The Supreme Court adopted the position of the SEC, affirming its traditional test of materiality. Matrixx Initiatives, Inc., v. Siracusano, Case No. 09-1156 (March 22, 2011). In a unanimous ruling the Court rejected Petitioner’s contention that there should be a bright line test for materiality in a securities fraud suit, a position previously rejected in Basic Inc. v. Levinson, 485 U.S. 224 (1989).

The shareholder complaint claims that the company made false statements about its key product Zicam, a cold remedy nasal spray. In 2003 the company made statements touting the success of the Zicam. At one point Matrixx increased its earnings guidance based on Zicam sales.

The company had however received information that Zicam could cause a loss of smell. The data came from several medical researchers as well as individuals. The product liability suits were filed. Nevertheles, Matrixx continued to maintain that Zicam was safe and that none of the clinical trials supported a claim that the nasal spray caused a loss of smell. Reports to the contrary were simply denied. A report of an FDA investigation was followed by a drop in the share price.

The district court dismissed the complaint, on concluding that the adverse product reports were not material. It held that a pharmaceutical company need not disclose such reports unless they are statistically significant. This is in accord with Second Circuit precedent.

The Ninth circuit reversed. The circuit court rejected the statistically significant test, concluding that it was contrary to Basic.

The Supreme Court affirmed. The Court held that “the materiality of adverse event reports cannot be reduced to 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.” Slip at 1-2.

The Court’s analysis is straight forward and is a reaffirmation of Basic and an adoption of the position argued by the SEC in its amicus brief (here). In Basic the Court adhered to the facts and circumstances “total mix” of information as viewed by a reasonable investor standard of materiality articulated earlier in TSC Industries, Inc v. Northway, Inc., 426 U.S. 438 (1976). In following Northway, the Basic Court rejected a “bright line” test because it could artificially delimit the information available to an investor.

In Matrixx the Court again rejected a bright line approach to materiality as flawed. The argument in favor of such a rule is based on the notion that statistical significance is the only indication of causation. Lack of statistically significant data however does not mean that medical experts have no reliable basis for inferring a causal link between a drug and adverse events. Indeed, medical researchers and the FDA frequently use a wide range of evidence to make such a determination. It thus “stands to reason” the Court concluded that investors may utilize a similar approach. The question of causation is resolved by considering context, not just statistical significance. Similarly, the question of materiality is based on a contextual inquiry.

In this case the Basic total mix standard has been met the Court held. This is not a case about a handful of anecdotal reports. Rather, the allegations of the complaint state that Matrixx received information which plausibly indicated a reliable causal link between Zicam and anosmia. That is sufficient at the pleading stage.