Johnson & Johnson (NYSE:JNJ) made news in late August when a state judge in Oklahoma found the pharmaceutical giant guilty of deceptively marketing its opioid medications to customers. The verdict was seen as a hallmark ruling for the pharmaceutical sector. That, combined with Purdue Pharma declaring bankruptcy due to the $12 billion settlement it's facing, has many investors worried the door has been opened to similar, perhaps much larger, fines for other companies in the opioid market.

Last week, Johnson & Johnson provided a reassuring piece of news to investors when it announced that it had settled two Ohio opioid cases for a total sum of $20.4 million. In doing so, the pharmaceutical giant will be able to dodge a major federal trial that could hold the pharmaceutical industry liable to the ongoing opioid addiction epidemic occurring in the U.S.

IMAGE SOURCE: GETTY IMAGES.

What happened?

The two Ohio counties responsible for the case, Summit and Cuyahoga, have brought several opioid manufacturers and distributors to a federal trial that's to take place Oct. 21, with Johnson & Johnson being one of those companies. In response, Johnson & Johnson agreed to privately settle two federal lawsuits for $20.4 million. This upcoming federal lawsuit is expected to be a litmus test for the prosecutors of over 2,300 opioid-related cases across the nation.

By settling this case, Johnson & Johnson will be able to opt out of the federal trial altogether. Around $10 million of the agreed sum would be given to the two counties, while $5 million would cover legal fees, with a further $5.4 million being donated to charitable, opioid-related nonprofit organizations.

Other major pharmaceutical companies have also reached settlements with the two counties to avoid having to appear in federal court. Mallinckrodt, one of the largest producers of opioids in the U.S., ended up paying $24 million in cash and an additional $6 million in addiction treatment medications to opt out of the federal trial. Other drug producers, such as Allergan and Endo International, both made settlement offers as well.

The only major drug manufacturer that hasn't done so yet is Teva Pharmaceuticals, alongside other major drug distributors such as McKesson, Cardinal Health, and AmerisourceBergen. While drug manufacturers have seemed eager to settle with prosecutors rather than face the heightened scrutiny of a federal appearance, drug distributors, as well as pharmacy chains, haven't been as willing to settle.

How should investors react?

This is a good piece of news for Johnson & Johnson. Paying around $20 million to prevent additional public scrutiny is not an astronomical price to pay for a giant like Johnson & Johnson, but it's unlikely that this will do much to change things in the long run. Should the federal trial rule against the pharmaceutical industry, which seems most likely at this point, Johnson & Johnson could find itself paying out billions in settlements from the thousands of other opioid cases across the country. State prosecutors across the nation would see a federal ruling against the industry for this particular case (something which seems likely at this point) as a sign that they should push ahead with their own respective cases.

Even if this particular federal trial doesn't rule against the industry in this instance, individual cases currently at the municipal and state level could still find legal success at their local levels. In the past, Johnson & Johnson has fought battles in court as opposed to settling, but the pharmaceutical giant has faced a number of major lawsuits that ended badly for the company, costing billions of dollars in damages in the process.

It's not just opioids that Johnson & Johnson has legal problems with. On Oct. 8, a Philadelphia jury ruled Johnson & Johnson should pay a whopping $8 billion to a man who claims the company's antipsychosis drug Risperdal resulted in him developing gynecomastia (enlarged breasts in males). The plaintiff argued that his gynecomastia developed during the five year period between 2003 and 2008 when he was taking Risperdal, a claim that the jury ended up agreeing with and ruled that Johnson & Johnson should pay an astonishing $8 billion to the one plaintiff. This opens up the possibility that the company could end up having to deal with billion-dollar-plus payouts to each of the 13,000 Risperdal lawsuits out there. While Johnson & Johnson's legal department will likely contest the sheer magnitude of the fine, these lawsuits represent a major liability for the company.  

Initially, the man in question was awarded just $680,000 in damages, but an appeal ruling paved the way to this most recent trial. This $8 billion award-which represents almost 10% of the company's 2018 revenues - could be just the beginning of a series of multi-billion-dollar rulings against the company. The last time the company faced a fine of such magnitude was in 2018, when a jury in St. Louis decided Johnson & Johnson would pay $4.7 billion for its baby powder products that had caused ovarian cancer in the 22 women represented in the case.

Overall, Johnson & Johnson is right to move away from fighting lawsuits and instead choose to settle when possible. Settling this recent opioid case is a good move from a shareholder and public image perspective, but it doesn't change the long-term issues facing the company, specifically surrounding all these pending lawsuits. Investors are right to remain worried about not just Johnson & Johnson, but other major pharmaceutical manufacturers in the opioid space as well.

Mark Prvulovic has no position in any of the stocks mentioned. The Motley Fool recommends Johnson & Johnson and McKesson. The Motley Fool has a disclosure policy.