On June 14, 2010, the Supreme Court granted certiorari in a private securities fraud class action, Matrixx Initiatives, Inc. v. Siracusano. 560 U.S. ___ (Jun. 14, 2010) (No. 09-1156) ("Matrixx"). The case will present the Court with an opportunity to address conflicting standards in the United States Courts of Appeals for determining when a pharmaceutical manufacturer's non-disclosure of reports of adverse effects from a medication may give rise to liability under Section 10(b) of the Securities and Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 (collectively, "10b-5").
The case raises potentially important issues as to the requirements for pleading "scienter" and "materiality" in a 10b-5 case.
Facts and Law
Matrixx involves a fact pattern that is familiar in 10b-5 cases against pharmaceutical companies. While each case has its own specific facts, the general pattern involves a drug that is either withdrawn from the market or denied regulatory approval because of harmful side effects, followed by a 10b-5 action claiming that material risks were known to the company and not promptly disclosed to investors.
In Matrixx, Plaintiffs alleged that Defendants, the manufacturer of Zicam Cold Remedy and the manufacturer's senior executives, made a series of positive statements about Zicam and the company's future prospects in press releases, earnings conference calls, and Securities and Exchange Commission filings without disclosing that a number of Zicam users had reported symptoms of anosmia (loss of the sense of smell) and that several had filed lawsuits against the company. See Siracusano v. Matrixx Initiatives Inc., 585 F.3d 1167, 1170-77 (9th Cir. 2009). Plaintiffs further alleged that when a news story indicated that the FDA was examining the question of Zicam's safety, the manufacturer issued a press release indicating that the drug was safe. Id. at 1172-74. When subsequent news reports indicated that Zicam patients were receiving treatment for anosmia, that lawsuits already had been filed and that others might be filed soon, the company's stock price fell. Id. at 1174. Plaintiffs contended that the alleged non-disclosure of reported anosmia incidents and lawsuits constituted securities fraud. Id. at 1176.
The district court dismissed the claim. Siracusano v. Matrixx Initiatives, Inc., No. CV-04-0886-PHX-MHM, 2005 WL 3970117 (D. Ariz. Dec. 15, 2005). Following a line of cases from the Courts of Appeals—particularly the Second Circuit—the district court held that Defendants did not have a duty to disclose the reports of anosmia until there was "statistically significant" evidence that the anosmia was caused by taking Zicam. See id. at 5-7. Accordingly, the district court held that Plaintiffs' complaint failed to plead the necessary elements of materiality and scienter. Id. at 7, 9.
A panel of the United States Court of Appeals for the Ninth Circuit reversed. Siracusano v. Matrixx Initiatives Inc., 585 F.3d 1167 (9th Cir. 2009). The court held that the lower court's reliance on the Second Circuit's "statistical significance" standard was in error, and that the question of materiality presented a fact issue that could not be resolved at the pleading stage. See id. at 1170.
The "Statistical Significance" Standard
In In re Carter-Wallace, Inc. Securities Litigation, the United States Court of Appeals for the Second Circuit established a "statistical significance" standard of materiality for 10b-5 claims based on nondisclosure of adverse drug events. 150 F.3d 153, 157 (2d Cir. 1998) ("Carter-Wallace I"). Under that standard, nondisclosure is not "materially misleading until [a defendant] had information that [the drug] had caused a statistically significant number of" adverse events. Id. In a later opinion in the same case, the Second Circuit explained that in the absence of such "statistical significance," the complaint also failed to give rise to a strong inference of scienter. In re Carter-Wallace, Inc. Securities Litig., 220 F.3d 36, 41 (2d Cir. 2000) ("Carter-Wallace II").
The First and Third Circuits have since adopted the statistical significance standard. See New Jersey Carpenters Pension & Annuity Funds v. Biogen IDEC Inc., 537 F.3d 35 (1st Cir. 2008); Oran v. Stafford, 226 F.3d 275 (3d Cir. 2000).
The Petition for Certiorari
In seeking certiorari, Defendants argued that the Ninth Circuit's decision rejecting the statistical significance standard created a split among the Courts of Appeals; to have a more lenient pleading standard in the Ninth Circuit than in other Courts of Appeals would result in forum shopping. Petition for Writ of Certiorari at 7-10, Matrixx (Mar. 23, 2010) (No. 09-1156). Defendants also argued that, under the Ninth Circuit's ruling, manufacturers seeking to avoid 10b-5 litigation would be encouraged to disclose all reports of adverse events alleged to have been caused by their products, resulting in confusion to investors and consumers. See id. at 12.
In response, Plaintiffs argued that there was no genuine split among the Courts of Appeals. Opposition to Petition for Writ of Certiorari at 13-15, Matrixx (May 13, 2010) (No. 09-1156). Plaintiffs contended that although the Second Circuit applied the statistical significance test to analyze whether an alleged misstatement or omission was made with scienter, the Ninth Circuit's decision focused not on scienter but on materiality. Id. Materiality—the likely relevance of information to a typical investor—often is left for juries to resolve, and Plaintiffs argued that the Ninth Circuit properly refused to apply a "bright-line" statistical significance standard to the element of materiality. Id. Moreover, Plaintiffs argued that regardless of the test employed, the facts of the case were sufficiently extreme to permit the conclusion, at least for purposes of deciding a motion to dismiss, that the alleged omissions and statements were actionable under 10b-5. Id. at 17-18.
As noted above, the Supreme Court granted certiorari. The case will be scheduled for briefing and argument in the October 2010 Term, with a decision expected by June 2011.
Implications
The Supreme Court's decision in Matrixx could have significant implications for pharmaceutical companies and medical device manufacturers, and for other companies as well. The Second Circuit's statistical significance test provided a measure of predictability for manufacturers and protected them from liability for failing to disclose mere anecdotal reports of product defects. If the Supreme Court rejects use of the Second Circuit framework in favor of the Ninth Circuit approach, companies will face pressure to routinely disclose all negative reports about their own products—irrespective of the reliability of the information—resulting in a profusion of anecdotal information that is of limited value either to investors, doctors or patients.
More broadly, the permissive approach taken by the Ninth Circuit panel in Matrixx to pleading materiality in this context—if accepted or left undisturbed by the Supreme Court—could have implications on private securities cases in other contexts. Motions to dismiss are a valuable tool for courts and defendants to narrow or eliminate cases brought on alleged misstatements or omissions that clearly would not have been material. Insofar as the Supreme Court in Matrixx addresses the availability of that tool, the decision could have impacts well beyond the narrow (though common) context of a claim against a pharmaceutical company.
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