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Matrixx Initiatives, Inc. v. Siracusano: A Case About Investor Protection

How open must a company be about product issues?

In this class action against the manufacturer of the Zicam cold and allergy remedies, investors allege that the company violated federal securities law by failing to disclose complaints that the products had impaired users' sense of smell.

The Court presumably will have to spell out what kind of notice a company must provide investors when it receives information that a product may be dangerous. This, in the eyes of some legal experts, makes the case double as a product-liability test.

What’s at stake. Older Americans make up a significant percentage of the investing public, and studies have shown that fraudulent, deceptive and unfair business practices tend to disproportionately harm them.

Where AARP stands. AARP argues that investors are entitled to truthful information and that, in this case, “Matrixx knowingly released misleading statements denying the existence” of a link between Zicam and loss of smell.

How the Court Ruled

In a unanimous decision issued on March 22, the Court held that drug companies may have an obligation to disclose reports of adverse effects associated with their products even if they deem the reports not to be statistically significant.

Writing for the Court, Justice Sonia Sotomayor flatly rejected Matrixx’s argument that it was under no obligation to tell investors about scattered reports that its products might have caused some users to lose their sense of smell.

“Given that medical professionals and regulators act on the basis of evidence of causation that is not statistically significant,” Sotomayor wrote in delivering the Court’s opinion (PDF), “it stands to reason that in certain cases reasonable investors would as well.”

Companies and courts must consider “the source, content and context” of reports of adverse events, she wrote, and not just their numbers.
The decision allows the class-action lawsuit to go forward and has major implications for publicly traded pharmaceutical and biotechnology companies.

Next: Does a credit card agreement's fine print offer sufficient notice?

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