The Supreme Court held unanimously, in Matrixx Initiatives, Inc. et al. v. Siracusano, No. 09-1156 (March 22, 2011), that a shareholder class could state a claim under the federal securities laws for a pharmaceutical company’s failure to disclose even statistically insignificant adverse events associated with its product. In rejecting the statistical significance standard, the Court resolved a split among the Circuits and confirmed that the appropriate standard was that articulated in Basic v. Levinson, 485 U.S. 224 (1988): whether there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by a reasonable investor as having significantly altered the total mix of information made available.
Matrixx’s main product is Zicam, a homeopathic remedy intended to reduce the severity and duration of the common cold. In early 2004, Matrixx issued a press release contending that reports linking Zicam with anosmia (loss of smell) were “completely unfounded and misleading.” Plaintiffs alleged that prior to this press release, Matrixx had received “adverse event” reports of consumers experiencing anosmia following the use of Zicam and had been served with product liability lawsuits charging that Zicam caused anosmia.
Matrixx successfully moved the district court to dismiss the complaint on the ground that plaintiffs had failed to allege a statistically significant correlation between Zicam and anosmia. The Ninth Circuit reversed.
Materiality Requires a Fact-Specific Inquiry
The Court unanimously affirmed the Ninth Circuit’s decision and made clear that “any approach that designates a single fact or occurrence as always determinative of an inherently fact-specific finding such as materiality, must necessarily be overinclusive or underinclusive” because it will likely exclude information that “would otherwise be considered significant to the trading decision of a reasonable investor.” Basic remains the appropriate standard.
The Court found that plaintiffs’ allegations satisfied the materiality requirement of Basic that there be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information available. The Court noted that medical professionals and the FDA often rely on evidence that is not statistically significant to assess risk, establish inferences of causation and take regulatory action. The Court reasoned that investors might reasonably rely on such evidence as well. The Court was careful to note, however, that its decision does not mean that pharmaceutical manufacturers must disclose all reports of adverse events; “something more” is needed.
The Court found “something more” in this case. Matrixx told the market that it expected its revenues to rise 50 and then 80 percent, but it had information indicating a significant risk to its leading revenue-generating product. In addition, the Court noted that Matrixx stated in its press release that “reports indicating that Zicam caused anosmia were “completely unfounded and misleading,” but Matrixx had evidence of a biological link, had not conducted its own studies to disprove it and later conceded that the scientific evidence was insufficient to determine if there was a link.
Scienter Requires a Holistic Review of the Allegations and Competing Inferences
Matrixx also argued that, because plaintiffs did not allege that the reports linking Zicam to anosmia were statistically significant, its failure to disclose them did not give rise to an inference that it acted knowingly or recklessly. The Court rejected this bright-line test as well.
The Court assumed without deciding that deliberate recklessness is sufficient to establish scienter and found that the inference that Matrixx acted recklessly was at least as, if not more, compelling than the inference that it simply thought that the reports did not indicate anything meaningful about adverse reactions. The press release was again a central focus of the Court’s analysis: “Most significantly, Matrixx issued a press release that suggested that studies had confirmed that Zicam does not cause anosmia when, in fact, it has not conducted any studies relating to anosmia and the scientific evidence at that time…was insufficient to determine whether Zicam did or did not cause anosmia.”
The Supreme Court’s decision does not require disclosure of all reports of adverse events; statistical significance remains a relevant consideration. The decision makes clear that companies may not rely on bright-line tests of materiality and must instead conduct a more holistic analysis of whether events may be sufficiently material to require disclosure.
The decision may also provide a lesson for the drafters of press releases. Matrixx’s press release said “Matrixx believes statements alleging that intranasal Zicam products caused anosmia (loss of smell) are completely unfounded and misleading” and that in no clinical trial had there been a report linking intranasal zinc gluconate gel product to loss of smell. Matrixx may have intended the release to say only that the link had not been established in clinical trials or otherwise. This statement would have been consistent with the absence of statistically significant evidence. The Court however understood the press release to say not that a link had not been established but that studies had confirmed there was no link. This statement was clearly not consistent with the available evidence. Going forward, companies may be well-advised to state clearly the basis for their statements and to consider carefully the possible interpretations of their press releases.
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