Failure to disclose a statistically insignificant incidence of adverse side effects could lead to significant securities-fraud liability for publicly traded drugmakers, device manufacturers, and others under a recent Supreme Court decision.

Investors filed a class action lawsuit in Arizona federal court against Matrixx Initiatives, Inc., makers of Zicam® cold remedy. The plaintiffs alleged that management had defrauded them with optimistic earnings guidance because it did not also disclose reports of a possible link between use of the drug and loss of smell. Dismissing the complaint, the trial court held that the reports were immaterial because the plaintiffs had not alleged a statistically significant correlation between the drug and the reported side effect. The U.S. Court of Appeals for the Ninth Circuit reversed. The Supreme Court granted review and affirmed the judgment of the appellate court. Agreeing that the reports were material, the Court noted that, because doctors and regulators often act on the basis of evidence of causation that is not statistically significant, it stands to reason that in certain cases reasonable investors would as well.

The Court's refusal to adopt a bright-line rule governing disclosure of product-related adverse events is likely to increase headaches for management during 10-Q and 10-K season.

Matrixx Initiatives, Inc. v. Siracusano, No. 09-1156 (Mar. 22, 2011)