Earlier today, the Supreme Court issued an opinion in Matrixx Initiatives, Inc. v. Siracusano. The case involved Matrixx's lack of disclosure of reports that its Zicam nasal spray products, which amounted to 70% of product revenues, caused a loss of the sense of smell (anosmia). The respondents in the case, owners of Matrixx's securities which allegedly lost value once the suspected link between the Zicam nasal products and anosmia was publicly reported, brought suit against Matrixx for failing to disclose a possible link between Zicam and anosmia. Matrixx argued that the Court should adopt a bright-line test for determining whether plaintiffs had sufficiently pled that the company had made material misstatements and omissions—that is, that unless there was an allegation that there was a statistically significant risk that its product caused the adverse events, the lack of disclosure of the adverse event reports could not be material. The Supreme Court declined to adopt such a standard.
Court Affirms Basic v. Levinson Materiality Analysis, Declines Test Based on Statistical Significance
The Supreme Court unanimously declined to adopt a bright-line rule that would base the materiality of drug adverse event reports solely on whether they reveal a statistically significant increased risk of adverse events occurring due to the drug's use. Instead, the Court affirmed the continued application of the materiality standard set out in Basic v. Levinson—whether a reasonable investor would have viewed the undisclosed information as having significantly altered the total mix of information made available.
The Court was careful to note, however, that its holding should not be read to mean that pharmaceutical manufacturers must disclose all reports of adverse events. The Court noted that, on the contrary, the mere existence of reports of adverse events—which says nothing in and of itself about whether the drug is causing the adverse events—without more would not satisfy the Basic "total mix" standard. While something more is needed, that something is not limited to statistical significance, and can come from the "source, content and context of the reports" which may reveal in some cases that reasonable investors would have viewed the adverse event reports as material.
The Court also confirmed the well-known rule, and stated that it "bears emphasis," that §10(b) and Rule 10b-5(b) do not create an affirmative duty to disclose any and all material information. As the Court notes, disclosure is required under these provisions only when necessary "to make . . . statements made, in the light of the circumstances under which they were made, not misleading. . . . Even with respect to information that a reasonable investor might consider material, companies can control what they have to disclose under these provisions by controlling what they say to the market." Under the particular allegations in the Matrixx case—namely, that the company had given guidance that its revenues were going to rise 50-80% and called reports that Zicam caused anosmia completely unfounded, at a time when it knew that there was a significant risk to leading revenue-generating product—the Supreme Court agreed with the Ninth Circuit that the company had a duty to disclose the material information at issue.
Statistical Significance Not Necessary for Pleading Scienter Based on Recklessness Standard
The court did not address whether scienter could be established by a showing of "deliberate recklessness" noting that Matrixx did not challenge the Court of Appeals holding in this regard and it would therefore assume, without deciding, that the recklessness standard applied by the Court of Appeals is sufficient to establish scienter.
In finding that the Matrixx defendants could be found to have acted recklessly, and therefore with the required scienter, the Supreme Court also rejected Matrixx's argument that statistical significance must also be present to establish a strong inference of scienter. In so doing, the Court noted that, in response to news reports about the Zicam users' allegations, Matrixx issued a press release stating that Zicam did not cause a loss of the sense of smell although Matrixx had yet not conducted any studies on the matter and the existing scientific evidence on the point was inconclusive. According to the Court, this allegation, along with suggestions that Matrixx was in the process of reviewing the efficacy of the product were "taken collectively" sufficient to give rise to an inference that Matrixx elected not to disclose the reports of adverse events not because it believed they were meaningless, but because it understood their likely effect on the market.
Even prior to Matrixx, district courts often deferred ruling on issues of materiality at the motion to dismiss phase. This opinion likely will spur parties bringing securities claims in this area to argue that motions to dismiss based on materiality in the context of alleged misstatements and omissions regarding pharmaceutical products should not be granted. The Court's opinion, however, does not change the status quo regarding the standard for evaluating materiality and does not provide more definitive guidance to companies concerned with when and what to disclose about numerous, and often unsubstantiated, adverse product claims.
Click here for a copy of Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. __, slip op. No. 09-1156 (Mar. 22, 2011).