Adverse Events Disclosures May Increase After Supreme Court Ruling Against Matrixx, But "Total Mix" Matters

Companies may have to disclose adverse event reports that are not statistically significant, but the court says the amount of disclosure needed can be limited by how much a company tells the market about an issue in general.

In a unanimous opinion, the Supreme Court ruled that companies can be sued for failing to disclose adverse event reports about their products even if the reports are not statistically significant.

In Matrixx Initiatives Inc. v. Siracusano, Matrixx sought to establish a "bright-line" rule that adverse event reports are not material in securities fraud litigation unless there is a sufficient number to establish a statistically significant risk that the product is causing the adverse event.

But in a March 22 opinion the court concluded that this rule would artificially exclude information that "'would otherwise be considered significant to the trading decision of a reasonable investor.'"

"Matrixx's argument rests on the premise that statistical significance is the only reliable indication of causation," Justice Sonia Sotomayor wrote for the court. "This premise is flawed: As the SEC points out, 'medical researchers ... consider multiple factors in assessing causation.'"

She said FDA also looks at more than statistically significant data in deciding to take regulatory action. She noted that this case "proves the point" as FDA issued a warning letter to Matrixx in 2009 citing 130 reports of ansomia in Zicam users.

The ruling is not surprising as the justices had expressed skepticism for Matrixx's position during oral arguments in January (Also see "Adverse Event Disclosure Standards Could Be Altered By Supreme Court In Matrixx Case" - Pink Sheet, 17 Jan, 2011.).

Ruling Is Beneficial To Life Sciences Industry, Lawyer Says

Investors allege that Matrixx failed to disclose that its zinc-containing over-the-counter Zicam Cold Remedy products could cause anosmia, the loss of the sense of smell. A district court dismissed their suit, finding that the number of complaints of a link was not statistically significant and thus investors could not claim the company withheld material information from the public. The U.S. Court of Appeals for the Ninth Circuit rejected the standard that adverse event reports must be statistically significant to be material.

The pharmaceutical and biotech industries were concerned that a decision upholding the Ninth Circuit would make it more difficult for companies to defend against meritless securities fraud cases and compel manufacturers to over-disclose adverse event reports. The Pharmaceutical Research and Manufacturers of America and the Biotechnology Industry Organization filed a joint amicus brief in support of Matrixx.

While Matrixx lost its bid for a new bright line rule, Erik Olson, a partner at Morrison & Foerster, said the Supreme Court's decision is helpful to the life sciences industry in several ways. He said it specifies that companies do not routinely have to disclose all adverse event reports and that "a company can control the amount it has to disclose depending on what it says" publicly.

"I don't see this as a major setback for the life sciences industry," said Olson, who co-authored BayBio's amicus brief in support of Matrixx. "Each company is going to have to make a context-specific analysis on what and how to disclose."

Matrixx's Public Statements Made Adverse Event Reports Material

Quoting its 1988 ruling in Basic Inc. v. Levinson, the Supreme Court said information is not material unless 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 made available.'"

But the court stated that the application of the "total mix" standard does not mean that pharmaceutical manufacturers must disclose all reports of adverse events.

The mere existence of reports of adverse events "will not satisfy this standard," the court stated. "Something more is needed, but that something more is not limited to statistical significance and can come from 'the source, content, and context of the reports.'"

The court went further: "Even with respect to 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," the ruling states.

The court indicated that Matrixx's public statements necessitated that it disclose the adverse event reports it had received. The court said Matrixx had reported that Zicam revenues were going to increase 50 percent and then 80 percent, disavowed reports indicating Zicam caused ansomia as "completely unfounded and misleading" and reported that the safety and efficacy of Zicam had been well established.

J. Robert Brown Jr., a professor at the University of Denver Sturm School of Law, said that if Matrix had not made such comments it "probably would not have had an obligation to comment on adverse event reports."

Brown filed an amicus brief on behalf of law and business school professors in support of respondent investors. He said the decision reaffirms existing analysis on disclosure requirements, with the exception of two circuit courts that gave companies more room not to disclose.

But Washington Legal Foundation attorney Richard Samp, who co-authored an amicus brief in support of Matrixx, said that by failing to adopt a bright-line rule the Supreme Court is encouraging more securities fraud cases.

"Companies will be required to disclose much more information earlier on for fear that later on it will be deemed to be material," he said.

Inference Matrixx Acted Recklessly Is Compelling, Court Says

The court also concluded that there was evidence that Matrixx acted with intent to deceive.

"The inference that Matrixx acted recklessly (or intentionally, for that matter) is at least as compelling, if not more compelling, than the inference that it simply thought the reports did not indicate anything meaningful about adverse reactions," the ruling states.

The opinion cited Matrixx's refusal to allow a researcher to mention Zicam by name in a presentation about a patient suffering from ansomia after using Zicam and a press release suggesting that studies had confirmed the drug does not cause anosmia.

"These allegations, 'taken collectively,' give rise to a 'cogent and compelling' inference that Matrixx elected not to disclose reports of adverse events not because it believed they were meaningless but because it understood their likely effect on the market," the court concluded.

The case will now go back to the district court, which will determine if Matrixx engaged in securities fraud by failing to disclose the adverse event reports.

Brenda Sandburg ([email protected])