A U.S. District Court in Newark, N.J., dismissed a complaint by participants in three Johnson & Johnson 401(k) plans, who alleged that plan fiduciaries failed to protect their investments in company stock offered as a plan investment option.
The participants argued that Johnson & Johnson fiduciaries should have acted following allegations that talc and asbestos had been found in some company products, most notably baby powder, which plaintiffs in product liability cases against Johnson & Johnson have said caused ovarian cancer or mesothelioma. The resulting controversy depressed Johnson & Johnson's stock price.
On Feb. 26, Chief U.S. District Judge Freda L. Wolfson dismissed a lawsuit representing a consolidation of several baby power-related stock drop complaints in the case of Perrone et al. vs. Johnson & Johnson et al. Plaintiffs were seeking class-action status.
The judge noted that she had dismissed an original lawsuit in April, but had given plaintiffs the opportunity to file an amended complaint to the initial lawsuit that had been filed in January 2019.
Referencing her first dismissal, the judge wrote again that plaintiffs' proposals for fiduciaries' response to the baby-powder issue failed to meet the standards set by the U.S. Supreme Court in 2014. The court unanimously, in Fifth Third Bancorp et al. vs. Dudenhoeffer et al., established guidelines for lower courts to determine if a stock-drop complaint should be dismissed or be allowed to go to trial.
"Plaintiffs acknowledge that in the prior opinion I held that issuing a corrective disclosure was not a viable alternative action under Dudenhoeffer," the judge wrote on Feb. 26. "But they argue that 'given the newly pleaded allegations showing that defendants intentionally linked their securities disclosures with their ERISA-covered fiduciary communications, plaintiffs respectfully submit that the failure to disclose non-public information is subject to ERISA's fiduciary duties in this case.'"
However, the judge reiterated her reasons for the earlier dismissal. "I find, as I did on the prior motion to dismiss, that issuing a corrective SEC disclosure revealing the alleged truth about the over inflation of J&J stock and/or the asbestos in the company's talc products, is not a viable alternative action because it is not one which could be taken in a fiduciary capacity, but only in a corporate one," she wrote.
The judge also rejected the plaintiffs' suggestion that Johnson & Johnson fiduciaries could have increased the amount of cash in the 401(k) plans' stock fund to soften the blow of a falling stock price. "Increasing the fund's cash buffer would have triggered a disclosure under both ERISA and the federal securities laws," she wrote. "Further complicating matters, the federal securities laws seemingly would have prevented defendants from making a limited disclosure to only the ERISA plan participants."
The strategy would have violated the Dudenhoeffer guideline against any corrective fiduciary action that would have done more harm than good, the judge wrote.
"Defendants would have been required to reveal to the public-at-large that they were doing so, and to explain that they were doing so because the company's stock was artificially inflated and/or that J&J's talc based products contain asbestos," she wrote.
However, the judge gave the plaintiffs 30 days to file another amended complaint.
Johnson & Johnson announced in May that it would stop selling talcum-based baby powder in the U.S. and Canada, but it would continue selling a cornstarch-based baby powder.
"Johnson's Baby Powder represents approximately 0.5% of the total U.S. Consumer Health business," the company's release said. "Demand for talc-based Johnson's Baby Powder in North America has been declining due in large part to changes in consumer habits and fueled by misinformation around the safety of the product and a constant barrage of litigation advertising."
The statement added that Johnson & Johnson "remains steadfastly confident in the safety of talc-based Johnson's Baby Powder. Decades of scientific studies by medical experts around the world support the safety of our product. We will continue to vigorously defend the product, its safety, and the unfounded allegations against it and the company in the courtroom."
According to Johnson & Johnson's latest 10-K statement, "the number of pending personal injury lawsuits continues to increase" relating to claims that body powders containing talc, primarily baby powder, cause cancer."
Most of cases are pending in federal court, organized into a multidistrict litigation in a U.S. District Court in Newark, N.J., said the 10-K statement, filed Feb. 22 with the Securities and Exchange Commission for the fiscal year ended Jan. 3.
"In talc cases that have previously gone to trial, the company has obtained defense verdicts in a number of them, but there have also been verdicts against the company, many of which have been reversed on appeal," the 10-K statement said.
