SIFMA Files Amicus Brief in Adverse-Event Disclosure Case

On Aug. 27, 2010, the Securities Industry and Financial Markets Association (SIFMA) filed an amicus brief (also known as a “friend of the court” brief) with the U.S. Supreme Court in the case of Matrixx Initiatives v. Siracusano, 585 F.3d 1167 (9thCir 2009). In the Matrixx case, the U.S. Court of Appeals for 9th Circuit found that a drug company could be held liable for failing to disclose adverse-event reports (i.e., reports by users of a drug who experienced an adverse event after using the drug) even if those reports are not “statistically significant.” Several other circuits, including the 1st, 2nd and 3rd Circuits, however, have held that statistical significance is required to make nondisclosure of such reports “material,” which is a required element for proving securities fraud.

The facts of the Matrixx case are that the shareholder class alleged that Matrixx failed to disclose material information about Zicam, a popular cold medicine.  Specifically, the shareholder class alleged that Zicam caused loss of the sense of smell, a condition called anosmia. The class alleged that Matrixx knew about this harmful effect because of: a phone conversation between a Matrixx vice president and a university researcher discussing a Zicam user’s anosmia; a 1999 study recognizing the possible link; and a university study citing 11 cases of anosmia in Zicam users. The district court dismissed the complaint, reasoning that the class had not alleged a statistically significant number of such instances and had therefore failed to allege a material misrepresentation or omission.

On appeal, the Ninth Circuit stated, among other conclusions, that “[t]he Supreme Court has rejected the adoption of a bright-line rule to determine materiality because ‘the determination [of materiality] requires delicate assessments of the inferences a ‘reasonable shareholder’ would draw…and the significance of those inferences to him.’” The Ninth Circuit therefore rejected the “statistical significance” standard in favor of a fact-specific inquiry to determine “whether the complaint state[d] a claim that [was] plausible on its face.”

Without a bright-line test for when a producer must disclose actual or potential product defects, producers are left to carefully consider disclosure issues on a case-by-case factual basis. SIFMA’s amicus brief focuses on this case’s wider ramifications to the extent the court offers further and more general guidance on the application of the materiality standard and also makes the point that dismissing cases that cannot establish materiality helps deter meritless securities fraud cases.