Disclosure Update: Supreme Court Affirms Traditional Test of Materiality

Back in January, we wrote about an interesting case before the Supreme Court involving Matrixx Initiatives (see http://commpro.biz/blog/irthereforeiam/2011/01/19/could-outcome-of-matrix-case-impact-corporate-disclosure-regulations/).  Matrixx, which was taken private earlier this year,  was challenging  a securities fraud lawsuit brought by a class of company investors alleging that the company failed to disclose that some users of its Zicam Cold Remedy nasal gel and swabs reportedly lost their sense of smell.

On Tuesday, March 22, the United States Supreme Court decided Matrixx Initiatives, Inc. v. Siracusano. The Court concluded unanimously “that the materiality of adverse event reports cannot be reduced to a bright-line rule.”   To evaluate materiality, the Supreme Court returned to the rule previously announced in Basic v. Levinson.   “In Basic, we held that this materiality 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.”  In essence, materiality will depend on the context in which a statement was made.   This includes an evaluation of the connection between the company’s actual statement and the quality and nature of the information about adverse events that is omitted.

In its opinion written by Justice Sonia Sotomayor, the Court rejected Matrixx’s argument that it only needed to disclose statistically significant adverse events.  Sotomayor said the Food and Drug Administration and medical experts both rely on evidence other than statistically significant data to establish inferences that a drug causes adverse side effects. “Given that medical professionals and regulators act on the basis of evidence of causation that is not statistically significant, it stands to reason that in certain cases reasonable investors would as well,” Sotomayor wrote in a 22-page opinion.

The court, however, declined to adopt any bright-line rules on when drug companies are required to disclose adverse-event reports to investors. Sotomayor said the court’s ruling did not mean that drug makers must disclose all reports. She noted that such reports are a daily event in the pharmaceutical industry and said that the reports standing alone did not mean that the drug caused the adverse event.

But Sotomayor said the context of the Matrixx case made the Zicam reports relevant. She said information provided to the company by medical expects revealed a plausible relationship between the Zicam products and the loss of smell. She also noted that the products accounted for a large share of the company’s sales.   Matrixx later received more incident reports on Zicam users who claimed to have lost their sense of smell. The company is facing numerous product liability lawsuits, and the FDA issued a warning letter to Matrixx in June 2009 concluding that Zicam’s nasal gel and cold-remedy swabs products may pose a serious risk to consumers.

Life sciences companies and other public companies can learn at least two lessons from the decision.   First and foremost, be careful what you say.   As the Court emphasized, the securities laws focus on false or misleading speech as noted in its opinion:  “[C]ompanies can control what they have to disclose under these provisions by controlling what they say to the market.”  Rash or categorical comments are far more likely to form the basis for a lawsuit than measured, careful statements about the facts.

Second, life sciences companies as well as others should consult with lawyers regarding specific disclosures and policies and practices for disclosing adverse events.   The strategy for each company will differ based on the products they produce, the status of FDA approval, the type and number of adverse event reports, whether the adverse events were statistically significant, and a variety of other factors.   Companies are certain to receive an ongoing stream of adverse events reports from clinical trials or public use.   Identifying in advance a strategy for when and how information about those adverse events might be disclosed could potentially prevent future lawsuits.   Additionally, adherence to such a strategy may both prevent future lawsuits and assist in the defense of them should they arise.