Law firm in J&J baby powder cases sues its litigation funders

By Dietrich Knauth

Feb 13 - A law firm that won the first plaintiff verdict in thousands of lawsuits tying Johnson & Johnson's talc-based baby powder to cancer is suing its litigation funders, alleging that the lenders deceived it in order to “pirate” its talc cases.

Smith Law Firm, which represents 11,500 talc clients in a joint venture with another law firm, alleged that lenders Ellington Financial Inc., ICG Investments and Stifel Financial Corp cut off a $30 million portion of a loan that Smith relied on to fund litigation expenses as the talc lawsuits dragged on in court.

Without that additional money, the Smith firm defaulted on the initial part of the loan and faced defaults on a second loan it had taken in order to buy out another law firm’s interests in a joint venture to represent talc clients, according to an amended complaintfiled Thursday in Mississippi federal court.

Smith Law Firm's principal, Allen Smith, alleged that the lenders always intended for him to default on the loan, and that they conspired to defraud him of ownership and profits from the talc cases through a "loan to own" scheme.

“The Defendants’ motivation was pure greed, realizing the billions of dollars at stake in the talc litigation and in the SLF case portfolio,” Smith Law Firm alleged in the complaint, which seeks a ruling that the litigation funding agreements are void because they were obtained by fraud.

Ellington, ICG Investments and Stifel Financial Corp did not immediately respond to requests for comment. Litigation funders invest in cases in return for a stake in any proceeds.

SPRAWLING TALC CASES

The talc litigation, which Smith says he set in motion with a 2009 lawsuit, now includes over 70,000 federal court cases alleging that J&J’s baby powder and other talc products contained asbestos and caused cancer. J&J, which stopped selling talc-based baby powder in the U.S. in 2020, says that its products are safe, do not contain asbestos and do not cause cancer.

J&J had attempted to contain the litigation by using a corporate maneuver called the Texas two-step to place its talc liabilities into a subsidiary company, which then filed for bankruptcy. Courts have rejected that strategy three times, most recently in March.

Smith Law Firm’s principal was a central figure in J&J’s third bankruptcy, providing 11,000 disputed votes in favor of a $9 billion bankruptcy settlement offer from the company.

The votes allowed J&J to claim that it had support from over 75% of the women suing the company, but the votes were immediately contested by Beasley Allen, a law firm that jointly represents those clients with Smith, and which opposed the settlement offer.

Questions about the votes contributed to a U.S. bankruptcy judge’s decision to dismiss the third bankruptcy, and sparked litigation between Smith and Beasley Allen. Beasley Allen has alleged in a lawsuit that Smith's bankruptcy vote terminated the joint venture agreement, and that he no longer represents the firms' 11,500 mutual clients.

Smith began working with Beasley Allen Law Firm and another law firm on talc cases in 2013, after Smith’s first case resulted in a jury verdict that awarded no damages but concluded that J&J talc products contributed to his client’s ovarian cancer. While J&J was pursuing its bankruptcy strategy, Smith borrowed more money from his lenders to buy out the third law firm in the talc joint venture, Porter Malouf.

Smith’s new lawsuit alleges that the litigation funders deceived him about the availability of $30 million in funds that could be tapped under his previous loan. If he had known those funds would later be restricted, he would not have borrowed more money to buy out Porter Malouf’s stake in the joint venture, according to the lawsuit.

Porter Malouf did not immediately respond to a request for comment.

Smith Law Firm said its initial loan was used to cover expenses related to the talc litigation, including acquiring, screening and filing new cases; obtaining and reviewing medical records; hiring expert witnesses; document management; and other litigation costs. The talc litigation also forced Smith Law Firm to turn away other cases while the lawsuits proceeded, according to the lawsuit.

The case is Smith Law Firm v. Ellington Financial, U.S. District Court for the Southern District of Mississippi; No. 26-cv-101.

For Smith Law Firm: Graham Carner of Carner & Rosemon

For defendants: Counsel has not yet been made public

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