The 3rd Circuit’s bankruptcy gift to the trial bar

The 3rd Circuit’s bankruptcy gift to the trial bar

In The News | March 8, 2023

Our civil justice system is intended to resolve issues among parties & provide clarity on the law. But in this situation, the 3rd Circuit failed to do either.

This op-ed was originally published by the Washington Examiner.

Imagine your house catches fire. Upon calling 911 for help, you are asked how severe the fire is. You’re then informed that the fire department will not provide assistance unless the situation is severe but will not tell you what that means.

That is essentially what the U.S. Court of Appeals for the 3rd Circuit told businesses this month.

Faced with tens of thousands of lawsuits, many of which made now-debunked claims regarding talcum powder, LTL Management (a subsidiary of Johnson & Johnson) sought relief through the bankruptcy process. The company would handle all claims through this process, which would bring far greater efficiency in resolving cases in contrast to resorting to individual trials in courthouses around the country. That process would take decades to complete, at great expense to all parties.

Instead, the 3rd Circuit decided that the company had not suffered the requisite level of financial distress the court arbitrarily deemed necessary in order to proceed under the bankruptcy code.

What makes matters even worse is that the court’s decision created a fog of ambiguity surrounding the bankruptcy process as a whole. Just how financially distressed must a business actually be before it’s permitted to utilize this tool? That’s now the question left unanswered.

If the goal of the 3rd Circuit was to clarify the appropriate use of the bankruptcy process, it has done just the opposite.

While the court’s decision is befuddling and likely to cause confusion in other courts, it is worth retelling how LTL Management ended up in this situation to begin with. A pervasive culture of lawsuit abuse and a robust trial lawyer playbook drove the company to seek bankruptcy protection.

Mass tort firms and trial lawyers find companies or organizations to target that they perceive as having deep pockets. Trial lawyers then concoct far-fetched legal theories, often based on junk science reports that they sometimes even fund themselves. Then, through robust advertising and marketing campaigns, they build large client pools for their lawsuits. Next, they seek plaintiff-friendly judges and courtrooms, often in “judicial hellholes,” where they’re more likely to find success with their outlandish claims.

This is the playbook they use time and time again. And although trial lawyers have become something of a caricature in this country with their “call now to get the financial compensation you deserve” advertisements, they keep using this playbook precisely because it works.

Excessive tort costs in the U.S. result in $313.7 billion in annual direct costs and a loss of 4.46 million jobs per year when dynamic effects are considered — all while Americans face record-high inflation.

The only way we’ll begin to rein in these excessive costs is to stop letting trial lawyers abuse our civil justice system.

The decision of the 3rd Circuit Court of Appeals will relegate tens of thousands of cases back into an already over-burdened civil justice system that is far too expensive and takes far too long to resolve matters.

It’s not just bad for the system — it’s a raw deal for claimants, too. Plaintiffs who have legitimate claims will be forced to get back in line and wait all over again. Granted, that’s why the trial lawyers love this decision — they’ll duke it out in the courts for years to come.

LTL Management offered its assets to resolve these claims, but the court’s decision seems to penalize the company for doing so. Under this rationale, the bankruptcy process can only be used when there are few or no assets left to distribute. Now, plaintiffs will face years of litigation, getting no closer to resolution, while the lawyers continue racking up fees and expenses.

Our civil justice system is intended to resolve issues among parties and provide clarity on the law. But in this situation, the 3rd Circuit failed to do either, instead serving the trial bar years of guaranteed employment on a silver platter.

Sherman Joyce is president of the American Tort Reform Association.