What’s really bankrupt? The newest liability dodge by Big Pharma

blindfoldjustice-150x150Big Pharma is blazing a legal trail that wealthy corporations are racing to follow. The corporatists are using a new approach to crush patients and other consumers who seek justice in the civil system with claims that drug makers and other big businesses harmed them with defective and dangerous products or demonstrable misbehavior.

The U.S. Constitution recognizes the fundamental right of claimants to have their cases heard in trial courts. But drug makers and other corporations hope to upend accepted norms, by shoving large-scale liability cases into federal bankruptcy courts that legal scholars say were never intended to hear such matters. As Bruce Markell, a Northwestern Pritzker School of Law professor and retired bankruptcy judge, told the Wall Street Journal of this rapacious corporate tactic:

“This is an attack on the American tort system.”

Indeed. This is not a casual disagreement among lawyers, jurists, and academics. It goes to fundamentals of the U.S. civil justice system and its operation. To see its inequity, we need to look at the differences between regular civil trial courts and bankruptcy courts. Both operate at the federal level. But the former’s authority is constitutional, while bankruptcy courts were a creation of Congress. As the U.S. Bankruptcy Court itself explains:

“A fundamental goal of the federal bankruptcy laws enacted by Congress is to give debtors a financial ‘fresh start’ from burdensome debts. The Supreme Court made this point about the purpose of the bankruptcy law in a 1934 decision: ‘[I]t gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.’”

At a time when the nation’s economy was dominated by people running small businesses, lawmakers wanted both to encourage not just failure that might lead to later success. They also wanted small merchants and others to avoid the centuries-old shadow of regular folks unable to innovate — and, indeed, to be slammed by lifetime debt and the worries, as occurred in the Old World, of penalties like debtor prisons.

But Purdue Pharmaceuticals, and now Johnson & Johnson, have turned the basics of bankruptcy upside down. They argue — in Purdue’s case, successfully for a time, and with J&J in a significant case still pending — that profitable going concerns, or their legal fictions, should be allowed to duck into bankruptcy to elude plaintiffs asserting wrongdoing by the companies.

In Purdue’s case, the company hand-picked a bankruptcy judge and got him to buy a plan that provided billions of dollars to resolve claims by states, counties, cities, Indian tribes, and others that the drug maker caused giant damage with its powerful painkiller OxyContin. The deal shielded the plutocratic family that founded and controlled the company for decades, allowing them to keep billions of dollars of their personal fortunes, avoid lawsuits against them, and never acknowledge any role in the opioid abuse and drug overdose crisis that has killed 500,000 Americans in a decade and still rages.

J&J, facing billions of dollars in claims over its iconic baby powder and whether the company knew it was tainted with cancer-causing asbestos, has one-upped Purdue in the bankruptcy scheme. Here is how investigative reporters for Reuters summarized the strategy of the company, which the news service said is “valued at more than $450 billion,” and “had about $31 billion in cash and marketable securities on hand at the end of the third quarter”:

“Reuters exclusively reported the broad outlines of the bankruptcy strategy being explored by J&J in July. The company went ahead with the plan in October, offloading responsibility for [its talc liability] cases to [a] new subsidiary, which then filed for bankruptcy. Before the filing, the company faced costs from $3.5 billion in verdicts and settlements, including one in which 22 women were awarded a judgment of more than $2 billion, according to bankruptcy court records. Now, J&J proposes to give the subsidiary in bankruptcy $2 billion to put into a trust to compensate all 38,000 current plaintiffs, as well as all future claimants.”

As Reuters also reported, plaintiffs and others have ripped the J&J creation, arguing it is a sham tactic, creating a bogus enterprise and bankrupting it almost at its beginning, so as to limit the corporate parent from facing the full force of justice in the civil system. The federal bankruptcy judge presiding over J&J’s plan is deciding its legal merits.

The news service reported that no matter what the bankruptcy judge decides, J&J will appeal — and the matter will be of sufficient legal significance the case could go on for years.

In the meantime, the corporation will benefit, Reuters reported, because many of those suing the company pursued their claims only after becoming seriously ill. Their lawsuits may be frozen, and they may die of cancers and other complications before their cases can be considered.

