Delaware District Court Doesn’t Want 2,400 Johnson & Johnson Talcum Powder Suits

The Johnson & Johnson talcum powder lawsuits provided a platform for a district judge in Delaware to explain why an indemnification agreement does not provide “related to” bankruptcy jurisdiction unless the obligation to indemnify and defend is automatic as a matter of contract.

Sending 2,400 lawsuits back to state courts, District Judge Maryellen Noreika decided there was no “related to” jurisdiction, and if there were, she would abstain.

The Indemnification Agreement

J&J and its talc supplier have been deluged with lawsuits contending that its baby powder contained asbestos-related materials causing cancer. Although J&J attacked the science underlying the claims, a jury in a New York state court, for example, awarded a plaintiff $325 million, including $300 million in punitive damages.

Imerys Talc America Inc. had been J&J’s talc supplier since 1966. Also beset with lawsuits, Imerys filed a chapter 11 petition in Delaware in February. After the filing, J&J removed some 2,400 lawsuits from state courts to local federal courts, contending that the lawsuits were “related to” the Imerys bankruptcy, thus giving rise to federal jurisdiction under 28 U.S.C. § 1334(b).

J&J based its jurisdictional argument on indemnification provisions in the parties’ supply agreement. The contract declared that Imerys “shall indemnify, defend, and hold [J&J] harmless . . . from . . . all liabilities arising out of any violation by [Imerys] of any law, ordinance [or] regulation.”

However, the agreement went on to provide that Imerys would not indemnify J&J for liabilities arising from J&J’s “acts or omissions” or acts or omissions “directed by” J&J.”

Two months into Imerys’s chapter 11 reorganization, J&J filed a motion asking Judge Noreika to establish Delaware as the venue for all the removed lawsuits. In addition to contending that the lawsuits were related to the Imerys chapter 11 case, J&J argued that the lawsuits were overwhelming state courts.

The Lack of Jurisdiction

In her July 19 opinion, Judge Noreika was not writing on a clean slate. She noted how federal courts around the country have already remanded 346 J&J suits to state courts. She said that no federal judge so far has found subject matter jurisdiction. For ABI’s report on one of the remands, click here.

The Third Circuit adopted the widely used test for “related to” jurisdiction: A lawsuit is “related to” if it “could conceivably have any effect on the estate being administered in bankruptcy.” Pacor Inc. v. Higgins, 743 F.2d. 984, 994 (3d Cir. 1984). However, Pacor went on to say that a lawsuit is not “related to” if it is “a mere precursor to the potential third party claim for indemnification” against the debtor. Id. at 995.

As the basis for “related to” jurisdiction, Judge Noreika interpreted Pacor to mean that indemnification “cannot be contingent on the factual findings of subsequent litigation.” Next, she analyzed the J&J indemnification agreement and concluded that it did not “automatically trigger Debtors’ duty to indemnify and defend” J&J.

The duty to indemnify and defend must be established in a separate lawsuit, Judge Noreika said. First, the obligation to indemnify only arises if the debtor violated a “law, ordinance, or regulation.” Second, the duty to indemnify cannot result from acts or omissions by J&J.

Judge Noreika rejected the notion that the agreement imposed an “unqualified duty to defend.” Again, she construed the contract and said the language “strongly suggests that there is no standalone duty to defend, but instead [there is a] potential indemnity for defense costs.”

Similarly, Judge Noreika was not persuaded by J&J’s argument that shared insurance provided the necessary nexus for jurisdiction, on the theory that judgments against J&J would reduce the coverage available for Imerys. Although the argument “might merit some discovery to further clarify the issue,” she did not reach the insurance question because she decided that abstention was appropriate even if there were subject matter jurisdiction.

N.B.: Judge Noreika noted that J&J had not filed any indemnification claims in the Imerys bankruptcy. Could it be that J&J wanted to avoid submitting to the jurisdiction of the Delaware bankruptcy court for counterclaims by Imerys while, at the same time, lodging 2,400 lawsuits in the Delaware district court?

Abstention

Section 1334(c)(1) allows the court to abstain “in the interest of justice, or in the interest of comity with State courts or respect for State law . . . .”

There is a 12-factor test for abstention, although no one factor is determinative, and the court is not required to consider all of them. Judge Noreika found that the following factors favored abstention: (1) The suits in state courts have been pending for months or years; (2) the claims “sound purely in state tort laws relating to personal injury and wrongful death;” (3) the suits are not based on federal law and do not rest on diversity jurisdiction; and (4) a federal judge would be required to apply different state laws to each suit.

Judge Noreika said that each federal judge in Delaware takes about 550 new cases a year. Dropping 2,400 cases on a judge, she said, “defies common sense and logic.” Switching venue would slow down the processing of the suits while a district judge becomes familiar with the facts and the law in dozens of jurisdictions.

Not ignoring the realities of litigation, Judge Noreika said that J&J removed the suits to federal courts “for its own benefit.” The “effort is patently forum shopping,” she said.

On top of finding no subject matter jurisdiction, Judge Noreika exercised her discretion by abstaining from the 2,400 suits in state courts.