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Legal Update

Materiality Under the Exchange Act and the US Supreme Court’s Grant of Certiorari in Siracusano v. Matrixx Initiatives, Inc.

21 June 2010
Mayer Brown Legal Update

On June 14, 2010 the Supreme Court of the United States granted certiorari in Siracusano v. Matrixx Initiatives, on appeal from the US Ninth Circuit Court of Appeals. The case addresses whether pharmaceutical companies are required under Section 10 of the Securities Exchange Act of 1934 (‘34 Act) and Securities and Exchange Commission (SEC) Rule 10b-5 to disclose adverse event reports even if the number of reports is not statistically significant. While the question presented before the Supreme Court is narrowly tailored to pharmaceutical companies, the decision could have broader implications to the business community if the Court modifies or clarifies its materiality standard for disclosures, outlined two decades ago in Basic Inc. v. Levinson, 425 U.S. 224 (1988).

The Ninth Circuit Decision

Matrixx Initiatives sold cold products through its wholly owned subsidiary Zicam, LLC, notably including the Zicam Cold Remedy. From 1999 to 2004, Matrixx received approximately 12 reports of users of Zicam experiencing ansomia, or the loss of the sense of smell. Plaintiffs brought a fraud suit against Matrixx under the ’34 Act for failing to disclose material information by not informing investors of the adverse event reports. The US District Court for the District of Arizona dismissed the complaint, reasoning that the limited number of user complaints were not material because they were not statistically significant.

The Ninth Circuit reversed the district court’s ruling. The reversal applied the Basic rule that “the determination [of materiality] requires delicate assessment of the inferences a reasonable shareholder would draw from a given set of facts” and held that materiality was therefore a “fact-specific inquiry” that did not lend itself to a bright-line statistical significance test. Siracusano v. Matrixx Initiatives, Inc. 2009 WL 3448282 (9th Cir. 2009). Finding that the plaintiffs’ allegations plausibly suggested that disclosure of the ansomia reports could have been viewed by the reasonable investor as having significantly altered the “total mix” of information available on Matrixx’s securities, the Ninth Circuit held that the plaintiffs had alleged sufficient facts to survive a motion to dismiss under the Private Securities Litigation Reform Act (PSLRA) even if the ansomia reports were not statistically significant.

The Supreme Court’s Grant of Certiorari

Matrixx’s petition for certiorari argued that Siracusano split the circuits on the question of whether a statistically insignificant number of adverse event reports can be considered materially misleading. Previous decisions in the First, Second, and Third Circuits had indicated that a standard of statistical significance was proper for determining whether adverse event reports were material. Notably, the Second Circuit had held that reports to shareholders that failed to disclose adverse event reports did not “become materially misleading until [the company] had information that [the pharmaceutical] had caused a statistically significant number” of adverse reports. In re: Carter-Wallace, Inc. Securities Litigation, 150 F.3d 153, 157 (2d. Cir. 1998). Likewise, the Third Circuit had indicated that “drug companies need not disclose isolated reports . . . until those reports provide statistically significant evidence that the ill effects may be caused by rather than randomly associated with use of the drugs.” Oran v. Stafford, 226 F.3d 275, 284 (3d Cir. 2000). The Supreme Court granted certiorari to resolve this circuit split and to determine whether the focus on statistical significance in Carter-Wallace and Oran was consistent with the fact-intensive inquiry required by Basic.

Possible Implications

The potential implications of the Supreme Court’s ruling for pharmaceutical companies are obvious. If the Court requires companies to disclose adverse event reports, even when those reports lack statistical significance, a lawsuit over a company’s failure to disclose even a trivial number of adverse reports could survive a motion to dismiss. A decision upholding the Ninth Circuit’s rule could place drug companies in the uncomfortable position of either disclosing any and all adverse event reports, including those that do not pose a statistically significant threat to consumers at the time of the report, or facing costly litigation.

But the implications of the Supreme Court’s grant of certiorari in Siracusano could run beyond the pharmaceutical industry and affect all companies subject to liability under the ’34 Act and SEC Rule 10b-5. The case represents an opportunity for the Court to clarify Basic and provide further guidance as to what a plaintiff must plead under the pleading standards articulated in Bell Atlantic v. Twombly, 550 U.S. 544 (2007),to survive a motion to dismiss under the materiality standard. Basic requires disclosure when “the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” 485 U.S. at 231-32.

If the Court holds that statistically insignificant adverse event reports are not sufficient for reasonable investors to plausibly infer that these reports would have been material, defendants could find it easier to challenge more generally the adequacy of allegations about materiality. For example, companies could argue that evidence of potential product liability or tort risk would not need to be disclosed if that evidence lacked credibility or statistical significance; more generally, plaintiffs pursuing securities fraud law suits might be required to include allegations that the stock market’s reaction to issuer statements and disclosures was statistically significant in order to survive a motion to dismiss. But if the Court reads Basic broadly and determines that materiality represents a factual question even when a court is faced with only statistically insignificant allegations in the pleadings, publically traded companies may have to choose between broader disclosures and greater risk that securities fraud claims will survive a motion to dismiss. Siracusano therefore bears watching both for the content and scope of the Supreme Court’s decision.

Oral arguments in Siracusano v. Matrixx Initiatives will likely occur in the Court’s fall term.

For inquiries relating to this alert, please contact John J. Tharp at or Kyle Steinmetz at .

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