J&J, which long promoted itself as a family friendly health company, says it is pursuing every legal avenue properly available to it. The company has tried to prevent news coverage of its dodge, which it provides what it argues is fair compensation to those with claims of harms. Imagine that — denying impropriety and then setting a price on it. How does that blue joke go about the bar pickup with the riposte that says, “We know what you are, we’re just dickering about the price …”?

The Wall Street Journal reported that the bankruptcy strategy is becoming a sort of legal, corporate contagion:

“The new legal tactic is shifting the balance of power toward corporate defendants Johnson & Johnson, Georgia-Pacific LLC as well as U.S. units of Ireland’s Trane Technologies PLC and France’s Compagnie de Saint-Gobain SA, which have corporate affiliates accused of previously selling products that contain asbestos, a cancer-causing mineral. J&J, Georgia-Pacific, Trane, and Saint-Gobain haven’t filed for bankruptcy. But they have used a Texas law to shift at least 250,000 personal-injury cases to bankruptcy court through newly created subsidiaries with limited business operations, a strategy developed by law firm Jones Day, court records show. The Texas law let the companies fill their new subsidiaries with legal liability for pending and future injury litigation before those units filed for chapter 11. The bankruptcies have paused pending lawsuits either against the parent companies or their U.S. affiliates, locking injury claimants out of the tort system and preventing them, at least for now, from putting their claims to juries. These four companies are receiving legal and financial benefits from chapter 11 without risking the likely loss of equity value that would come from placing whole business divisions in bankruptcy.”

In my practice, I see not only the harms that patients suffer while seeking medical services, but also the damage that can be inflicted on them by dangerous drugs and as well the injury they can suffer due to  defective and risky products, especially those of the health care variety.

It is a privilege for my colleagues and I to assist regular folks and to witness the fortitude they must summon when they suffer harms and decide to seek justice in the often intimidating civil system. Malpractice and product liability cases can be time consuming and draining. Testifying and exposing one’s life in court can be scary. But plaintiffs pursue legitimate claims, not just because they often will need a lifetime’s financial support after their injury. They also genuinely seek justice and redress for grievous damage done to them. They want to ensure that systemic wrongs get fixed so others will not suffer as they have.

Corporatists should not be allowed to jurisdiction shop and to bowdlerize the bankruptcy system in profit-maximizing ploys. Bankruptcy judges should reject this ploy. They know that in the federal system, the role of the bankruptcy system is the orderly, reasonable dissolution of businesses — not the determination of broader, complex, and difficult issues, including whether wrongdoing occurred and how justice might best be served.

If the federal system doesn’t quash — pronto — the antics of corporations, what faith will patients, consumers, and public have in our courts? Will we see toy makers create divisions ala BabyOops Inc. for bankruptcies that, effectively, sanction injuring or killing infants? Will vehicle makers have new subsidiaries like Junker Ltd. for bankruptcies that evade injuries or deaths due to wrecks with defective or dangerous cars, trucks, and motorcycles? Will every professional under the sun, doctors notably, suddenly sprout second-life corporate entities that will file for bankruptcy when egregious acts occur with patients?

In the bankruptcy system, the first level of appeal occurs with U.S. District judges, and one has already rejected the Purdue bankruptcy settlement. U.S. District Judge Colleen McMahon, of the Southern District of New York, urged courts above her to resolve growing, unsettled questions about bankruptcy actions, including giving the Sackler family immunity against suits against them over their company’s misbehavior. She emphasized that such courts should not pioneer legal paths but stick to what Congress allows by detailed statute.

Of course, lest any legal scholar wonder about the wisdom of a more expansive role for bankruptcy courts, it is worth revisiting the great regret expressed by Judge Robert Drain of the U.S. Bankruptcy Court in White Plains, N.Y. In an hours-long speech from the bench, he expressed frustration over his court’s inability to address critical issues in the Purdue case, including the ultimate sums settled on and the Sacklers’ taking money from their company that then could not be disbursed to the harmed.

As the New York Times reported of his remarks, the judge said this, spelling it out:

 “This is a bitter result. B-I-T-T-E-R.”

We have much work to do to safeguard Americans’ free and fair access to civil courts to seek justice when they consider themselves wronged.

Patrick Malone & Associates, P.C. listed in Best Lawyers Rated by Super Lawyers Patrick A. Malone
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