Sometimes the most significant changes in the law come from unexpected places. That may be the case when the US Supreme Court decides Matrixx Initiatives, Inc. v. Siracusano later this term. Though a securities fraud case, Matrixx may decide the legal significance of adverse event reports in many other contexts. In an era of increasing federal and state regulation, the ramifications may extend far beyond securities fraud.
Matrixx Initiatives sold Zicam as a homeopathic remedy for the common cold. From 1999 to 2004 Matrixx received reports that roughly a dozen customers claimed that Zicam caused them to lose their sense of smell (a condition called anosmia, which is often caused by the cold virus itself). The company did not disclose the adverse event reports (AERs) to investors because they were not statistically useful or significant. However, once the potential problem with Zicam came into the national news spotlight, shares in Matrixx dropped sharply. The shareholders claim that the individual AERs would have influenced their decision to buy stock in Matrixx and that Matrixx therefore had a duty to disclose.
Matrixx’s petition for certiorari frames the issue as “whether drug companies have a duty to disclose [AERs] when the reports do not reflect statistically significant evidence that the adverse event may be caused by the use of the drug.” The Ninth Circuit determined that the AERs might be material to investors even though they were not statistically meaningful. Disagreeing with the First, Second and Third Circuits (which would have granted a motion to dismiss on the issue), the Ninth Circuit found that the materiality of the AERs was an issue of fact. The Supreme Court’s decision in Matrixx will likely determine whether AER-based investor suits will be dismissed at the pleading stage or go to trial.
But the significance of Matrixx is not confined to securities fraud. AERs factor prominently in product liability suits, and thus the Supreme Court’s decision on the securities question may spill into product liability law. The current Supreme Court has shown a tendency to issue opinions – particularly in the business context – with ramifications far greater than the precise question presented. This year alone, the Court has gone further than the parties requested in several notable business-related cases.
If the Supreme Court holds that anecdotal reports of a customer suffering from a particular symptom can be material to a shareholder’s purchasing decision, it may open the way for holdings that AERs should be material to a company’s decision to market a product or a customer’s decision to use it. This creates obvious conflicts with the FDA’s powers. The FDA does not use AERs to calculate the risks of a drug because product safety decisions should be based on scientifically-valid evidence.
FDA-regulated industries, including over-the-counter medications and medical devices, have addressed these problems with the Ninth Circuit’s decision in their amicus briefs to the Supreme Court. But the potential reach of Matrixx is much greater. All companies making consumer products – from automotive to garment manufacturers – would feel increased pressure to warn shareholders about individual customer reports. And if a company is warning its shareholders about a possible problem, it will be hard to argue that the company should not be warning its customers as well. Matrixx has the potential to be one of the blockbusters of the 2010-2011 term.