Last month, the Supreme Court issued a plaintiff-friendly opinion reaffirming its prior ruling in Basic v. Levinson (1988) and likely making it more difficult for corporations to move to dismiss class action lawsuits for failure to adequately allege materiality. In Matrixx Initiatives, Inc. v. Siracusano, the Court was asked 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 reports to establish a statistically significant risk that the product is in fact causing the events." Though some circuit courts had adopted such tests, such as the 2nd Circuit in In re Carter-Wallace, Inc. Secs. Litig., the Supreme Court declined to do so.
Matrixx Initiatives markets Zicam and other cold remedies. Several investors commenced a securities fraud class action lawsuit, alleging that they were injured by the failure to adequately disclose adverse event reports and other research that revealed the possible link between Zicam and anosmia (loss of smell) and by materially misleading statements made by Matrixx.
Matrixx moved to dismiss, arguing that the failure to disclose a risk of injury caused by the company's products is not material to investors unless the risk is alleged to be statistically significant. The district court granted Matrixx's motion to dismiss, finding that the plaintiffs had failed to allege a "statistically significant correlation between the use of Zicam and anosmia so as to make the failure to publicly disclose" certain facts actionable material omissions. The 9th Circuit reversed, holding that it was sufficient that the plaintiffs had alleged that information regarding the possible connection between Zicam and anosmia would have been material to a reasonable investor.
Affirming, the Supreme Court refused to adopt the bright-line rule advocated by Matrixx and adhered to the general test announced in Basic that an omission is material if there is "a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information available." The Court concluded that "[g]iven 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. . . . this is not to say that statistical significance (or lack thereof) is irrelevant--only that it is not dispositive in every case."
The effect of this opinion should not be overstated. The Court did not impose any new disclosure requirements but merely declined to add a gloss on the "total mix" standard. A statistical-significance standard would not necessarily have been helpful to many companies, which cannot usually measure risk with such precision. The Court also clarified that firms need not disclose all adverse impact reports or the results of all studies--a potential treasure trove for product liability plaintiffs--but would need to disclose reports if "something more," perhaps coming from "the source, content, and context of the reports," made them material.
Perhaps most importantly, the Court reiterated that "it bears emphasis that ? 20(b) and rule 10b-5(b) do not create an affirmative duty to disclose any and all material information. . . . Even with information that a reasonable investor might consider material, companies can control what they have to disclose under these provisions by controlling what they say to the market." According to the complaint, Matrixx had not simply failed to disclose the studies, but also had called reports of anosmia "completely unfounded and misleading" and had predicted that sales of Zicam, its leading product, would rise by 80 percent.
While the Court in Matrixx did not take the opportunity to set a bright-line disclosure standard, albeit one that would apply to only a limited type of facts, it did not retreat from its prior holdings on materiality. The standard remains a general one--whether the information changes the total mix of what a reasonable investor would consider important--and in-house counsel should be wary of any shortcuts for evaluating the need for disclosure.