Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 provide that a business may be held liable for failure to disclose any material fact in connection with the purchase or sale of its securities. For pharmaceutical companies, these facts may include so-called “adverse event reports” that are received when the users of a drug experience adverse side-effects. The Supreme Court granted certiorari on June 14, 2010, in Matrixx Initiatives, Inc. v. Siracusano, No. 09-1156, to determine whether a drug company can be held liable for failure to disclose adverse-event reports if the undisclosed reports do not constitute statistically significant evidence that the drug caused the adverse events.

This case is important not only to pharmaceutical companies, but to any public company subject to liability under SEC Rule 10b-5. The Court’s decision will likely clarify when a company has a duty to disclose potential adverse information to the public, and it may also affect which securities fraud claims are subject to summary dismissal and which will get to a jury.

The petitioner in this case manufactures Zicam Cold Remedy. Between 1999 and 2004, petitioner received 12 reports of Zicam users experiencing anosmia, or the loss of the sense of smell. Respondents filed this class-action lawsuit alleging that petitioner committed securities fraud by failing to disclose these reports. The First, Second, and Third Circuits would have dismissed the lawsuit because the complaint did not allege that the number of known reports of anosmia was statistically significant. In the decision below, however, the Ninth Circuit rejected any rigid statistical-significance requirement and instead held that it should be left to the trier of fact to determine whether the nature and number of adverse-event reports rise to the level of material information.

Absent extensions, which are likely, amicus briefs in support of the petitioners will be due on August 5, 2010, and amicus briefs in support of the respondent will be due on September 7, 2010. Any questions about this case should be directed to Dan Himmelfarb (+ 202 263 3035) in our Washington, DC office.

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