585 F.3d 1167 (9th Cir. 2009), cert. granted, 78 U.S.L.W. 3728 (June 14, 2010) (No. 09-1156)
Can a plaintiff state a claim under § 10(b) of the Securities Exchange Act and Sec rule 10b-5 based on a pharmaceutical company's nondisclosure of adverse event reports, even though the reports are not alleged to be statistically significant?
In Matrixx, the Supreme Court will address the question of whether adverse event reports must be alleged to be statistically significant in order to support a claim under § 10(b) of the Securities Exchange Act and SEC rule 10b-5.
Plaintiffs-respondents are NECA-IBEW Pension Fund and James Siracusano, who brought a class action against defendant-petitioner Matrixx Initiatives Inc. and three Matrixx executives. Plaintiffs allege that in 1999 the Smell & Taste Treatment and Research Foundation Ltd., informed Matrixx's customer service line that it recognized a link between Zicam and anosmia, a condition associated with temporary or complete loss of the ability to smell. In September 2003 and April 2004, a collaborative research effort by the University of Colorado identified anosmia in more than 100 Zicam users. In addition, on Jan. 30, 2004, an article published in the Dow Jones Wire indicated that three product liability suits had been filed against Matrixx regarding Zicam.
Despite knowledge of these events, Matrixx continued to make positive statements regarding Matrixx's growth and Zicam's safety. On Oct. 22, 2003, Matrixx issued a news release stating that "[t]he Zicam brand is poised for growth." In a Nov. 12, 2003, quarterly report, Matrixx again predicted positive growth, but added "[w]e may incur significant costs resulting from product liability claims." Matrixx, however, did not disclose that at the time of this statement at least one lawsuit had already been filed claiming a causal connection between Zicam and anosmia. On Feb. 2, 2004, Matrixx stated that reports of Zicam's danger were "completely unfounded and misleading." On Feb. 6, 2004, Good Morning America reported the existence of the medical reports and pending lawsuits. The following day, Matrixx's stock dropped 23.8 percent.
Section 10(b) of the Securities Exchange Act of 1934 makes it unlawful for any person "to use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate…" 15 U.S.C. § 78j(b). Rule 10b-5 makes it unlawful to "make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading[.]" 17 C.F.R. § 240.10b-5(b). To state a securities fraud claim, a plaintiff must allege that the defendant (1) made a misrepresentation or an omission; (2) of a material fact; (3) with scienter, i.e. intent to deceive; (4) in connection with the purchase and sale of a security; (5) upon which the plaintiff relied; and (6) that the plaintiff's reliance was the proximate cause of the injury for which plaintiff seeks damages.
The District Court found that the plaintiffs failed to appropriately plead materiality and the court granted Matrixx's motion to dismiss. The court concluded that in order to properly allege materiality the plaintiffs needed to allege a statistically significant correlation between the use of Zicam and anosmia. The court stated, "Where a company is presented with statistically significant adverse medical reports, adverse clinical data, and a 'consensus emerges that the data' is putting 'the brand at risk' the courts have found a material omission." The court determined that the number of adverse reports was not statistically significant and that there was no reason for Matrixx to believe that the reports were reliable.
The Ninth Circuit Court of Appeals reversed, holding that it was not necessary for the plaintiffs to plead statistical significance. According to the court, the Supreme Court rejected the use of bright-line rules for determining materiality in Basic Inc. v. Levinson, 485 U.S. 224 (1988). The primary reason for this position stems from the fact that materiality is based on the likelihood that a reasonable shareholder would consider the misrepresentation or omission important. The court then "engage[d] in the fact-specific inquiry required by Basic" and found the allegations relating to Matrixx's knowledge of the reports and lawsuits sufficient to plead materiality.
The circuit courts are split on whether statistical significance is necessary in order to plead materiality. The First, Second and Third circuits hold that a plaintiff must allege statistical significance, while the Fifth, Seventh and Ninth circuits have each indicated a rejection of bright-line materiality tests in favor of a fact-based approach.
AARP will file an amicus brief urging the Supreme Court to find that the plaintiffs are not required to plead a statistically significant relationship between an adverse effect and a product in order to sustain an action under § 10(b) of the Securities Exchange Act of 1934. AARP will argue that requiring statistical significance will lead to inadequate investor protection by creating an insurmountable barrier to many plaintiffs with legitimate claims. Establishing a statistically significant correlation between a drug, procedure or medical device and an adverse impact can be extremely difficult. A decade has passed since the first study recognizing a link between Zicam and anosmia, yet no study has been able to conclusively prove a correlation. Despite the failure to allege statistical significance, the plaintiffs have suffered a substantial loss, in the form of significantly reduced stock value. It would be inequitable to allow such a harm to occur without offering investors an opportunity to hold the company and responsible executives accountable for their misleading handling of the issue.
This case is important to persons 50 and older because as more individuals participate in defined contribution plans constituting their primary and sometimes exclusive retirement savings plan, stocks have become an increasingly important part of individuals' retirement asset portfolios. Retirees and those planning retirement also rely to a significant extent on savings and investment assets held outside of retirement plans as major sources of retirement security. Requiring that plaintiffs plead statistical significance will lead to the courts dismissing a greater number of cases in which defendants have acted in a fradulent manner. By rejecting the statistical significance standard, the court will permit more investors to seek adequate redress and recoup retirement savings that were lost as a result of deceptive corporate conduct.