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Johnson & Johnson has an enterprise value of $375bn. Yet it wants you to think of it as an underdog. Earlier this month, the healthcare titan announced that it had reached the outlines of a deal to settle liability over allegedly carcinogenic talcum powder. The terms would see the tens of thousands of claimants being paid $14bn over 25 years, or $6.5bn in present value terms.
The so-called mass tort case had been an ongoing, significant overhang for J&J. And the agreed deal was clever — a potential win-win for victims who would begin to get their money soon and closure for the company. But J&J in the press release took the opportunity to fire a broadside against its adversaries. It first singled out plaintiffs’ lawyers whom it said had “conflicted financial incentives”, amid the negotiations.
And then in a remarkable subsequent line, it blamed what it said was frivolous litigation as a result, in part, of “the unregulated and surreptitious financing of product litigation by financial institutions, including private equity and sovereign wealth funds”.
The release did not name the firms in question. But on Friday J&J told a federal court it sought the details on the plaintiffs’ backers and it was serving a subpoena on the $48bn alternative asset manager Fortress Investment Group, whose new owner is Abu Dhabi’s Mubadala Investment Company.
Within Fortress’s private credit business is one of the most sophisticated litigation funding players in the world, known as Fortress Legal Assets. One plaintiff’s lawyer in the talc matter admitted last spring in a deposition that Fortress dollars were, at least in part, funding the multimillion-dollar pursuit of the claims.
Notwithstanding its agreement, J&J has maintained that the scientific evidence shows its talc did not cause either ovarian cancer or mesothelioma, a cancer that develops in the lining of some internal organs. And while it has unsurprisingly taken aim at the lawyers on the other side of the table, its real fury is trained on Fortress. J&J claims the firm’s funding has distorted the bargaining process, with lawyers taking extreme positions because of the financial return requirements of their client. In other words, the Fortress money — with a cost of capital of roughly 15 per cent — served as tax that prevented a settlement from being struck sooner, making both J&J and victims worse off.
Litigation finance is not new and has always been controversial. Plaintiff law firms have been derided as “ambulance chasers” and have stigma attached to them in the US. But they are increasingly backed by the Wall Street houses in mass tort cases, which is leading to showdowns with Fortune 500 companies like the J&J battle.
Litigation funders maintain that at their core they simply level the playing field. Corporate defendants have insurance policies that let them escape or cushion the consequences of their wrongdoing. Litigation finance is supposed to provide the counterbalance for victims of misconduct so they are not stymied in seeking justice by limited upfront cash.
Samir Parikh, a law professor at Wake Forest University who has studied mass tort litigation finance, says that, in fact, the quality of victim claims has little to do with how cases are ultimately resolved. He said in many cases, the most valuable service provided by attorneys is outside the courtroom. “Rather, the name of the game is really marketing, or ‘building inventory’,” he says.
Parikh was referring to the process of finding and accumulating thousands of claimants — meritorious and otherwise — in order to maximise pressure on companies to settle lawsuits. This marketing machine is ultimately what litigation finance is beginning to underwrite.
According to Fortress’s website, it has cumulatively funded $6.8bn in litigation finance. Industry participants say virtually every major private capital firm is involved in funding lawsuits, though often quietly and through affiliates. Centerbridge and Apollo both funded lawsuits of victims of PG&E while also being financial creditors and shareholders of the California utility that paid victims billions over its role in devastating wildfires.
Corporate general counsels and the US Chamber of Commerce advocacy group are now arguing that litigation finance has become a grave threat to many companies given the billions in firepower of mainstream private capital firms. Private capital firms are trying to shed their long-standing image as cut-throat vultures. Still, investing in legal brawls can be lucrative business and the Johnson & Johnson stand-off shows that managing this dilemma is very real.
