In a unanimous opinion issued this week, Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. __ (2011), the Supreme Court declined to adopt a proposed bright-line rule for materiality and reaffirmed the Basic “total mix” test. Specifically, the Court rejected Matrixx’s argument that adverse incident reports are never material unless they are statistically significant - overturning several lower court decisions to the contrary, including one written by then-Judge Alito. The Court applied the Basic test and concluded that plaintiffs had alleged facts sufficient to plead materiality and to survive dismissal. Further, the Court found the allegations give rise to an inference that Matrixx failed to disclose adverse reports because it understood the likely market effects, thus satisfying the scienter pleading requirement.
In April 2004, investors brought suit against Matrixx, a pharmaceutical company, claiming that the company had failed to disclose information regarding reports that the nasally-administered versions of its over-the-counter cold remedy, Zicam, caused anosmia (a loss of sense of smell). The complaint alleged that the defendants knew of dozens of complaints from doctors and consumers as well as consumer product lawsuits. The district court dismissed the investors’ complaint, concluding that the undisclosed information was not material because there was no “statistically significant correlation between the use of Zicam and anosmia.” The Ninth Circuit reversed, creating a split with the First, Second and Third Circuits (Judge Alito wrote the majority opinion in the Third Circuit’s decision Oran v. Stafford, 226 F.3d 275 (3d Cir. 2000)), which had previously held that adverse reports related to the safety of a product are not material unless such reports provide reliable “statistically significant” evidence that the drug is unsafe.
The Court granted certiorari on the following question: Whether a plaintiff can state a claim under Section 10(b) and Rule 10b-5 based on a pharmaceutical company’s nondisclosure of adverse event reports even though the incidents are not alleged to be statistically significant?
Supreme Court Decision
The Court answered the question presented with a unanimous “Yes,” affirming the Ninth Circuit. In doing so, the Supreme Court rejected a bright-line rule on materiality for suits under Section 10(b) - as it had in Basic - and upheld the familiar Basic “total mix” framework. Rather than focus solely on the statistical significance of adverse event reports, the Court held that lower courts must undertake a fact-specific inquiry that considers “the source, content, and context of the [adverse event] reports” to determine whether the manufacturer possessed “information that plausibly indicate[s] a causal link” between the drug and the adverse condition.
In considering the specific context of Matrixx, the Court noted that medical doctors and the FDA act on evidence of causation that is not statistically significant, so “it stands to reason that in certain cases reasonable investors would as well.” In determining that this was one of those cases, the Court keyed on several allegations: (1) doctors notified Matrixx of Zicam causing anosmia; (2) at least ten patients lost their sense of smell after taking Zicam; (3) nine plaintiffs commenced four product liability suits involving Zicam; (4) Matrixx knew researchers presented findings of a possible causal link between Zicam and anosmia at a medical conference; (5) “Critically,” the researchers pointed Matrixx toward previous studies that showed a biological causal link between zinc (a key ingredient in Zicam) and anosmia; (6) Matrixx told the market that reports linking Zicam to anosmia were “completely unfounded and misleading” and that Zicam’s safety and effectiveness were “well-established” even though it later admitted that the evidence was “insufficient” to determine if Zicam’s active ingredient “affects a person’s ability to smell”; (7) Zicam accounted for seventy percent of Matrixx’s sales and the company announced to investors that revenues were going to rise between fifty and eighty percent.
Assuming the truth of these allegations, the Court determined that “Matrixx received information that plausibly indicated a reliable causal link between Zicam and anosmia,” and that “[c]onsumers likely would have viewed the risk associated with Zicam. . .as substantially outweighing the benefit of using the product.” This was enough to establish materiality for purposes of a motion to dismiss.
Implications of the Decision
The Matrixx decision reaffirms the continuing vitality of Basic’s “total mix” test, leaving unchanged the general materiality standard under the securities laws. It further reflects that the Court will likely continue to eschew bright-line rules for when information is material, requiring a more fact-specific inquiry based on the allegations or evidence as a whole. The decision may make it more difficult for some defendants to successfully move to dismiss complaints on materiality grounds, particularly in courts that had previously articulated a bright-line materiality standard.
While the decision does not provide any bright-line guidance for issuers to follow in making disclosure decisions, the Court did emphasize that not all adverse event reports are material. This should provide some comfort that a company need not necessarily disclose every arguably negative anecdotal occurrence every time it chooses to speak on a topic.