In the Matrixx Initiatives v. Siracusano case, the U.S. Supreme Court has held that the plaintiffs were not required, in a case alleging that Matrixx failed to disclose reports of a possible link between its leading drug product and the loss of smell, to plead that these reports were statistically significant. The unanimous decision authored by Justice Sotomayor rejects the use of statistical significance as a “bright-line rule” for the assessment of materiality in this type of case.
The core of the defendants’ argument was that in the absence of statistical significance, adverse event reports suggesting that a drug has caused a loss of smell do not “reflect a scientifically reliable basis for inferring a potential causal link” that would be material to a reasonable investor. The Court declined to hold, however, that “statistical significance is the only reliable indication of causation.” For example, the FDA relies on a wide range of evidence of causation and “sometimes acts on the basis of evidence that suggests, but does not prove, causation.” If “medical professionals and regulators act on the basis of evidence that is not statistically significant, it stands to reason that in certain cases reasonable investors would as well.”
Having rejected the proposed bright line rule, the Court found that the complaint adequately alleged “Matrixx received information that plausibly indicated a reliable causal link” between the drug and the loss of smell. The information included the adverse event reports and studies suggesting a causal link. In turn, investors would have viewed this information as material because it suggested there was “a significant risk to the commercial viability of Matrixx’s leading product,” especially because the risk associated with the drug (possible loss of smell) substantially outweighed the benefit of using the drug (alleviate cold symptoms). The omitted material information rendered Matrixx’s statement that its “revenues were going to rise 50 and then 80 percent” misleading.
Holding: Reversal of dismissal affirmed (the court also found that the plaintiffs had adequately plead scienter).
Notes on the Decision:
(1) The decision is quite narrow. Perhaps most importantly, the Court did not offer any redefinition of the Basic materiality standard (so the forests are safe). Nor did the Court make any broad pronouncements on the appropriateness of evaluating materiality at the motion to dismiss stage of a case.
(2) In line with its Tellabs decision on the issue of pleading scienter, the Court emphasized a holistic approach to evaluating the plaintiffs’ materiality allegations (e.g., “Viewing the allegations of the complaint as a whole . . .”).