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Materiality of Alleged Misrepresentations Not Dependent on Statistical Significance

By Sean T. Carnathan, Litigation News Associate Editor – May 11, 2011

Materiality and statistical significance are not equivalent, according to the U.S. Supreme Court. Matrixx Initiatives, Inc. v. Siracusano [PDF]. The Court unanimously held that class action plaintiffs suing a pharmaceutical company for alleged securities fraud adequately pled material misrepresentations about adverse events associated with one of the company’s drugs, even though the events were not statistically significant.

Plaintiffs challenged statements by Matrixx as misleading in light of reports that Zicam, which accounted for 70 percent of Matrixx’s sales, had caused consumers to lose their sense of smell. The challenged statements included statements that Zicam was “poised for growth,” as well as generalized statements about earnings expectations. The market reacted strongly to news reports about the adverse event reports and related products liability lawsuits. Matrixx, however, steadfastly maintained that there was insufficient scientific evidence to connect Zicam to loss of smell and issued two press releases to that effect.

After the district court dismissed the plaintiffs’ claims against Matrixx, the plaintiffs obtained a reversal on appeal. At the Supreme Court, Matrixx urged the adoption of a bright-line rule that “adverse event reports regarding a pharmaceutical company’s products are not material absent a sufficient number of such reports to establish a statistically significant risk that the product is causing the events.” The Court declined.

A Plaintiff-Friendly Decision on Materiality
“From the plaintiffs’ side, it was an encouraging development,” says Matthew L. Mustokoff, Radnor, PA, chair of the Class Actions and Derivative Suits Subcommittee of the ABA Section of Litigation's Securities Litigation Committee. “What we have seen from the Roberts Court in the past is a willingness to rewrite securities laws,” he notes. “It was reassuring that the Court was not trying to rewrite the law here.” Instead, “Matrixx confirms the decades-old principle that materiality is a jury question that cannot be decided at the pleadings stage,” Mustokoff says.

Silence May Still Be Golden
“I would have preferred another outcome, but the implications of the ruling for the plaintiffs' bar should not be overstated,” says Andrea J. Robinson, Boston, a securities litigator and member of the Section of Litigation. “There's no doubt that Matrixx's rejection of the defendant's proposed bright-line test of materiality makes it more challenging for a pharmaceutical company to gauge when to disclose adverse event reports,” says Robinson. She believes, however, that “the case reaffirms the bedrock principle that silence is a perfectly viable course absent a duty to disclose.”

“As the Court put it, ‘companies can control what they have to disclose . . . by controlling what they say to the market,’” Robinson notes. “If you don't say anything that's misleading absent another disclosure, there's no broad duty to volunteer,” she says.

Broader Application of Decision Debatable
“For a drug company in particular, any time you have some sort of negative information and you do not disclose it, if you are wrong and the stock market public perceives it as detrimental and the stock drops, you are in a tough spot,” says Todd A. Murray, Dallas, a member of the Class Actions and Derivative Suits Subcommittee of the Section’s Securities Litigation Committee. “Companies should be careful about issuing denials when there is at least some information in their possession to the contrary,” says Murray. He believes that it remains an open question whether Matrixx, instead of issuing positive statements about its products, could simply have remained silent about the negative reports it had received.

“One can imagine plaintiffs' lawyers characterizing Matrixx as a basis for resisting any motion to dismiss grounded in an argument that an alleged omission was immaterial,” says Robinson. “And I would not be surprised to see arguments that the decision should be read as having implications across industries,” she says. “But the reality is that Matrixx, by its terms, is limited only to a pharmaceutical company's nondisclosure of adverse events under circumstances where the plaintiff pleaded specific facts, which the court concluded could support a reasonable investor's view that the particular reports in question were material,” she notes.

Statistical Evidence Still Relevant
“The court also did not reject statistical significance as irrelevant,” says Robinson. “It merely held that it was not dispositive under these circumstances,” she observes. “In other cases it might be enough.”

Keywords: litigation, class actions, securities fraud, Matrixx Initiatives, Inc. v. Siracusano

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