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Securities Alert Matrixx: Supreme Court Rejects "Statistical Significance" and Other Bright-Line Assessments of Materiality

The Supreme Court unanimously decided this week, in Matrixx Initiatives v. Siracusano, Case No. 09-1156 (March 22, 2011), that a shareholder's ability to state a claim for securities fraud--based on a pharmaceutical company's failure to disclose adverse event reports--does not depend solely upon the statistical significance of those adverse events. Refusing to adopt such a "bright-line rule," the Court instead reaffirmed the materiality standard set forth in Basic v. Levinson and held that pharmaceutical companies must disclose any adverse event reports that alter the "total mix" of information available to investors. Click here to read the full opinion.

Background

Plaintiffs in the underlying securities fraud class action alleged that Matrixx Initiatives, Inc. and three of its executives ("Matrixx") failed to disclose reports of a possible link between its leading product (Zicam) and anosmia (loss of smell), rendering statements made by Matrixx misleading.

Matrixx moved to dismiss the complaint arguing, in part, that plaintiffs had failed to plead the elements of a material misstatement or omission. Matrixx argued that the allegedly omitted information, consisting of a handful of adverse event reports, research reports, and product liability lawsuits, was not statistically significant. The District Court, relying on Second Circuit precedent, agreed and granted the motion to dismiss because plaintiffs had failed to allege a "statistically significant correlation between the use of Zicam and anosmia so as to make failure to public[ly] disclose" such complaints a material omission.

The Ninth Circuit reversed, finding that the District Court had erred in requiring an allegation of statistical significance to establish materiality. Instead, the Ninth Circuit reasoned that Basic Inc. v. Levinson, 485 U.S. 224, 236 (1988) correctly set forth the standard for assessing the materiality of a misstatement or omission: "The determination [of materiality] requires delicate assessments of the inferences a `reasonable shareholder' would draw from a given set of facts and the significance of those inferences to him." The Ninth Circuit's holding was premised upon the assumption that courts are required to engage in a factspecific inquiry sensitive to the subtleties of each case.

No Bright-Line Rules for Determining Materiality

Matrixx urged the Court to adopt a bright-line rule that adverse event reports associated with a pharmaceutical company's products cannot be material absent a sufficient number of such reports to establish a statistically significant risk that the product is in fact causing the adverse events.

The Court, as it has in the past, rejected the adoption of such a bright-line rule. The Court reasoned that "[a]ny approach that designates a single fact or occurrence as always determinative of an inherently fact-specific finding such as materiality, must necessarily be overinclusive or underinclusive" because it is likely to exclude information that "would otherwise be considered significant to the trading decision of a reasonable investor."

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March 24, 2011

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Instead, the Court held that the standard announced in Basic--"a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available"--remains the appropriate standard.

Statistically Insignificant Information May Be Material to Reasonable Investors

The Court found that Matrixx's argument (i.e., that only statistically significant information is material) rested on the flawed premise that statistical significance is the only reliable indicator of causation. Medical experts often rely on other evidence to establish an inference of causation (e.g., a temporal relationship between exposure and the adverse event, consistency across studies, biological plausibility, and consideration of alternative explanations). Moreover, the FDA relies on a wide range of evidence of causation and "sometimes acts on the basis of evidence that suggests, but does not prove, causation." If "medical professionals and regulators act on the basis of evidence that is not statistically significant, it stands to reason that in certain cases reasonable investors would as well." The Court also noted the fact that Zicam accounted for more than 70 percent of Matrixx's revenue.

Disclosure of More, But Not All, Adverse Event Reports

Acknowledging that adverse event reports are a common occurrence in the pharmaceutical industry, the Court wrote that pharmaceutical companies should be mindful of the materiality standard in Basic. "[T]he mere existence of adverse events . . . will not satisfy this standard. Something more is needed . . . ." That "something more" will depend on the context of the adverse event or events as they apply to the drug and issuer in question, and not merely the shear number of adverse events themselves. As a result, companies will now need to conduct a more holistic analysis of whether a small number of adverse events, because of their nature, would be sufficiently material to a reasonable investor to require disclosure. For further information, please contact the Seyfarth attorney with whom you work, or any Securities & Financial litigation attorney on our website.



Attorney Advertising. This Securities Alert is a periodical publication of Seyfarth Shaw LLP and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult a lawyer concerning your own situation and any specific legal questions you may have. Any tax information or written tax advice contained herein (including any attachments) is not intended to be and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. (The foregoing legend has been affixed pursuant to U.S. Treasury Regulations governing tax practice.) ? 2011 Seyfarth Shaw LLP. All rights reserved.

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