The jig is up for the Texas two-step

This is an audio transcript of the FT News Briefing podcast episode: ‘The jig is up for the Texas two-step’

Marc Filippino
Good morning from the Financial Times. Today is Tuesday, February 7th, and this is your FT News Briefing.

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Johnson & Johnson can no longer sidestep certain liability lawsuits. Google is playing catch-up with its artificial intelligence technology. And 11,000 Nigerians are suing Shell over oil spills. But first, get ready for a virtual quid, maybe. I’m Marc Filippino and here’s the news you need to start your day.

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The UK Treasury and the Bank of England are designing a digital pound. If it gets off the ground, the e-currency could replace paper banknotes by the end of the decade, but you would still be able to use it just like regular cash. Officials want to make sure the Bank of England keeps control of the UK financial system. The Treasury said a final decision on whether to go ahead with the digital pound would be made around 2025.

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A US court ruled against a company that tried to use a complex legal move to avoid liability. The move is called the “Texas two-step”.

Jamie Smyth
Well, I mean, in some parts of the US, the Texas two-step is actually a country- or western-style dance.

Marc Filippino
That’s the FT’s Jamie Smyth.

Jamie Smyth
But among the legal community, it’s the name of a complex corporate restructuring and bankruptcy scheme that’s become increasingly popular over the last few years, especially among companies facing billions of dollars of personal injury claims.

Marc Filippino
Like Johnson & Johnson, one of the biggest companies in the world. For years, it’s been fighting lawsuits from cancer patients who say the company’s popular talcum powder caused their cancer. So Johnson & Johnson created a subsidiary, transferred all the liabilities into it, and then put that subsidiary into bankruptcy. That move is the Texas two-step, and it’s called that because it uses a business-friendly law in Texas. It allowed Johnson & Johnson to pause all the lawsuits against the subsidiary. And Jamie says other companies have been quietly using this strategy for the past couple of years.

Jamie Smyth
But when Johnson & Johnson’s subsidiary filed for bankruptcy protection — you know, J&J’s a huge company, it’s worth $430bn in terms of its market cap and it’s very well known — so it brought a lot of attention onto the use of these complex bankruptcy schemes by companies facing civil liability lawsuits. So politicians started to query whether this is the right way to go, and they threatened to pass legislation. The media started to sort of question this type of system.

Marc Filippino
And last week, an appeals court ruled against J&J.

Jamie Smyth
Well, it essentially argued that this J&J subsidiary, LTL, actually was not in financial distress and then shouldn’t be in bankruptcy. And the reason it said this was that Johnson & Johnson had provided LTL with a financial backstop so that LTL could pay back whatever claims were decided within the bankruptcy court. So it’s a big blow to Johnson & Johnson.

Marc Filippino
So now all the claims head back to civil court — unless J&J wins an appeal, which Jamie says is a long shot. He also says the recent court ruling against Johnson & Johnson could serve as a cautionary tale for other companies.

Jamie Smyth
You know, what we’re seeing is that Johnson & Johnson has, it’s absorbed quite a lot of reputational damage by pursuing this type of, you know, complex legal mechanism to shield itself from these personal injury claims. You know, most of the claimants have cancer and some of them are in very bad shape. And now if the court dismisses the whole bankruptcy, it means Johnson & Johnson, it spent more than $100mn on this strategy for a start. But now it’s got to go back to square one in terms of fighting these cases back in the civil courts. So most of the legal scholars think it’s unlikely, certainly at the minute or in the near future, that companies are gonna pursue this route. There is a chance maybe if it gets, if Johnson & Johnson win on appeal and there’s more law laid down, perhaps they could come back into fashion. But certainly it’s gonna make companies think twice about this.

Marc Filippino
Jamie Smyth is the FT’s US pharmaceutical correspondent. If you want to learn more about the Texas two-step, another FT podcast, Behind the Money, did an episode on this just a little while back. It was a great listen. We’ll throw a link to that episode so you can hear it in the show notes.

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Now on to another legal case, this time in Africa. Shell has been hit with a claim by residents of an oil-producing region in Nigeria called the Niger Delta.

Tom Wilson
Anybody that’s gone to the Delta or flown over it will just see this mangrove riverine area in parts basically slick with black crude.

Marc Filippino
That’s our energy correspondent, Tom Wilson.

Tom Wilson
Oil exploration started here in the ‘50s and ran successfully for some time. But in the last 20 to 30 years, every single operator has really struggled to manage relations with the community groups down in these onshore areas.

Marc Filippino
And earlier this month, more than 11,000 residents of the Ogale community filed their claim in London’s high court. They said that oil spills from Shell’s operation contaminated drinking water, harmed air quality and destroyed farmland and fishing stocks. It’s now the second community from the region to file this kind of claim against Shell.

Tom Wilson
I think what’s significant about this case is Shell doesn’t necessarily object to the payment of compensation or its responsibility for clean-up. It is already running cleaning operations in certain communities. Shell is arguing that it is only responsible for oil spills that its subsidiaries have committed, but not responsible for oil spills, which are the results of criminal activity. So when criminal groups in the Delta have tapped into Shell’s pipelines to basically steal their oil, which has happened frequently over the last eight years and that’s related to environmental damage, Shell’s arguing it’s not responsible for that.

Marc Filippino
And Shell is also questioning if the case can be heard in a UK court.

Tom Wilson
So the British court has intervened here and said, yes, it can hear this case because Shell PLC is listed in London, headquartered in London, and Shell PLC therefore has sufficient operating responsibility over the Nigerian subsidiary. Shell has been arguing, no, this is a Nigerian issue, the subsidiary is in charge and the subsidiary should be challenged in a Nigerian court. I think that what is important about that is that if successful, if this case is successful, then it opens up Shell and its competitors in the oil and gas space, but ultimately more companies in other industries, to be held legally accountable in western courts, in the jurisdiction where they are headquartered for environmental damage that’s happened overseas.

Marc Filippino
Tom Wilson is the FT’s energy correspondent.

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Google announced plans yesterday to launch an AI chatbot. It would be a rival to the more well-known ChatGPT. ChatGPT’s owner, OpenAI, made a huge splash a couple of months ago when it released the chatbot. It offers an easier alternative to more traditional search engines. Now, search engines and tech companies in general are investing billions of dollars in AI. Just last week Google invested about $300mn in artificial intelligence start-up Anthropic. Google’s chatbot will be called “Bard”. Google indicated that this would be a separate interface from the company’s search engine.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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