The Supreme Court recently issued a unanimous decision in a securities fraud case, Matrixx Initiatives, Inc. v. Siracusano.1 This case will have significant implications for publicly traded drug, device, dietary supplement, and food/beverage companies - all of which must monitor, collect and submit postmarket reports to the Food and Drug Administration ("FDA") concerning potential adverse health effects linked to their products (hereinafter "adverse event reports" or "AERs").2 The Supreme Court held, in short, that a publicly traded company cannot rely on "statistical significance" alone to determine whether AERs linked to a consumer health product must be disclosed to shareholders. The Court's unanimous decision makes clear that "statistical significance" provides no bright line test for disclosing AERs to shareholders and that companies must account for the relevant facts surrounding AERs to determine whether the "total mix" of information plausibly indicates a reliable causal link to the company's product.
Matrixx Initiatives, Inc. v. Siracusano
Matrixx focused on whether shareholders of a cold remedy company had properly pled their securities fraud case. In order to properly plead such a case, plaintiffs, among other things, must assert in their complaint facts that, if true, would support a finding that a material misrepresentation had been made and that it had been made with the intent to deceive, manipulate, or defraud. According to the plaintiffs, corporate officers had deceived them by claiming that company revenues were rising 50 to 80 percent, but not mentioning that the company had received multiple AERs suggesting a possible link between the company's best-selling cold product and anosmia - or loss of smell. The defendants countered that the plaintiffs' factual allegations were inherently flawed, given that the number of AERs received did not reach a level sufficient to establish a statistically significant risk of anosmia.
Relying on the test from Basic Inc. v. Levinson,3 the Court found that whether a material misrepresentation has been made depends on "whether a reasonable investor would have viewed the non-disclosed information as having significantly altered the total mix of information made available" (internal quotations omitted, emphasis in original). The Court found that, with regard to AERs, specifically, statistical significance is one factor to consider, but that companies must also consider the "the source, content, and context of the reports." The Supreme Court emphasized that FDA relies on a wide range of evidence to determine causation of AERs and not statistical significance alone.
In considering the source, content, and context of the AERs at issue, the Court found the following allegations to be important:
- That several prominent medical professionals and researchers had informed the defendants that patients had developed anosmia after using the cold remedy;
- That the defendants had received separate, additional reports of consumers experiencing anosmia;
- That four product liability cases had been filed against the company over the product and anosmia;
- That researchers had alerted defendants' to previous studies showing a "biological causal link" between anosmia and the product's active ingredient, when administered in the same manner as the defendant's product; and
- That at a national medical conference, two researchers had presented findings linking the product to anosmia.
The court found that, if true, these facts would support a misrepresentation, regardless of the number of AERs not reaching statistical significance. Regarding intent, the Supreme Court found that similar allegations, if true, would support a "strong inference" that defendants had the necessary intent in "elect[ing] not to disclose the reports not because [they] believed they were meaningless but because [they] understood [the reports'] likely effect on the market."
Implications for Public Companies
Although a bright line statistical significance rule may have been far easier and cost effective to administer, the "total mix" and "source, content, and context" standards that the Court applied in the Matrixx decision are unlikely to surprise companies that are subject to FDA's postmarket reporting requirements, or have experience assessing scientific evidence to determine whether the available scientific evidence supports a health-related product marketing claim. In both of these contexts, companies must consider the basic internal reliability of each piece of evidence, the totality of relevant scientific research, and the relevance of the evidence to the proposed claim. In considering the "source, content, and context" of AERs for the purpose of disclosure to shareholders, companies will need to follow a similar protocol considering the internal reliability of each AER (e.g., whether a report comes from an experienced researcher or medical practitioner in the field, whether it is scientifically logical and internally coherent); how the AERs fit into the totality of relevant surrounding scientific research (e.g., whether relevant studies exist suggesting a link or not); and the relevance of the AERs to the particular statements being made to shareholders.
Stakeholders have closely watched Matrixx as it has wound through the courts, with the U.S. District Court in Arizona initially siding with the defendants, the 9th Circuit later reversing, then the Supreme Court affirming the 9th Circuit. At the Supreme Court, amicus briefs were filed by groups, including the Council for Responsible Nutrition, PhRMA, the Natural Products Association, AdvaMed, the Product Liability Advisory Council, Inc., and others.