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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.