Cengage Advantage Books: Foundations of the Legal Environment of Business 3rd Edition by Marianne Jennings

Exercise 15

Siracusano v. Matrixx Initiatives, Inc. 131 S.Ct. 1309 (2011)
Missing Disclosures by a Nose
Facts
Matrixx Initiatives, Inc. ("Matrixx") is a pharmaceutical company that sells Zicam through its wholly-owned subsidiary, Zicam, LLC. One of its products, responsible for 70% of its sales, is Zicam Cold Remedy, a homeopathic product marketed as stopping or minimizing cold symptoms.
In December 1999, Matrixx began to get questions from physicians whose patients were developing anosmia (loss of the sense of smell). Researchers at medical facilities contacted Matrixx in 2002 to offer access to studies showing that zinc sulfate (Zicam also had zinc in it) was linked to anosmia.
Matrixx's SEC filings did not discuss these inquiries and studies. In fact, on October 22, 2003, Matrixx issued an optimistic press release that the third quarter of 2003 had increased revenues by 163% over the third quarter of 2002. On an October 23, 2003, earnings conference call, executives for Matrixx expressed their "optimis[m] about the future." At one point during the call, Zicam executives were asked to "make any comment on the litigation MTXX or its officers are involved in, or whether or not there is any SEC [Securities and Exchange Commission] investigation." They replied that there was no litigation and that they were not aware of any SEC investigation. In truth, a lawsuit alleging that Zicam caused anosmia had already been filed at this time.
By January 30, 2004, the FDA was investigating whether Zicam may be causing some users to lose their sense of smell. Matrixx's stock then declined, "falling from $13.55 per share on January 30, 2004 to $11.97 per share on February 2, 2004."
NECA-IBEW Pension Fund and James Siracusano (plaintiffs/appellants) brought a class action suit against Matrixx and three Matrixx executives (Appellees) alleging a violation of 10(b) by their failure to disclose material information regarding problems with Zicam. The district court granted Matrixx's motion to dismiss the complaint. The court of appeals reversed. The shareholders appealed.
Judicial Opinion
SOTOMAYOR, Justice
To prevail on a § 10(b) claim, a plaintiff must show that the defendant made a statement that was "misleading as to a material fact."
Matrixx urges us to adopt a bright-line rule that reports of adverse events associated with a pharmaceutical company's products cannot be material absent a sufficient number of such reports to establish a statistically significant risk that the product is in fact causing the events. Absent statistical significance, Matrixx argues, adverse event reports provide only "anecdotal" evidence that "the user of a drug experienced an adverse event at some point during or following the use of that drug." Accordingly, it contends, reasonable investors would not consider such reports relevant unless they are statistically significant because only then do they "reflect a scientifically reliable basis for inferring a potential causal link between product use and the adverse event."
A lack of statistically significant data does not mean that medical experts have no reliable basis for inferring a causal link between a drug and adverse events. As Matrixx itself concedes, medical experts rely on other evidence to establish an inference of causation.
The FDA similarly does not limit the evidence it considers for purposes of assessing causation and taking regulatory action to statistically significant data. For example, the FDA requires manufacturers of overthe- counter drugs to revise their labeling "to include a warning as soon as there is reasonable evidence of an association of a serious hazard with a drug; a causal relationship need not have been proved."
This case proves the point. In 2009, the FDA issued a warning letter to Matrixx stating that "[a] significant and growing body of evidence substantiates that the Zicam Cold Remedy intranasal products may pose a serious risk to consumers who use them." The letter cited as evidence 130 reports of anosmia the FDA had received, the fact that the FDA had received few reports of anosmia associated with other intranasal cold remedies, and "evidence in the published scientific literature that various salts of zinc can damage olfactory function in animals and humans." It did not cite statistically significant data. Given that 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.
Medical experts revealed a plausible causal relationship between Zicam Cold Remedy and anosmia. Consumers likely would have viewed the risk associated with Zicam (possible loss of smell) as substantially outweighing the benefit of using the product (alleviating cold symptoms), particularly in light of the existence of many alternative products on the market. [T]he complaint alleges facts suggesting a significant risk to the commercial viability of Matrixx's leading product. It is substantially likely that a reasonable investor would have viewed this information "'as having significantly altered the "total mix" of information made available.'"
Matrixx elected not to disclose the reports of adverse events not because it believed they were meaningless but because it understood their likely effect on the market. [A] reasonable person would deem the inference that Matrixx acted with deliberate recklessness (or even intent). We conclude, in agreement with the Court of Appeals, that respondents have adequately pleaded [materiality and] scienter.
Affirmed.
Case Questions
1. Based on this decision, if you had been the executives at Matrixx, what would you have disclosed and when would you have disclosed it?
2. Why is it relevant that consumers would be affected by the studies, whether significant or not?
3. By 2009, the FDA required that Zicam be removed from stores and warned consumers about the risk of losing their sense of smell. What happens to the company as a result? What will be the impact on Matrixx investors? What will their damages be?