & Johnson and Aearo suits are still pending, and how they play out could either validate or nullify the Texas Two-Step in other high-value and high-profile torts and claims. Plaintiffs' counsel should pay close attention to defense's legal footwork, and consider partnering with co-counsel before they make any of their own moves.