J&J has on two separate occasions placed its subsidiary, LTL Management LLC, into bankruptcy to address tens of thousands of claims that its talc-based baby powder caused cancer. The millions of dollars in fees are part of the rising cost of corporate lawyers, but also the time and effort of pursuing a relatively new legal strategy in an already complicated Chapter 11.
J&J has been trying to employ the Texas Two-Step, the legal tactic that roughly half a dozen companies—including
“It seems to me $175 million is a lot to pay for a failed strategy,” said Bruce Markell, a Northwestern University law professor and former bankruptcy judge.
The first bankruptcy and a related appeal incurred fees of about $116 million, court records reviewed by Bloomberg Law show. The second bankruptcy attempt, which was dismissed in July, has so far racked up approximately $62 million in fees.
The company still faces claims that its talc-based products caused cancer, and the suits have already cost it billions of dollars in verdicts, settlements, and litigation fees.
Still, the fees represent a mere fraction of J&J’s overall financial wealth. The company reported $94.9 billion in 2022 gross sales and offered $8.9 billion to resolve the talc claims.
Even if failed, the bankruptcies weren’t without benefits, shielding J&J from most talc-related lawsuits while pursuing them. The company also notched a victory Tuesday when an appeals court threw out a jury verdict that had awarded $223 million to a group of people who blamed their cancers on J&J’s talc-based products.
Now, it must resume defending itself in talc cases outside of bankruptcy, meaning money it had offered to settle with victims will go to legal expenses, J&J’s worldwide vice president for litigation Erik Haas said at a September Senate hearing.
“At the end of the day, the $8.9 billion is going to go to one place: lawyers who are litigating this case,” Haas said. “A bankruptcy resolution would provide—and is the only way to provide in the short term—an equitable resolution.”
J&J didn’t respond to multiple requests for comment. The company says its talc products are safe and don’t cause cancer.
A Novel Case
Jones Day, lead counsel for LTL in both bankruptcies, charged a combined $42.4 million for its work on the cases over the course of nearly two years, according to court filings. But that dollar amount isn’t unusual for lead counsel in a case of this size and complexity.
Kirkland & Ellis LLP charged about $40 million for its work on a
The Third Circuit threw out LTL’s first bankruptcy case in January, ruling that LTL didn’t qualify for bankruptcy relief because, with J&J’s financial backing, it wasn’t in financial distress.
Just hours after the first bankruptcy was formally dismissed in April, J&J again placed LTL into Chapter 11. But Judge Michael Kaplan of the US Bankruptcy Court for the District of New Jersey dismissed that case as well. Applying the Third Circuit’s standard, he ruled that LTL couldn’t receive bankruptcy protection because it wasn’t in “imminent and immediate financial distress.” LTL has appealed Kaplan’s ruling.
The novelty of the Texas Two-Step makes it vulnerable to higher fees, lawyers said. Complex or unusual cases usually bring steeper fees because lawyers spend more time working on them.
The FTX bankruptcy is another example of a complicated, expensive case. Multiple lawyers in the crypto exchange’s bankruptcy have charged more than $2,000 an hour. FTX racked up more than $200 million in fees in just seven months as attorneys and judges alike found themselves in the unfamiliar territory of digital currency.
The Texas Two-Step and crypto bankruptcies are similar in that they’re both still-developing areas of the law, said Nancy Rapoport, a University of Nevada, Las Vegas bankruptcy professor who has worked as a fee examiner in Chapter 11 cases.
Breaking Down the Costs
Claimant lawyers seeking damages from J&J moved to dismiss the bankruptcies several times, repeatedly arguing that the two-step strategy was illegal. Under the bankruptcy code, LTL was on the hook to pay for that opposition: Debtors have to cover the legal fees of court-approved creditors’ committees.
LTL incurred committee fees totaling about $56.7 million during the first bankruptcy and the subsequent appeal. Its own lawyers, consultants, and financial advisers charged approximately $53.7 million for the same time period, court records show.
Another $4.8 million was billed by the teams backing a court-appointed fee examiner and a representative advocating for the value of future claims.
