Ethical Dilemma: Two Texas Policy

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Ethical Dilemma: Two Texas Policy

13 Nov 2022
- admin
- Industry Insights
At SOIL, the teaching methodology is largely based on case discussions, which frequently lead to conversations about current business dilemmas. In one of our corporate strategy classes, we spoke about how businesses have developed strategies to deal with challenging situations by deftly avoiding penalties and preventing any negative effects on their overall brand equity.

A case in point was Johnson & Johnson, which earlier this year discontinued its talcum powder products. Apparently, it was a business decision as sales had been steadily declining ever since it was discovered that their talc products had been contaminated with asbestos (a carcinogen) for many years. According to reports, 38000 lawsuits had reportedly been filed in this matter over the years.

“But did the company have no obligations to its customers?” – the class asked the professor.

Our professor replied: “What if I told you that affluent firms might avoid their obligations to their customers thanks to a tactic that is employed in the US”.

It is called the ‘Texas Two Step’ strategy and it works in the following way.
1. Suppose an organization has been compelled to pay compensation because the consumers were severely harmed by its products. To get around this, the organization first establishes a new legal entity into which it transfers its tort liabilities (present and future obligations resulting from the harm it caused to consumers) while retaining only a small amount of the assets of the original company.
2. The newly formed corporation then declares bankruptcy, thus protecting the old business from the costs associated with tort liability.
3. So now all the cases are referred to the bankruptcy process where it will take years to come up with a resolution and the consumers will have to settle for pennies on the dollar or even less!
J&J has recently employed the Texas Two-Step Strategy to manage its exposure to potential legal claims in the following way.
1. In June 2021, one lawsuit against talcum powder resulted in an appeals court in Missouri ordering the company to pay $2.1 billion to the claimants.
2. Later that year, the company used a divisive merger to create a new subsidiary called LTL Management LLC, transferring its talcum-related liabilities to that subsidiary along with a $2 billion trust intended to provide funding for any potential future claims against LTL.
3. Because the talcum-related liabilities are now held in the new subsidiary, claimants can theoretically no longer pursue JNJ for damages but must instead pursue LTL. Given that LTL’s $2 billion trust is significantly smaller than the total assets available to JNJ, this could effectively limit the maximum damages that future claimants could claim, thereby shielding JNJ from potentially unlimited liabilities.
Do you know about any other law that allows corporations to bend the rules and shy away from taking responsibility? Even though they were legally able to do this, was it morally correct? At SOIL, we learn that leading a profitable business is one thing, but doing so while being morally and ethically correct is a major factor in our success. Being ethical is about being fair to all stakeholders, using the right means to achieve results and ensuring no deception. We practice this in every process in SOIL and are also taught to explore this within ourselves through a week-long intense course conducted by theatre artists.

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