Every Bit of Information.

Matrixx Initiatives v. Siracusano - January 10, 2011

     Thom Yorke, frontman for Radiohead, claims he lives in a town where he can’t smell a thing.  Maybe he took Zicam, a zinc-based cold remedy manufactured by Matrixx Initiatives, and lost the ability to smell.  Medical professionals call this condition anosmia.  Mr. Yorke’s condition, if reported by him or his doctor to the drug manufacturer, would then be included in an Adverse Event Report, or AER.  The AER is then filed with the Food and Drug Administration.

     Federal statutes make it unlawful for a company to make an untrue statement of material fact or to omit a statement of material fact.  A shareholder of a company may file a lawsuit under this law.  To prevail, the shareholder must show that the material statement or omission was made with the company’s knowledge and caused economic loss.

     This morning, the United States Supreme Court heard oral arguments in the case of Matrixx Initiatives v. Siracusano, to determine if the drug maker’s failure to disclose the AER’s of anosmia results in an actionable claim by the shareholders.  Out of the millions of consumers who bought Zicam, only 23 developed anosmia.  The issue is whether the manufacturer has to disclose information that is not statistically significant.  In this case, no connection has been shown between Zicam and anosmia.  The lower courts are divided on this issue.

     Matrixx argues that the shareholder’s lawsuit should be dismissed because the AER that was not released was not material.  Information is material if there is a substantial likelihood that a reasonable shareholder would consider it important.  Matrixx further argues that for the reports to be material, they must be shown to contain statistically significant evidence proving that Zicam caused anosmia.

     Siracusano and the shareholders argue that the lack of statically significant evidence should not preclude their lawsuit, claiming that reasonable investors would consider relevant information, even if it had not reached the level of statistical significance.  The federal government agrees with the shareholders and filed an amicus brief in support of their position.

     Justice Kagan was skeptical of Matrixx’s position, making the point that “the FDA takes action all the time as to drugs -- they force the withdrawal of a drug from the market, they force relabeling of a drug -- on the basis of findings that are not statistically significant,” and that those actions “severely affect the product's value to the company.”  Justice Sotomayor echoed this position, stating that reasonable evidence of a connection is required, not statistical significance.

     If the Court finds in favor of Matrixx, the adoption of the statistically significant test could result in cases being dismissed before a judge or a jury has an opportunity to evaluate the facts.  If the Court rules for Siracusano, companies may feel required to release every bit of information available, to avoid running afoul of the law.