Sign Up for PublicationsUse of Bankruptcy Proceedings to Address the “Long Tail” of Mass Tort Claims
In recent years, solvent companies facing mass tort litigation have sought to use the bankruptcy code in novel ways, in an effort to obtain something that standard settlements frequently fail to achieve—a final and complete resolution of all potential claims in exchange for a sum certain. Recent developments, however, including the Supreme Court’s decision in Harrington v. Purdue Pharma L.P., raise the question: are these bankruptcy strategies still viable?
The Challenge of the “Long Tail”
The search for a mechanism to achieve a final and complete resolution of mass tort claims has been driven, at least in part, by shareholders. Shareholders of public companies often struggle to understand and value the risks presented by mass tort litigation. Professional investors may have expertise in the industries they invest in, but lack expertise in mass tort litigation, and therefore take a cautious approach to investing in companies targeted by mass tort claims. The result can be a drag on a company’s stock that is disproportionate to the risk the litigation presents.
A global settlement offers a potential solution: if shareholders are implicitly penalizing a company’s stock by $5 billion due to concerns over mass tort litigation, a global resolution of all claims that costs the company $2 billion could boost the company’s share price. However, such a settlement may not have the desired effect if it does not resolve all potential claims. Thus, a critical challenge in structuring a mass tort settlement is what is sometimes known as the “long tail.”
If there are 30,000 product liability claims pending against a company, it is perhaps challenging, but feasible, to negotiate a broad settlement of those 30,000 claims. But what about claims that have not yet been filed? Or that have not yet arisen? Obtaining finality with respect to these future claims—i.e., cutting off the “long tail”—is far from straightforward.
Limits of Class Action Settlements
Class action settlements, although a potentially powerful tool, have important limitations in this context. Courts have generally rejected class settlements that seek to address future claims by creating a capped fund, where the defendant’s liability for future claims is capped at a specific number. This limitation stymied efforts by defendants in the 1990s to resolve asbestos claims through class action settlements. See Amchem Prod., Inc. v. Windsor, 521 U.S. 591 (1997); Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999).
Class action settlements without a hard cap for future claims have been approved in certain contexts; but such settlements leave uncertainty around a company’s future liability. That risk was placed into stark relief in the Vioxx class settlement, which created a $3.75 billion fund that was expected to fully cover future claims. The fund quickly ran out, and within five years Wyeth (the settling defendant) had paid out nearly $14 billion in settlements.
Bankruptcy as an Alternative Mechanism
Bankruptcy procedures, in contrast, do offer finality for a company facing mass tort litigation; however, they usually wipe out the company’s shareholders in the process. Several companies have, nonetheless, sought to avoid that outcome by employing novel strategies.
These strategies trace their origins to a provision of the bankruptcy code designed to protect affiliates of asbestos manufacturers. Under Section 524(g), a bankruptcy court, as part of an approved reorganization plan, may enter a permanent injunction channeling claims against both the debtor and its affiliates to a trust created with the debtor’s assets. Any affiliate seeking protection typically must contribute to the trust an amount that the court determines to be fair and equitable relative to that affiliate’s potential liability. This mechanism offers affiliates of asbestos manufacturers something close to that elusive goal—finality in exchange for a sum certain.
Inspired by this provision, affiliates of defendants facing mass tort litigation have sought to extend the statute’s principles beyond the asbestos context, with some initial success. Courts in some Circuits have, outside the asbestos context, approved class action settlements with channeling injunctions in favor of a debtor’s affiliates, holding that bankruptcy courts have inherent authority to issue such injunctions. See, e.g., In re Combustion Eng’g, Inc., 391 F.3d 190, 230 (3d Cir. 2004).
More recent efforts go a step further. In these cases, the primary mass tort defendant is fully solvent. Thus, to avail themselves of bankruptcy protections, the solvent defendant must undertake an atypical procedure. Though the details may vary, the procedure usually involves a subsidiary with little capital filing for bankruptcy. The subsidiary (debtor) then requests that the automatic stay be extended to the solvent defendant (its parent company), effectively pausing the mass tort litigation. The solvent defendant (parent) uses the space created by the stay to attempt to negotiate a settlement with key plaintiff’s firms. Ultimately, the subsidiary (debtor) seeks approval of a reorganization plan that includes a permanent channeling injunction in favor of the solvent defendant (its parent company), who agrees to contribute a fixed sum to a bankruptcy trust that will pay the mass tort claimants.
These efforts have typically been met with strong opposition from the plaintiff’s bar and skepticism from the courts. Efforts by 3M to address claims related to its combat earplugs in this way were rejected by the bankruptcy court. Aearo Techs. LLC, 2023 WL 3938436, at *14 (Bankr. S.D. Ind. June 9, 2023). Back-to-back efforts by Johnson & Johnson to resolve claims related to talcum powder in this way were likewise rejected by the Third Circuit, In re LTL Mgmt., LLC, 64 F.4th 84, 92 (3d Cir. 2023); In re LTL Mgmt. LLC, 2024 WL 3540467 (3d Cir. July 25, 2024), although a third attempt is currently before a federal judge in Texas.
The Supreme Court’s recent decision in Harrington v. Purdue Pharma L.P. raises fresh challenges for this approach. In that decision, the Court rejected use of non-consensual injunctions in favor of non-debtors (like parent companies) outside of the asbestos context. Under the Court’s ruling, such injunctions are now available only where they are consensual, meaning all debtors agree to them.
Is There Still a Role for Bankruptcy in Resolving Claims Against Solvent Companies?
In the wake of the Aero Technologies, LTL Management and Harrington decisions, is bankruptcy still a viable strategy for solvent defendants facing mass tort litigation? The window for such strategies has certainly narrowed. For such a strategy to work, it would essentially need buy-in from all of the plaintiff-side firms involved in the mass-tort litigation. That may be possible if the defendant takes a collaborative, rather than hostile, approach to the plaintiff’s bar, and offers a large enough settlement. Certainly some defendants believe this is still a viable strategy.