The US Supreme Court [official website; JURIST news archive] on Tuesday ruled [opinion, PDF] that a shareholder class action suit can continue against Matrixx Initiatives [corporate website], the maker of Zicam Cold Remedy, for failure to disclose harmful side effects that were not statistically significant. The shareholders alleged that Matrixx failed to disclose reports of a possible link between the active ingredient in Zicam and loss of smell and that, in light of these reports, had made misleading statements to the public about Zicam's possible side effects. The unanimous opinion by Justice Sonia Sotomayor in Matrixx Initiatives, Inc. v. Siracusano [Cornell LII backgrounder] held that the respondents representing the shareholders had stated a claim under § 10(b) of the Securities Exchange Act of 1934 and Exchange Commission Rule 10b-5 [texts] for employment of a manipulative or deceptive device. These laws require that the shareholders allege that Matrixx intentionally disclosed material information to investors. Matrixx claimed that the link between Zicam and loss of smell was not material because it was not statistically significant. The Supreme Court did not agree with such a bright-line rule:
Although in many cases reasonable investors would not consider reports of adverse events to be material information, respondents have alleged facts plausibly suggesting that reasonable investors would have viewed these particular reports as material. Respondents have also alleged facts giving rise to a strong inference that Matrixx acted with the required state of mind.The court reasoned that oftentimes medical experts and the Food and Drug Administration rely on less than statistically significant data to prove causation and that a reasonable investor may be inclined to do the same. Matrixx also argued that that the shareholders did not allege facts sufficient to prove the scienter requirement. However, the court held the shareholders met their burden because, assuming the alleged facts to be true, there was a cogent and compelling inference that Matrixx withheld disclosure to prevent harmful impacts on the marketing of Zicam.
The decision upholds the US Court of Appeals for the Ninth Circuit [official website] ruling [opinion, PDF] in favor of the shareholders. Counsel for Matrixx had argued during oral argument [JURIST report] that the reports do not establish any reliable facts about the drug and that a duty to report these results would unfairly affect the company. Matrixx claimed that, absent evidence that "the company has knowledge of facts establishing a reliable basis for inferring that the drug itself is the cause of the reported event," neither the materiality nor scienter requirements of the securities laws were violated.