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Johnson & Johnson tests a legal maneuver known as the Texas Two-Step

STEVE INSKEEP, HOST:

How does a giant consumer company defend its image in court? Johnson & Johnson is performing the Texas two-step, a complicated strategy in response to litigation. Stacey Vanek Smith and Adrian Ma from NPR's daily economics podcast The Indicator are here to teach you the dance.

STACEY VANEK SMITH, BYLINE: Johnson & Johnson - multinational company based in New Jersey, flying high in public opinion right now and a credit market superstar.

ADRIAN MA, BYLINE: 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. So J&J is trying something kind of bold and kind of new. It's called the Texas two-step.

KATE WALDOCK: It's honestly not something that was, really, like, a major tactic prior to Johnson & Johnson.

MA: That's economist and Columbia Law fellow Kate Waldock, and she walked us through the Texas two-step.

VANEK SMITH: So Step 1 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 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. 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. By putting the lawsuits in a box, they basically make all the lawsuits come together, and they would create a really big pool of money. They've offered, like, at least 2 1/2 billion in this case.

VANEK SMITH: And that money will be used to pay out victims. And then Step 2 is that LTL declares bankruptcy.

BOSTON: Bankruptcy puts an immediate stay on any lawsuit. So it basically pauses everything that's happening in court right now. Then they don't have to worry about future claims.

VANEK SMITH: Everything in court kind of gets settled 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 cannot 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: 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: 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.

VANEK SMITH: So, you know, Johnson & Johnson's kind of shooting the moon, trying this really bold move.

Stacey Vanek Smith.

MA: Adrian Ma, NPR News.

(SOUNDBITE OF LOS ESPLIF'S "INTRO") Transcript provided by NPR, Copyright NPR.

Stacey Vanek Smith is the co-host of NPR's The Indicator from Planet Money. She's also a correspondent for Planet Money, where she covers business and economics. In this role, Smith has followed economic stories down the muddy back roads of Oklahoma to buy 100 barrels of oil; she's traveled to Pune, India, to track down the man who pitched the country's dramatic currency devaluation to the prime minister; and she's spoken with a North Korean woman who made a small fortune smuggling artificial sweetener in from China.
Adrian Ma
Adrian Ma covers work, money and other "business-ish" for NPR's daily economics podcast The Indicator from Planet Money.