Trevor Noah Explains the Texas Two-Step

Pharmaceutical giant Johnson & Johnson’s latest attempt to avoid liability in its wave of talcum baby powder lawsuits is drawing attention from the media and lawmakers. Their legal strategy, colloquially called the Texas Two-Step, takes advantage of a quirk in Texas law that allows corporations to effectively sidestep financial consequences from legal claims and payouts.

The Daily Show With Trevor Noah recently discussed this loophole, pointing out that although Johnson & Johnson might be the latest company attempting this strategy, they’re most certainly not the only ones. Today’s blog explains the Texas Two-Step and how corporations abuse the Chapter 11 bankruptcy process, causing further harm to injured consumers.

What’s going on with Johnson & Johnson?

Johnson & Johnson is reportedly considering using a loophole in Texas law to escape liability for the billions of dollars owed in lawsuits over its talcum powder. Although the company continues to deny allegations the talc caused cancer, NPR and Reuters report:

From at least 1971 to the early 2000s, the company’s raw talc and finished powders sometimes tested positive for small amounts of asbestos, and that company executives, mine managers, scientists, doctors and lawyers fretted over the problem and how to address it while failing to disclose it to regulators or the public.

Johnson & Johnson halted sales of their talcum-based baby powder in the U.S. and Canada in 2020, but continues to face an onslaught of lawsuits numbering in the tens of thousands. Over the past few years, courts and juries have ordered the company to pay out billions of dollars in damages to injured consumers.

Successful use of the Texas Two-Step could effectively dispose of all of these lawsuits in one fell swoop – a failure of justice for the hundreds of people who developed cancer or mesothelioma from exposure to their products.

The Texas Two-Step, explained

How do corporations like Johnson & Johnson get themselves out of paying the billions of dollars in damages they owe to injured consumers and individuals? The process involves side-stepping the entire problem and taking advantage of a loophole in Texas business law.

Here’s how that works. A company with massive liabilities – let’s call it LiabilityCo – needs to figure out a way to avoid both accountability and payouts. (It goes without saying that this is an unethical, unfair, and terrible way to do business, but it is also perfectly legal.)

• LiabilityCo transforms itself into a brand-new, Texas-based entity.
• Then, under the state’s unique “divisive merger” law, LiabilityCo splits itself into two entities – GoodCo and BadCo, for example. GoodCo keeps all the assets and BadCo keeps all the liabilities.
• BadCo files for Chapter 11 bankruptcy to discharge their financial liabilities and, along with that, judgements against them.

Effectively, the Texas Two-Step allows a corporation to dispose of lawsuits against them, while guarding their precious corporate assets. In most states this is considered a “fraudulent transfer,” but Texas law has a more flexible interpretation, making these actions permissible and technically legal.

Johnson & Johnson, a New Jersey-based company, went to Texas and created an entirely new company called LTL, which they used to dump their liability. LTL immediately filed for Chapter 11 bankruptcy in an effort to both avoid paying out damages as well as disclosing sensitive information in court.

U.S. House Representative Katie Porter (D-CA) spoke to Trevor Noah about this bankruptcy loophole, saying, “Companies basically exploit a combination of state and federal law to get off the hook. Bankruptcy is for people and companies who cannot pay. Johnson & Johnson can pay.”

Corporate abuse of the justice system hurts everyone – and it happens a lot

This method of sidestepping liability commits a great wrong against anyone harmed by a product or corporation. As Trevor Noah wonders, why are corporations held to different standards than individuals? As lawsuit and after lawsuit unfolds, the public keeps discovering that these companies knew what they were doing, that they were aware of the dangers, yet they continued selling their products regardless. As individuals, we would likely be charged with a crime for this type of behavior.

Representative Porter points out that the structure of a corporation is inherently designed to protect owners from liability in the event something goes wrong. However, she says, this structure should have its limits, and the Texas loophole is “fundamentally a problem about preventing corporate abuse.”

Johnson & Johnson’s abuse of the system is just one example of a company attempting to escape liability. Other high-profile cases include Purdue Pharma LP, the makers of Oxycontin, largely recognized for their role in ushering in the opioid crisis in the United States. Trevor Noah states they currently face about 3,000 lawsuits. Their bankruptcy plan protects the owners of Purdue, the Sackler family, from future opioid-related lawsuits.

The Boy Scouts of America also sought Chapter 11 bankruptcy as a way of shielding themselves from thousands of claims of sexual abuse dating back for decades. Asks USA Today, “In the Boy Scouts case, is it ethically acceptable for the Scouts, who pledge ‘to do my duty … help other people at all times’ and ‘keep myself … morally straight,’ to escape paying their debts in full?” In our opinion? Absolutely not.

Other corporations abusing the Chapter 11 bankruptcy strategy include USA Gymnastics, the Catholic Church, the Weinstein Company, and PG&E. In an Emory Law journal article, Juan Martinez points out that, with bankruptcy, most survivors are left in the lurch:

This presents a dilemma for the survivors. If they decide to receive a settlement through bankruptcy, then they will be able to close this traumatic chapter of their lives sooner, but they may never be able to hold the organization accountable, and there remains the potential that future victims may suffer abuse. The survivors may also agree to a settlement in bankruptcy, only to discover down the line that the compensation is insufficient to cover their injuries and mental anguish.

Use of the Texas Two-Step and bankruptcy erodes consumer confidence and allows dangerous products on the market. How do we, as consumers, feel safe if we know corporations can protect themselves from liability by simply restructuring and starting over? This creates a system where consumers have no avenue to pursue the damages they need and deserve for their injuries – as well as cause them to lose trust in healthcare and medicine.

The Maryland attorneys at Plaxen Adler Muncy, P.A. work to protect consumers from harm and fight for their rights when injured. Call our experienced legal team today if you were hurt by a dangerous drug of defective product. We want to help. To schedule a free consultation, call 410-730-7737 or contact us to schedule a free consultation. We serve clients throughout Maryland from a variety of office locations.