A few weeks ago, I mentioned that the Supreme Court had begun to hand down its class-action cases for the term. I was wrong. It actually delivered another opinion a month ago that, despite sitting on my desktop, I had forgotten. And that’s something I ought to correct.

The case, Matrixx Initiatives, Inc. v. Siracusano, arose out of an alleged securities fraud. According to the plaintiffs, Matrixx Initiatives, Inc. (in the person of three of its executives) withheld reports of a possible link between its cold remedy Zicam and a condition known as anosmia, or loss of the sense of smell. Specifically, the plaintiffs alleged that, starting in 1999, Matrixx had received calls from doctors who had reported "clusters" of patients who used Zicam and suffered anosmia. (Even under more rigorous conditions than self-reporting, cluster samples tend to lack the precision required for statistical significance.)

Matrixx convinced the district court to dismiss the complaint by arguing that clusters are not significant enough to reach the standard of materiality under § 10 of the Securities Exchange Act, and that the plaintiffs had not pled that the defendants had scienter under the PSLRA. The Second Circuit reversed, and Matrixx appealed to the Supreme Court.

The Court faced two questions, both of which arise primarily in securities class actions. First, does an omission of data that is not statistically significant count as material? Second, is recklessness enough to fulfill the PSLRA’s scienter requirement?

It didn’t struggle with either question. Justice Sotomayor wrote for a unanimous court. First, the Court held that data does not have to be statistically significant to be material.

As Matrixx itself concedes, medical experts rely on other evidence to establish an inference of causation. We note that courts frequently permit expert testimony on causation based on evidence other than statistical significance. We need not consider whether the expert testimony was properly admitted in those cases, and we do not attempt to define here what constitutes reliable evidence of causation. It suffices to note that, as these courts have recognized, "medical professionals and researchers do not limit the data they consider to the results of randomized clinical trials or to statistically significant evidence."

(Internal citations omitted.) Justice Sotomayor concluded that since

medical professionals and regulators 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 did try to set some limit on the materiality of any adverse events. It noted that adverse event reports are "daily events" for pharmaceutical manufacturers. So the real question was not whether there had been an adverse event report, but how a reasonable investor would treat the "total mix" of information at that time.

The Court also briefly discussed scienter. Given plaintiffs’ allegations that Matrixx had hired a consultant and convened a "panel of physicians and scientists" to help it respond to the reports of anosmia,

[t]he inference that Matrixx acted recklessly (or intentionally, for that matter) is at least as compelling, if not more compelling, than the inference that it simply thought the reports did not indicate anything meaningful about adverse reactions.

So what does this ruling mean for defense lawyers? First, it should guarantee continued business. Efforts to limit its reach aside, the Court’s ruling provides an opening for enterprising plaintiffs’ counsel to file securities-fraud cases based on isolated events, so long as they argue that the events changed the total mix of information available to an investor. The ruling also means that lawyers will have to pay extra attention to how their clients conduct investor relations. The more aggressive the investor-relations strategies, the more likely plaintiffs will be able to paint a picture that the company thought a given event indicated something meaningful, leading to an inference of scienter.

  • Andrew, I view Matrixx as limited primarily to its facts. As Sotomayor stressed, it’s what you say to the market that creates a duty to disclose. Here, the defendant said a lot about the state of the science that appears to have been dead wrong, making the existence of adverse event reports important. But for the seller of prescription medicines that has a huge file of studies supporting FDA approval of the product, the existence of an isolated adverse event report or two — even post-Matrixx — shouldn’t alter the mix of information available to investors. See http://www.consumerclassactionsmasstorts.com/2011/03/articles/new-suits/some-thoughts-on-matrixx-initiatives/

  • Russell,

    Always good to hear from you, and thanks for the link. I think you’ve provided a nice, level-headed discussion of why no one should panic at the Matrixx ruling, and I largely agree with that analysis.

    Where we part ways–IF we part ways–is in our intuition of how plaintiffs’ lawyers will react to the ruling. “Perfect storm” and limiting language aside, I think a number of plaintiffs’ lawyers will still try to exploit the small opening that the Court has left them. (And, having defended a few securities class actions, I do think that investor-relations statements may unwittingly help them out.) Not all of those attempts will succeed, but not all of them have to. The Court’s ruling reduces the cost of filing a complaint at the margins, and that’s where I think we’ll see some new filings.

    Will that effect be a large one? That’s an interesting question. My guess is that it will be large enough to be noticeable. It looks like this is where you disagree. And if that’s the case, I’m more than happy to make a gentleman’s bet on the issue. Should we check back this time next year?