563 U.S. 27
Matrixx Initiatives, Inc., through a wholly owned subsidiary, develops, manufactures, and markets over-the-counter pharmaceutical products whose core brand is Zicam.1
At the time of the events in question, Zicam Cold Remedy came in several forms including nasal spray and gel, with zinc gluconate as its active ingredient.2
Respondents allege that Zicam Cold Remedy accounted for approximately 70 percent of Matrixx’s sales.3
Respondents are individuals who purchased Matrixx securities between October 22, 2003, and February 6, 2004.4
Respondents later filed this securities fraud class action against Matrixx and three of its executives.5
In 1999, Dr. Alan Hirsch, neurological director of the Smell & Taste Treatment and Research Foundation, Ltd., called Matrixx’s customer service line after discovering a possible link between Zicam nasal gel and loss of smell in a cluster of his patients.6
Dr. Hirsch mentioned previous studies demonstrating that intranasal application of zinc could be problematic.7
In September 2002, Matrixx’s vice president for research and development called Miriam Linschoten, Ph.D., at the University of Colorado Health Sciences Center after receiving a complaint from a person she was treating who had lost her sense of smell after using Zicam.8
Clarot informed Linschoten that Matrixx had received similar complaints from other customers.9
Linschoten drew his attention to previous studies linking zinc sulfate to loss of smell.10
By September 2003, one of Linschoten’s colleagues, Dr. Bruce Jafek, had observed 10 patients suffering from anosmia after Zicam use.11
Linschoten and Jafek planned to present their findings at a meeting of the American Rhinologic Society in a poster presentation entitled “Zicam® Induced Anosmia,” whose abstract the society posted in advance.12
Matrixx learned of the planned presentation.13
Clarot sent a letter to Dr. Jafek warning him that he did not have permission to use Matrixx’s name or the names of its products.14
Dr. Jafek deleted the references to Zicam before presenting.15
By the end of the class period on February 6, 2004, nine plaintiffs had filed four product liability lawsuits against Matrixx.16
During the class period Matrixx stated that Zicam was poised for growth in the upcoming cough and cold season and had very strong momentum.17
Matrixx raised its revenue guidance to predict an 80 percent increase in revenues.18
In its November 2003 Form 10–Q filed with the SEC, Matrixx warned of the potential material adverse effect that could result from product liability claims whether or not proven to be valid.19
Matrixx did not disclose that two plaintiffs had already sued Matrixx for allegedly causing them to lose their sense of smell.20
On January 30, 2004, Dow Jones Newswires reported that the FDA was looking into complaints that Zicam may be causing some users to lose their sense of smell in light of at least three product liability lawsuits.21
Matrixx’s stock fell from $13.55 to $11.97 per share after the report.22
On February 2, 2004, Matrixx issued a press release asserting that statements alleging intranasal Zicam products caused anosmia were completely unfounded and misleading.23
The press release stated that in no clinical trial of intranasal zinc gluconate gel products had there been a single report of lost or diminished olfactory function.24
The press release stated that the safety and efficacy of zinc gluconate had been well established in two double-blind, placebo-controlled, randomized clinical trials.25
On February 6, 2004, after Good Morning America highlighted Dr. Jafek’s findings and noted that four lawsuits had been filed, Matrixx stock fell to $9.94 per share.26
The company issued another press release largely repeating its February 2 statement.27
The district court granted Matrixx’s motion to dismiss.28
The Ninth Circuit reversed.29
The Supreme Court granted certiorari.30
Whether a plaintiff can state a claim for securities fraud under §10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b–5 based on a pharmaceutical company’s failure to disclose reports of adverse events associated with a product if the reports do not disclose a statistically significant number of adverse events?31
To prevail on a §10(b) claim, a plaintiff must show that the defendant made a statement that was misleading as to a material fact.32 This requirement is satisfied when 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.33 The Court has rejected bright-line rules for materiality determinations because they are inherently fact-specific.34
Yes.
The complaint’s allegations suffice to raise a reasonable expectation that discovery will reveal evidence satisfying the materiality requirement.
The complaint’s allegations suffice to allow the court to draw the reasonable inference that the defendant is liable.
Assuming the complaint’s allegations to be true, Matrixx received reports from medical experts and researchers that plausibly indicated a reliable causal link between Zicam and anosmia.
Consumers likely would have viewed Zicam’s risk as substantially outweighing its benefit.
Viewing the complaint’s allegations as a whole, the complaint alleges facts suggesting a significant risk to the commercial viability of Matrixx’s leading product.35
It is substantially likely that a reasonable investor would have viewed this information as having significantly altered the total mix of information made available.36
Assuming the complaint’s allegations to be true, Matrixx told the market that revenues were going to rise 50 and then 80 percent when it had information indicating a significant risk to its leading revenue-generating product.37
On February 2, 2004, Matrixx issued a press release asserting that statements alleging intranasal Zicam products caused anosmia were completely unfounded and misleading.
The press release stated that in no clinical trial of intranasal zinc gluconate gel products had there been a single report of lost or diminished olfactory function.
The press release stated that the safety and efficacy of zinc gluconate had been well established in two double-blind, placebo-controlled, randomized clinical trials.
The district court granted Matrixx’s motion to dismiss.
The Ninth Circuit reversed.
The Supreme Court granted certiorari.
Respondents have stated a claim under §10(b) and Rule 10b–5.38
Whether respondents adequately pleaded the element of materiality without alleging that the adverse event reports reflected statistically significant evidence of causation?39
Under Basic Inc. v. Levinson, materiality is satisfied when 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.40 Any approach that designates a single fact or occurrence as always determinative of an inherently fact-specific finding such as materiality must necessarily be overinclusive or underinclusive.41
Yes.
The complaint’s allegations suffice to raise a reasonable expectation that discovery will reveal evidence satisfying the materiality requirement.
The complaint’s allegations suffice to allow the court to draw the reasonable inference that the defendant is liable.
Assuming the complaint’s allegations to be true, Matrixx received reports from medical experts and researchers that plausibly indicated a reliable causal link between Zicam and anosmia.
Consumers likely would have viewed Zicam’s risk as substantially outweighing its benefit.
Viewing the complaint’s allegations as a whole, the complaint alleges facts suggesting a significant risk to the commercial viability of Matrixx’s leading product.
It is substantially likely that a reasonable investor would have viewed this information as having significantly altered the total mix of information made available.
Assuming the complaint’s allegations to be true, Matrixx told the market that revenues were going to rise 50 and then 80 percent when it had information indicating a significant risk to its leading revenue-generating product.
Respondents adequately pleaded materiality.42
Whether respondents adequately pleaded the element of scienter without alleging that Matrixx knew of statistically significant evidence of causation?43
Under the Private Securities Litigation Reform Act of 1995, a complaint adequately pleads scienter only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.44 The court must review all the allegations holistically.45
Yes.
The complaint’s allegations, taken collectively, give rise to a cogent and compelling inference that Matrixx elected not to disclose adverse event reports not because it believed they were meaningless but because it understood their likely effect on the market.46
A reasonable person would deem the inference that Matrixx acted with deliberate recklessness at least as compelling as any opposing inference.47
Matrixx’s proposed bright-line rule requiring an allegation of statistical significance to establish a strong inference of scienter is flawed.48
The inference that Matrixx acted recklessly is at least as compelling as the inference that it simply thought the reports did not indicate anything meaningful about adverse reactions.49
Respondents adequately pleaded scienter.50