(Bloomberg) — Johnson & Johnson’s bold move to bypass a U.S. court in New Jersey and seek a potentially friendlier venue in Texas to resolve claims that its baby powder caused cancer in women is set to begin Thursday before an important decision.

A federal judge in Texas is close to deciding whether J&J will have access to its court in Houston, 1,600 miles from the company’s headquarters in New Jersey, to hear the case. It’s the health care company’s latest attempt to settle thousands of lawsuits using a strategy that includes Chapter 11 proceedings, a controversial move that has been criticized by legal experts and challenged by the U.S. Justice Department and lawyers for women who don’t support the settlement.

J&J created a corporate shell to absorb the cancer claims and file for bankruptcy, a tactic that has already been stopped twice by the influential U.S. Third Circuit Court of Appeals, which has jurisdiction over New Jersey. In these rulings, the court stated that bankruptcy was not justified because the entity ultimately had the support of its financially strong parent company. Now J&J, whose current offering employs a newly formed Texas subsidiary, is fighting to stay in Houston under Chapter 11 rules that allow companies to choose the court of their choice.

The maneuvers “are an attack on the integrity of the bankruptcy system,” the Justice Department’s bankruptcy regulator said, arguing that the case should be sent back to New Jersey, where the first two bankruptcies were dismissed. Even legal scholars who agree with J&J’s position agree that the company is using the Houston court to prevent further unfavorable decisions from the Third Circuit.

J&J’s $8 billion baby powder settlement is supported by about 83% of women who voted for it and has a better chance of being approved if the case is heard in a Texas court. J&J said its talc-based products are safe and that lawsuits against the company are without merit.

Every decision can have far-reaching consequences. A ruling in J&J’s favor could motivate companies facing lawsuits over defective or toxic products to adopt the same strategy, known as “Texas Two Step,” and bypass other Chapter 11 centers, such as Delaware, as well overseen by the Third Circuit.

New Jersey appeals judges concluded that J&J was wrong to send a unit into bankruptcy to settle cancer-related debts that the $385 billion company was unable to pay. A return to New Jersey or another mid-Atlantic state under the Third Circuit would likely end the same way, said Anthony J. Casey, a law professor at the University of Chicago.

“It’s not like you’re shopping in the forum,” Casey said. “It’s just a fact that the Third District is off limits.”

J&J’s new Talk subsidiary, Red River Talc LLC, is incorporated in Texas, where its assets are located and where women who voted for the plan were chosen as the appropriate legal forum, said Erik Haas, vice president of litigation at J&J, in a statement. Law firms representing the vast majority of plaintiffs have long advocated filing for bankruptcy in Texas, Haas said.

“In agreeing to the plan, 83% of plaintiffs expressed their desire to have this case filed there,” he said.

Under the bankruptcy rules, a company can file wherever the company or one of its smaller entities has its “principal place of business.” This has become an easy test. Judges have ruled that it is enough for a company to have a bank account in a city or for a small unit of a large company to file incorporation papers in a state.

According to Bloomberg, the loose interpretation in recent decades has resulted in most major corporate bankruptcies being referred to three federal court districts: Wilmington, Delaware, Manhattan and Houston.

“Legal loopholes”

A handful of Washington lawmakers have tried unsuccessfully over the years to tighten jurisdictional rules under Chapter 11, despite support from groups like the National Association of Attorneys General, which represents the top government lawyers in each state.

“It is clear what Johnson & Johnson is doing — like so many other giant companies, it is relying on legal loopholes to protect itself from liability and delay justice,” said U.S. Sen. Elizabeth Warren, a Democrat from Massachusetts. “As I have been saying for years, we must close these loopholes to prevent companies from abusing our insolvency system and to ensure they are held to account.”

Red River said in an Oct. 2 court filing that women bringing claims against the J&J subsidiary “come from all corners of the United States” and about 8.2% of plaintiffs reside in Texas, compared with fewer than one percent who live in New Jersey.

Houston has become a popular landing spot largely because of a unique process in which large Chapter 11 cases are referred to just one of two judges. The process differs from other major bankruptcy centers such as New York, Delaware and New Jersey, where large cases are randomly assigned to more than half a dozen judges.

The tactics some companies used to get into bankruptcy court in Texas have been challenged. For example, the Justice Department objected to San Diego-based Sorrento Therapeutics Inc.’s 2023 filing in Texas, which came shortly after a subsidiary deposited $60,000 at a local branch of a New York-chartered bank and an attorney had opened a post office box in a suburb of Houston. Judge Christopher Lopez rejected the Justice Department’s request, which, unlike the J&J case, came only a year after Sorrento sought court protection.

Creditors of Montana-based talc supplier Barretts Minerals Inc. lost a bid to delay the Texas mining company’s bankruptcy last year. Barretts had facilities in Bay City, Texas, but just days before filing Chapter 11, it also purchased properties leased from operators of a McDonald’s and Whataburger. A Barretts executive testified that the real estate deal bolstered the company’s claim to bankruptcy in Texas.

Previous attempt

When J&J made its first attempt to resolve the talc dispute through Chapter 11 in 2021, it filed another subsidiary in North Carolina for bankruptcy. However, a North Carolina judge later ruled that the bankruptcy was in New Jersey, where the consumer health company is based and where most of the litigation had been fought. The Justice Department said in court filings that J&J should not be allowed to ask another judge in Texas to reconsider the earlier court decision.

Lawyers for women supporting the talc settlement said the decision to locate the J&J subsidiary in Texas was a central aspect of the deal they negotiated, which is supported by a large majority of plaintiffs who voted for it. Law firm Smith Law Firm PLLC, which represents more than 11,800 plaintiffs, said in a court filing that Judge Lopez “should respect the preferences of those harmed by the debtor’s pre-filing practices.”

The support J&J has among tens of thousands of women who voted for the plan is the company’s best argument for keeping the case in Houston, said Jay Westbrook, a professor at the University of Texas at Austin School of Law . But one of opponents’ strongest arguments against the strategy is the fact that a North Carolina judge has already ruled that the previous bankruptcy was in New Jersey, he said.

The Texas lawsuit is “a blatant attempt to circumvent previous decisions,” Westbrook said.

The bankruptcy case is Red River Talc LLC, 24-90505, U.S. Bankruptcy Court for the Southern District of Texas (Houston).

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