In the second bankruptcy, the company has so far incurred about $33.5 million on the combined cost of its own professionals and those of a group of claimant law firms that supported the $8.9 billion settlement proposal. The official committee that fought to dismiss the bankruptcy billed about $27.6 million.
In all, at least 38 different law firms, financial advisers, and other experts billed LTL for their work on the bankruptcies or the related appeal.
Rising Rates
Most professionals charged more per hour for the second bankruptcy than they did for the first.
Jones Day partner Greg Gordon charged $1,550 an hour for services he provided in the first LTL bankruptcy, which was filed in October 2021. After the US Court of Appeals for the Third Circuit struck down the strategy—which Gordon has called the “greatest innovation in the history of bankruptcy"— Jones Day upped Gordon’s rate.
In the second bankruptcy, filed in April, Gordon charged $1,800 an hour.
The rate change is par for the course amid a rapid increase in hourly rates seen across the restructuring field. In multiple cases this year, lawyers charged upwards of $2,000 an hour.
Brown Rudnick LLP partner David Molton came close to the $2,000-an-hour mark in the second bankruptcy, charging $1,950 per hour—up from $1,620 per hour in the first case. Molton was part of the group that led the opposition to both bankruptcies.
Rates have ballooned over the past decade. In 2009, Judge Kevin Carey of the US Bankruptcy Court for the District of Delaware capped a Sidley Austin LLP partner’s fees at $925 per hour in the Tribune Co. bankruptcy, one of the more onerous and lengthy Chapter 11 cases of the time. Carey said any lawyer seeking to charge more than that needed to provide evidence in support of a higher fee.
“It took us a long time to get to $1,000 an hour as a permissible rate, and in a relatively, comparatively short period of time, we’re now north of $2,000 an hour,” said Robert Keach, co-chair of Bernstein Shur Sawyer & Nelson PA’s restructuring group, who worked as the fee examiner in the first LTL bankruptcy. Keach declined to comment on LTL’s fees.
With LTL, Jones Day was testing a strategy in which a company designates its liability to a subsidiary and then places that subsidiary into bankruptcy. The legality and effectiveness of the Texas Two-Step are still up in the air as companies that have tried it—including Georgia-Pacific unit Bestwall LLC, which faces mass asbestos liabilities—remain mired in lengthy court battles.
“Maybe at some point people are worth $2,000 an hour,” Markell said. “But I would like them to get paid $2,000 an hour for strategies that have uniformly succeeded rather than strategies that are still being tested.”
When claimants asked the Third Circuit to strike down the first bankruptcy, LTL brought in Hogan Lovells partner and former acting Solicitor General Neal Katyal, who charged $2,465 an hour. His rate prompted an objection from the Justice Department, which was overruled.
‘Astronomical’ Fees
Bankruptcy has long been an expensive exercise. Lehman Brothers Holdings Inc., the largest bankruptcy in US history, accrued more than $2 billion in legal fees.
The size of a bankrupt company, the number of professionals retained, and the existence of official committees all have significant effects on how much a bankruptcy costs, according to a 2007 study commissioned by the American Bankruptcy Institute.
Total fees for the LTL litigation will climb as lawyers continue to submit fee applications for their work during both bankruptcies, even after the cases were dismissed. The company will also have to cover appellate costs.
Cases like Lehman Brothers and FTX show that bankruptcy can be far more expensive than what LTL’s cases so far. Even so, the cost of the case is striking, said Cliff White, the former head of the Justice Department’s bankruptcy watchdog.
“When I tell you that fees approaching $200 million are not unprecedented, it’s not to diminish the fact that they are astronomical,” he said.
The cases are LTL Management LLC, Bankr. D.N.J., No. 21-30589, 4/4/23 and LTL Management LLC, Bankr. D.N.J., No. 23-12825, 8/11/23.
To contact the reporter on this story:
To contact the editors responsible for this story:
Learn more about Bloomberg Law or Log In to keep reading:
See Breaking News in Context
Bloomberg Law provides trusted coverage of current events enhanced with legal analysis.
Already a subscriber?
Log in to keep reading or access research tools and resources.