The U.S. Supreme Court has agreed to hear a case next term that will try to answer the controversial question of how much information companies are expected to disclose to the public, even if certain information doesn’t appear significant at first glance.
The case that the justices have agreed to hear, Matrixx Initiatives v. Siracusano, stems from a securities class-action lawsuit filed in April 2004 over allegations that pharmaceutical company Matrixx Initiatives and its executives misled shareholders by failing to disclose unflattering information about its cold medicine Zicam.
According to the plaintiffs, Matrixx received more than a dozen complaints about Zicam from doctors and customer between 1999 and 2003, over concerns that the nasal spray caused loss of smell. Yet Matrixx continued to market the over-the-counter drug, falsely touting Zicam’s safety, the lawsuit claims.
An Arizona district court first dismissed the case, agreeing with Matrixx’s argument that the small number of complaints was not material because it was not “statistically significant.” Citing the Private Securities Litigation Reform Act of 2005 and decisions from multiple appellate courts, the Arizona court held that plaintiffs must show statistical significance to bring a securities lawsuit based on alleged misstatements about a product’s safety.
The Ninth Circuit Court of Appeals, however, reversed that ruling—and in the process, parted ways with appellate decisions in the First, Second and Third circuits. The Ninth Circuit held that determining materiality in a lawsuit “requires delicate assessment of the inferences a reasonable shareholder would draw from a given set of facts.” In other words, materiality depends on a “fact-specific inquiry” and not a bright-line test like statistical significance.
That means a reasonable investor could have viewed the reports about Zicam as having significantly altered the “total mix” of information available on Matrixx’s securities, and therefore the allegations in the lawsuit should survive a motion to dismiss, the court said, even if the reports were not statistically significant.
“Having clear guidance about what needs to be disclosed, and when, is very helpful for companies and helps them manage their disclosures.”
—Dan Himmelfarb,
Partner,
Mayer Brown
Given the difference of opinion among the appellate courts, the Supreme Court in June decided to take up the case in its next term starting in October. The specific question will be whether a plaintiff can press a claim under federal securities laws “based on a pharmaceutical company’s nondisclosure of adverse event reports even though the reports are not alleged to be statistically significant.” But while that question appears narrow, legal experts say the final decision next spring could have wide-ranging consequences.
Wide Ramifications
Thau
Stephen Thau, a partner at the law firm Morrison & Foerster, says the case could be hugely important to biotech and pharmaceutical companies. “They’re often getting clinical data on an ongoing basis, and are having to decide what is material to disclose,” he says. Only in hindsight is it easy to know which information is important, “because it’s connected to an end result, or it seems connected to an end result.”
As noted in a legal alert recently published by the firm, the Food and Drug Administration received more than 525,000 adverse event reports for drugs and similar products in 2008. In that same year, the agency’s Center for Drug Evaluation and Review issued 379 product recalls and 87 warning letters.
While a company’s first reaction might be to disclose everything, it could also significant risks of over-disclosing bad results that aren’t statistically significant and aren’t borne out by later data, Thau adds. “Companies could wind up in a damned if you do, damned if you don’t situation,” he says.
Himmelfarb
The idea that only material information should be disclosed is just as beneficial to investors as it is to companies, says Dan Himmelfarb of the law firm Mayer Brown. A 10-page prospectus can be difficult enough for an investor to digest, he says; if that swells into a 100-page document “filled with all kinds of stuff that, frankly, is not important, but it’s in there because you’re afraid of losing a securities case in the Ninth Circuit,” that doesn’t help the situation either.
The case could also have broader implications if the Supreme Court extends its materiality standard for disclosures. “It’s going to decide at some level when cases can be cut off at the pleading stage, based on a failure to allege the element of materiality,” Himmelfarb says. If the Ninth Circuit’s view prevails—that materiality is a question for the jury to decide at trial, rather than for the judge at the earlier pleading stage—“presumably it’s true in every type of case,” he says.
MATRIXX INITIATIVES V. SIRACUSANO
QUESTIONS PRESENTED:
Respondents filed suit under Section 10(b) of the Securities Exchange Act of 1934 and
Securities and Exchange Commission Rule 10b-5, alleging that petitioners
committed securities fraud by failing to disclose "adverse event" reports—i.e., reports
by users of a drug that they experienced an adverse event after using the drug.
The First, Second, and Third Circuits have held that drug companies have no duty to disclose adverse event reports until the reports provide statistically significant
evidence that the adverse events may be caused by, and are not simply randomly
associated with, a drug’s use. Expressly disagreeing with those decisions, the Ninth
Circuit below rejected a statistical significance standard and allowed the case to
proceed despite the lack of any allegation that the undisclosed adverse event
reports were statistically significant.
The question presented is: Whether a plaintiff can state a claim under Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5 based on a pharmaceutical company’s nondisclosure of adverse event reports even though the reports are not alleged to be statistically significant.
LOWER COURT CASE NUMBER: 06-15677
Source
Matrixx Initiatives Question Presented.
That said, people who handicap Supreme Court cases says the odds of a Ninth Circuit victory here are slim. The California-based court has a long history of deciding securities cases in ways that allow the suits to pass the pleading stage, which typically is where most cases are won or lost. And the Supreme Court, Himmelfarb says, has a long history of reviewing disputes from the Ninth Circuit and bringing it back into line with the rest of the country.
The last time the Supreme Court took up the question of materiality in securities litigation happened in 2005, in Dura Pharmaceuticals v. Broudo. In that case, too, the Ninth Circuit allowed a class-action lawsuit to proceed and the Supreme Court ultimately ended up reversing that decision. The appellate court had said that Dura could face litigation if the price of its stock was inflated due to fraud, even if a later stock decline could not be attributed to any misrepresentation. The Supreme Court’s reversal was unanimous.
“I wouldn’t be surprised at all if this case fell into the category where you get the sort of unanimity you frequently get in securities cases,” Himmelfarb says.
The U.S. Solicitor General’s Office has not yet filed any amicus brief on the Matrixx dispute, although it has the discretion to do so and its opinion can carry considerable weight with the justices.
Regardless, the simple fact that the Supreme Court has taken the case for review is good news. “Having clear guidance about what needs to be disclosed, and when, is very helpful for companies and helps them manage their disclosures,” Thau says.
The Ninth Circuit is the biggest in the country, where a plurality of securities fraud lawsuits are heard, Himmelfarb says. “So without the Supreme Court’s intervention, the case would have been a big problem for publicly traded companies who are getting sued for securities fraud,” he says. I imagine that’s one of the reasons the court granted review.”
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