When a company’s products cause harm, that company is liable to consumers who suffer the damages. Whether those harms include cancer caused by continuous uses of talcum powder that contained asbestos, or exposure to asbestos in paper products, or hearing loss due to faulty earplugs, U.S. law and courts have long held that the company must offer reparations to the damaged parties. But when the damages are truly extensive, the costs of such remediation can lead the companies at fault into bankruptcy.

To avoid such outcomes, some famous corporate names have used a tactic called the “Texas two-step,” in which they create a new subsidiary, fund it with some minimum level of resources, and then transfer all liability to that firm. So for example, Johnson & Johnson established LTL Management LLC, a limited liability company to which it transferred all liability for the approximately 100,000 consumer claims that allege its talcum-based baby powder is a cancer-causing agent. (We should note explicitly that Johnson & Johnson denies all such claims and asserts that its baby powder is safe for use.) Next—that is, the second step in the Texas two-step—the new subsidiary company claims bankruptcy and settles any legal claims with the limited resources it has available.

In this way, the parent company avoids having to pay out any more than it cost it to set up the subsidiary. It also skirts any further liability and reduces its chances of having to declare bankruptcy itself. The losses are limited to just the single subsidiary.

But many consumers and consumer advocates are turning down the invitation to dance the two-step. Noting that such tactics benefit the corporation, to the detriment of consumers, they have brought various court cases to deny the efforts. Judges thus have disallowed LTL Management from declaring bankruptcy, such that it (and its parent company) would continue to be required to pay the talc-related claims.

In contrast, 3M previously had maintained its subsidiary company Aearo to sell earplugs to military and civilian consumers, even before allegations of the products’ faulty protection that led to users’ hearing loss. But the courts still have rejected 3M’s attempt to limit liability just to Aearo, noting that the subsidiary does not qualify for bankruptcy, because it is not in immediate jeopardy. Even if Aearo might not have enough funds to pay out claims and continue operating, its parent company does, so it cannot avoid the responsibility by claiming bankruptcy. 

Although consumer advocates have cheered these decisions, the ultimate outcomes remain unclear. The corporations continue to appeal the rulings, and for example, the Johnson & Johnson case appears destined to appear before the Supreme Court. In the meantime, consumers harmed by their use of its baby powder face medical bills and ongoing challenges.

Discussion Questions

1. What represents an ethical solution to product harm crises in which companies deny responsibility?
2. Should the Texas two-step be allowed, or does it represent a reasonable precedent?

Sources: Alexis Keenan, “Why J&J’s ‘Texas Two-Step’ Setback Could Make it Harder for Companies to Shed Lawsuits,” Yahoo! Finance, August 2, 2023; Evan Ochsner and Alex Wolf, “J&J Is Left Weighing Options After Second Talc Bankruptcy Tossed,” Bloomberg Law, August 1, 2023