WASHINGTON — The Supreme Court unanimously ruled on Tuesday that investors suing a drug company for securities fraud may rely on its failure to disclose scattered reports of adverse affects from an over-the-counter cold remedy that fell short of statistical significance.
The case involved Zicam, a nasal spray and gel made by Matrixx Initiatives and sold as a homeopathic medicine. From 1999 to 2004, the plaintiffs said, the company received reports that the products might have caused some users to lose their sense of smell, a condition called anosmia.
Matrixx did not disclose the reports and in 2003, the company said it was “poised for growth” and had “very strong momentum” though, by the plaintiffs’ calculations, Zicam accounted for about 70 percent of its sales.
After a link between Zicam and anosmia was reported on “Good Morning America” in 2004, the company’s stock price dropped significantly. In 2009, the Food and Drug Administration warned consumers not to use the products, and Matrixx recalled them.
In the case before the justices, Matrixx Initiatives Inc. v. Siracusano, No. 09-1156, lawyers for Matrixx argued that it should not have been required to disclose small numbers of unreliable reports, which were the only ones available in 2004, they said. They added that the company should face liability for securities fraud only if the reports had been collectively statistically significant.
“All drug companies receive on an almost daily basis anecdotal hearsay reports about alleged adverse health events following the use of their products,” Jonathan Hacker, a lawyer for Matrixx, told the justices when the case was argued in January.
The Supreme Court has said that companies may be sued under the securities law for making statements that omit material information, and it has defined material information as the sort of thing that reasonable investors would believe significantly alters the “total mix” of available information.
Justice Sonia Sotomayor, writing for the court on Tuesday, roundly rejected Matrixx’s proposal that information can be material only if it meets standards of statistical significance.
“Given that medical professionals and regulators act on the basis of evidence of causation that is not statistically significant,” she wrote, “it stands to reason that in certain cases reasonable investors would as well.”
On the other hand, she said, “the mere existence of reports of adverse events — which says nothing in and of itself about whether the drug is causing the adverse events — will not satisfy” the requirement of materiality. Instead, she said, companies and courts must consider “the source, content and context of the reports.”
Here, Justice Sotomayor wrote, the plaintiffs had accused Matrixx of having received information from “three medical professionals and researchers about more than 10 patients who had lost their sense of smell after using Zicam.” That was enough to allow the case to go forward in its earliest stages, she wrote.
If the accusations are proved true, she said, “Matrixx received information that plausibly indicated a reliable causal link between Zicam and anosmia.”
Reasonable investors would want to know about the reports, she said, particularly given the importance of the product to the company and the risk-benefit calculation consumers might make after hearing of the possibility that using a cold remedy could result in lasting injuries.
In rejecting the proposed categorical rule in favor of a contextual inquiry, the court provided only limited guidance to companies and lower courts.
“What’s the test?” asked Ronald J. Allen, a law professor at Northwestern, referring to the analysis that companies and courts must make. “The test is what a reasonable person would react to given all the evidence.”
