PHILADELPHIA (CN) — In appeals court on Tuesday, pharmaceutical magnate Johnson & Johnson challenged investors who say the company concealed asbestos contamination in its baby powder and other talc products, fraudulently inflating its products’ value.
New Jersey federal Judge Zahid Quraishi certified the class in December 2023, finding that the class period concluded when Reuters published a Dec. 14, 2018, exposé examining internal J&J documents showing the company knowingly hid instances of asbestos contamination in its products.
That exposé, along with five prior partial corrective disclosures, directly correlated with ensuing declines in J&J stock valuation, Quraishi ruled. Thus, Quraishi wrote, J&J’s purported falsehoods created a price impact on the investors’ assets, allowing the class action to proceed.
J&J, which denies asbestos contamination in its talc products, promptly appealed.
As a three-judge Third Circuit panel heard J&J’s appeal on Tuesday, practically the entire hearing revolved around one key question — what qualifies as new information?
Representing J&J, attorney Rob Hochman argued that the Reuters article failed to present any new information and therefore could not be considered the case’s final corrective disclosure. Instead, Hochman posited that a Bloomberg article uncovered evidence indicating purported asbestos contamination of J&J talc and the company’s purported decadeslong cover-up over one year earlier.
“Plaintiffs pled that originally,” Hochman told the panel, suggesting the investors declined to use the Bloomberg article as a corrective disclosure because the 2018 Reuters article created a more significant market disruption, from which they could more strongly assert a price impact on their assets.
Hochman continued, relying on the efficient market hypothesis — the idea that asset prices reflect all available information — to suggest that even if a price impact did exist, the investors’ descriptions of their proposed partial corrective disclosures might render their class period so small that many of the litigants would fail to qualify.
“You have to take the good with the bad,” Hochman said. “They have all sorts of facts where they rely on small sources…they say can move the market because it has false statements. But then when it comes time for them to pay the price of how the efficient market hypothesis absorbs things, they say, ‘Oh no, no — it doesn’t have to be really new, and maybe people were evaluating differently.’ But opinions, and reporters’ opinions like the Reuters opinion, that doesn’t count.”
Circuit Judge L. Felipe Restrepo — a Joe Biden appointee — questioned Hochman on whether information could qualify as a corrective disclosure if it remains “unintelligible or opaque to the average participant in the market.”
While Hochman argued any such consideration is irrelevant, Chung suggested otherwise, noting that existing legal precedent specifically defines corrective disclosure as the moment in which a company’s falsehood becomes “publicly known.”
Chung continued, referencing J&J’s prior court-ordered document releases in which the company made available tens of thousands of unorganized and unlabeled files containing information indicating the company knew of asbestos contamination in its talc products.
Describing these releases as “document dumps,” Chung suggested accessing relevant information among filler files might be so difficult that it cannot be considered public knowledge.
“That might be publicly available, but that’s not what [legal precedent] says,” Chung told Hochman. “[Legal precedent] says ‘publicly known.’”
Hochman countered Chung’s notion, suggesting the difficulty of accessing the information is irrelevant so long as the information is ultimately available to the relevant parties.
“We assume that people whose job it is to follow the marketplace are doing their jobs,” Hochman said. “And if it doesn’t take anything to monitor these websites, to monitor the trials — if that’s the job that you have — we assume you do your job right… The marginal cost of doing that job is zero, and that’s why it all counts.”
Representing the investors’ class, attorney Joseph Daley pushed back on the notion that the 2018 Reuters article merely rehashed existing information.
“The defendants here insist that Reuters had nothing new, and that’s not true,” he told the court panel. “We know it’s not true.”
Daley continued, noting that one of J&J’s experts at trial conceded that the company’s decision to ignore recommendations for more accurate asbestos testing methods was first disclosed by Reuters.
Chung cast doubt on this assertion, however, noting that a separate article published over a year earlier than Reuters’ used the same source to show that J&J neglected to use more accurate testing.
Still, Daley argued, J&J has failed to disprove price impact, providing insufficient evidence to meet its burden.
“They have none,” Daley said. “There’s no citation to a page in the appendix where they come forward and say, ‘XYZ shows that we have disproved price impact.’”
In lieu of evidence, Daley argued, J&J’s arguments amount to little more than “casting some aspersions.”
“They’ve made some showing, but they haven’t carried their burden of severing that link between their misconduct and then the obvious price impact that happens at the end of the class period,” he said.
Circuit Judge Patty Shwartz, a Barack Obama appointee, joined Tuesday’s panel.
J&J is also awaiting a decision in bankruptcy court that could force a settlement for tens of thousands of mass tort litigants who say the company’s baby powder caused them to develop ovarian and other cancers, preventing them or future individuals from seeking justice in court.
With over 62,000 plaintiffs currently demanding compensation from J&J’s subsidiary J&J Consumer Inc. — which produced the talc baby powder — the subsidiary began shielding its assets using a controversial legal tool known as the “Texas Two-Step.”
Step one of the Two-Step involves registering the subsidiary in Texas before taking advantage of the state’s unique “divisive merger” law, which allows a company to split into two entities — one that assumes all liabilities and one that retains nearly all assets. This prevents all litigants from demanding legal compensation from the asset-laden entity.
In step two of the Texas Two-Step, the liability-bearing entity files for bankruptcy — which freezes all related lawsuits, halting all litigants’ attempts to receive compensation in court.
Once the legal maneuver is complete, opponents argue, a company can use that red tape to pressure litigants into accepting lesser payments via a settlement.
While a federal judge struck down J&J’s first two attempts at the Texas Two-Step, the company’s latest attempt remains pending in the U.S. Bankruptcy Court for the Southern District of Texas. If the company is successful, litigants will be entitled to an approximately $9 billion settlement.