Johnson & Johnson (JNJ) is taking a controversial legal argument to court for a third time in hopes of containing a barrage of lawsuits alleging its baby powder caused cancer.

Judges have denied J&J’s previous attempts to resolve such claims using a maneuver known as the "Texas two-step," where a company tries to use the bankruptcy of an affiliate or subsidiary to settle mass liabilities.

J&J's third attempt at bankruptcy protection involves a subsidiary called Red River Talc that would cap settlement damages at $8 billion. The company maintains that none of the talc-related claims against it have merit.

J&J’s CFO Joseph Wolk told Yahoo Finance this time the bankruptcy court result should be different, in part because a large majority of talc claimants signed on to the company's settlement offer.

“The difference this time … I'd say, is 83% of the claimants actually support the current offer that's on the table,” Wolk said. “So we think that's something that was not present in the prior filings.”

The current proposal seeks to resolve all current and future claims related to ovarian cancer alleged to be caused by the company's cosmetic talc.

But a plaintiffs' lawyer who represents 11,434 of approximately J&J's roughly 100,000 talc claimants said the company's figure is inflated, and its latest bankruptcy petition is "fraught with problems."

The lawyer, Andy Birchfield of Beasley Allen, said J&J "stuffed the ballot box" in a tally held to determine the percentage of plaintiffs on board with J&J's latest settlement proposal.

A container of Johnson & Johnson baby powder is displayed in 2023 in San Anselmo, Calif. (Justin Sullivan/Getty Images) (Justin Sullivan via Getty Images)

Birchfield said in addition to counting no votes as votes in support of the deal, J&J counted votes from claimants who should not have been included because they have not been diagnosed with disease and therefore have only non-compensable claims.

The lawyer said 69 of his clients voted in favor, and his firm has asked the court for a re-tabulation.

"We're confident that J&J’s 83% number that it floated … that that's wrong," Birchfield said. "Once those [inaccurate votes] are sifted out, I don't know where it will be, but it'll be significantly less than 70%."

The claims being made by both sides set up a new legal battle that will now unfold inside a Houston bankruptcy court.

J&J's worldwide vice president of litigation Erik Haas told Yahoo Finance that Beasley Allen "misstates the record in a failed attempt to explain away the blatantly false certification submitted by its partner Andy Birchfield."

Haas said Birchfield falsely certified under oath that he contacted and secured informed consent to oppose the plan from claimants who affirmatively voted in favor of the deal that was certified by an independent claims administrator.

"We look forward to the full discovery of this malfeasance before the Bankruptcy Court in Houston,” Hass said.

Earning the support of at least 75% of claimants may be an important threshold for J&J.

Bankruptcy courts have permitted companies to move forward with resolving large numbers of injury claims through bankruptcy when at least 75% of the outstanding creditors, including claimants, agree to the deal.

How it works

The "Texas two-step" strategy takes advantage of state laws that allow for the transfer of liabilities through a so-called divisive merger, which is a way to separate a company's operations into discreet business entities.

Texas was the first state to allow this, in 2006, which helps explain why the strategy came to be known as the "Texas two-step."

The first step is the division. The second is that the liability-retaining entity gets limited funding from its solvent parent, files for bankruptcy, and then manages mass tort litigation with the limited funds.

The benefits are that further litigation is paused, capping costs, and the assets of the solvent company are walled off from the reach of plaintiffs. The hope is that the solvent parent can also absolve itself of secondary liability for the claims.

But critics of the strategy see it as a subversion of the US Bankruptcy Code. Courts have become increasingly skeptical of attempts by companies to use bankruptcy court law to protect assets from plaintiffs.

Aden McCracken Tyrone of Pennsylvania holds a sign in honor of his parents outside of the Supreme Court in December as the Supreme Court heard arguments regarding a nationwide settlement with Purdue Pharma, the manufacturer of OxyContin. (Michael A. McCoy/For The Washington Post via Getty Images) (The Washington Post via Getty Images)

In June, the US Supreme Court took a step that will make it more difficult for companies to do so in the future.

In a 5-4 decision, the court held that billionaire members of the Sackler family, longtime owners of the now-bankrupt opioid maker Purdue Pharma, could not shield their personal assets from opioid claims using the corporation's bankruptcy proceedings.

The Sacklers, the court said, engaged in a "milking program" by withdrawing from Purdue approximately $11 billion — roughly 75% of the firm’s total assets.

The court said that no provision within the US Bankruptcy Code permits the type of agreement that the Sacklers and the company tried to reach by limiting plaintiff recoveries to a $6 billion settlement fund.

Other attempts by companies like 3M, Avon, and Georgia Pacific to use the two-step strategy have had varying outcomes. Those inconsistent court decisions are leading some legal experts to predict that the US Supreme Court may review the tactic's legality.

'No financial distress'

In J&J's latest attempt at the two-step, it is asking for the latest vote from claimants to support a “channeling injunction.”

That would cap its liability for all existing and future talc claims at the $8 billion it agreed to place in a settlement trust. J&J agreed to fund the proposed settlement trust over 25 years.

Birchfield expects J&J's latest bankruptcy attempt could run into roadblocks no matter how many claimants vote in favor of a broad settlement because the two-step would strip especially future claimants from their constitutional rights to demand that J&J face jury trials.

"Our view is J&J isn’t entitled to bankruptcy relief because there is no financial distress,” he said. “They’re a $400 billion company."

“If they would pay reasonable compensation and do it on reasonable terms, they could put this behind them,” Birchfield added.

J&J's Wolk said its proposed bankruptcy would provide more recourse to claimants and more quickly resolve cases that would take years to be adjudicated.

Juries have handed down multimillion-dollar awards related to talc litigation risks.

On Tuesday, a Connecticut jury returned a $15 million verdict in favor of a man who said the company's talc-based powder caused him to develop mesothelioma, a cancer that impacts lung and other tissue.

The jury also held that J&J should pay punitive damages to punish it for including talc in its products.

Yahoo Finance Senior healthcare reporter Anjalee Khemlani contributed to this report.

Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on X @alexiskweed.