Why the 'Texas Two-Step' might be Johnson & Johnson's secret weapon : Planet Money : The Indicator from Planet Money For years, Johnson & Johnson has been entangled in lawsuits regarding its talcum based products being linked to causing ovarian cancer. And to save itself from future lawsuits, the company is betting big on a tricky legal move named after a famous dance.

J&J tries the 'Texas Two-Step'

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SYLVIE DOUGLIS, BYLINE: NPR.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

ADRIAN MA, HOST:

Johnson & Johnson - it's one of the biggest, most famous companies in the world.

STACEY VANEK SMITH, HOST:

Its vaccine has saved millions of lives. Also bandaids, lotion, shampoo, 130,000 workers worldwide - not to mention the elusive Triple-A credit rating. Johnson & Johnson is one of just a couple of companies in the country that has that highest credit rating.

MA: Yeah, except maybe not for long. Johnson & Johnson is facing a huge legal issue - tens of thousands of lawsuits relating to its talcum powder, which has been linked to health problems, including ovarian cancer.

VANEK SMITH: These lawsuits are going to cost J&J billions of dollars, and victims will likely continue coming forward for years and maybe even decades to come.

MA: Economist and Columbia Law fellow Kate Waldock says big cases like these can destabilize even huge companies like J&J.

KATE WALDOCK: It might be that, like, this talc litigation completely swallows up all of Johnson & Johnson. You never know where it's going to end up.

VANEK SMITH: So J&J is trying something kind of bold and kind of new. It's called the Texas Two-Step.

(SOUNDBITE OF MUSIC)

WALDOCK: It's honestly not something that was really like a major tactic prior to Johnson & Johnson. There were maybe a couple of cases, but it's not like a trodden tactic.

VANEK SMITH: But that could change. This is THE INDICATOR FROM PLANET MONEY. I'm Stacey Vanek Smith.

MA: And I'm Adrian Ma. If J&J pulls off the Texas Two-Step, the implications could be enormous - and not just for folks who are filing lawsuits against big corporations, but for the whole U.S. financial system.

VANEK SMITH: Johnson & Johnson - multinational company based in New Jersey, flying high in public opinion right now, and a credit market superstar - also plagued by tens of thousands of lawsuits relating to the talcum powder it used to make. So it is trying this very bold move called the Texas Two-Step. It is a legal maneuver - pretty complicated. Touches on bankruptcy, mass tort litigation and this little company that I'm pretty sure you've never heard of.

(SOUNDBITE OF MUSIC)

VANEK SMITH: So settle in, young Adrian. I've got a tale to tell - of bankruptcy, lawsuits and a thing called LTL.

MA: What is about to happen?

VANEK SMITH: (Laughter) Well, you know, Adrian, corporate law - it can be kind of a dry, complicated topic at times. But of course, the name Two-Step got me very excited, got me thinking about country music. So I actually thought I would try to write a little bit of a two-step explanation of what Johnson & Johnson is attempting here.

MA: OK.

(SOUNDBITE OF MUSIC)

VANEK SMITH: J&J went down to Texas. Debt was on its mind. It owed billions of dollars of the mass torts litigation kind. Now J&J had sterling credit. It's rated Triple-A. But thousands suing could make that go away. Now, J&J's enormous - makes bandaids and vaccines. And it got worried those lawsuits could lick its profits clean. So J&J went down to Texas to try to shed those pesky claims, using a special Texas dance. The Two-Step is its name.

MA: This may be the song of summer.

VANEK SMITH: (Laughter) Maybe the song of the year.

MA: I love it, but maybe should we explain, like, what J&J is doing in Texas and why it's going there and what the Two-Step is?

VANEK SMITH: Yes, that is true. And for this part, it's probably helpful to explain the sans music. So here is the Texas Two-Step. So step one is that Johnson & Johnson goes down to Texas from its headquarters in New Jersey, and it basically breaks the company in two - kind of into a big part and a little part. The big part is, you know, Johnson & Johnson. It's the company. And the little part is this little break-off, and they rename it LTL Management. And basically, all of those talc lawsuits, they get put into LTL.

MA: We should clarify that this is completely different from J&J's recent announcement that its consumer products division is spinning off from its pharmaceutical operations. That's a big deal that will create two huge publicly traded companies.

VANEK SMITH: And LTL has nothing to do with any of that. LTL is just this tiny vessel created especially to hold J&J's talc lawsuits. Claire Boston covers bankruptcy for Bloomberg.

CLAIRE BOSTON: Texas has laws that allow for this split to create the box to put the liabilities in. The idea is by putting the lawsuits in a box, they basically just make all the lawsuits come together, and they would create a, you know, really big pool of money. They've offered, like, at least 2.5 billion in this case, and that would just settle the loss.

VANEK SMITH: So Adrian, step one is just, you know, split the company up, create a little mini company that houses the lawsuits - that's LTL - and put a bunch of money into LTL. And that money will be used to pay out victims. And then step two is that LTL declares bankruptcy. And Claire says that this does a couple of really important things.

BOSTON: Bankruptcy puts an immediate stay on any lawsuit, so it basically pauses everything that's happening in court right now, which is huge because there were some pretty big cases that were pretty close to a verdict. And so that's a huge amount of uncertainty for Johnson & Johnson. And secondly, then they don't have to worry about future claims.

VANEK SMITH: Everything in court kind of gets paused, and then everything kind of gets settled - a lot of it at once - instead of, you know, the company dealing with a bunch of lawsuits that keep coming up for decades.

MA: OK. So I think I understand, but is this even legal?

VANEK SMITH: So in Texas, when a company splits off some of its assets, the law explicitly says that creditors can not go after the other assets. So whatever amount J&J funnels into LTL will go to the victims bringing the suits, but those victims will not have access to any of J&J's other assets.

MA: OK, so this seems like a pretty good strategy for J&J, but does that mean other companies could do it too?

VANEK SMITH: Well, that is TBD actually. So Kate Waldock says this might be a little tricky to pull off actually because the implications of Johnson & Johnson doing this Two-Step are so enormous.

WALDOCK: If you legitimize the Texas Two-Step procedure, I mean, that would just undermine, like, our entire financial system.

VANEK SMITH: And Kate says that is because if Johnson & Johnson can do this to people who are suing it, it could potentially do the same thing to a company or a bank that it owes money to.

WALDOCK: The whole point of being a creditor - you lend someone money, and then they pay you back. If the deal where you lend them money, and if they feel like it, they do a Texas Two-Step and get rid of your claim, then no one's ever going to lend money again.

VANEK SMITH: Oh. It, like, breaks down the trust in the system.

WALDOCK: Yeah.

MA: On the other side, there is this idea that the Texas Two-Step is a way for companies to survive big company-threatening-style lawsuits, you know, be able to do some damage control from big class actions. But a lot of legal experts say this approach also seems like kind of a way to shirk responsibility for hurting consumers.

VANEK SMITH: Everybody does agree that Johnson & Johnson is kind of shooting the moon here, trying this really bold move, and we'll have to see how it shakes out and whether we'll have, you know, any future verses to add to the Two-Step.

(SOUNDBITE OF MUSIC)

VANEK SMITH: This episode was produced by Brittany Cronin, with help from James Willetts. It was fact-checked by Taylor Washington. Our senior producer is Viet Le. Our editor is Kate Concannon. And THE INDICATOR is a production of NPR.

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