Matrixx Initiatives, Inc. v. Siracusano

• Citation: 563 U.S. 27,179 L.Ed.2d 398,131 S.Ct. 1309
• Decision Date: 22 March 2011
• Docket Number: No. 09–1156.,09–1156.
• Parties: MATRIXX INITIATIVES, INC., et al., Petitioners, v. James SIRACUSANO et al.
• Court: United States Supreme Court

563 U.S. 27

131 S.Ct. 1309

179 L.Ed.2d 398

MATRIXX INITIATIVES, INC., et al., Petitioners,

v.James SIRACUSANO et al.

No. 09–1156.

Supreme Court of the United States

Argued Jan. 10, 2011.

Decided March 22, 2011.

Jonathan Hacker, Washington, D.C., for Petitioners.

David C. Frederick, Washington, D.C., for Respondents.

Pratik A. Shah, for United States, as amicus curiae, by special leave of the Court, supporting the Respondents.

Michael G. Yoder, Molly J. Magnuson, O'Melveny & Myers LLP, Newport Beach, CA, Amy J. Longo, O'Melveny & Myers LLP, Los Angeles, CA, Jonathan D. Hacker, Counsel of Record, Matthew Shors, Loren L. Alikhan, R. Seth Davis, O'Melveny & Myers LLP, Washington, D.C., for Petitioners.

Darren J. Robbins, Eric Alan Isaacson, Joseph D. Daley, Scott H. Saham, Lucas F. Olts, Robbins Geller Rudman & Dowd LLP, San Diego, CA, Samuel H. Rudman, David A. Rosenfeld, Robbins Geller Rudman & Dowd LLP, Melville, NY, David C. Frederick, Counsel of Record, Scott H. Angstreich, Gregory G. Rapawy, Emily T.P. Rosen, Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C., Washington, D.C., for Respondents.

Justice SOTOMAYOR delivered the opinion of the Court.

This case presents the question whether a plaintiff can state a claim for securities fraud under § 10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, as amended, 15 U.S.C. § 78j(b), and Securities and Exchange Commission (SEC) Rule 10b–5, 17 CFR § 240.10b–5 (2010), 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. Respondents, plaintiffs in a securities fraud class action, allege that petitioners, Matrixx Initiatives, Inc., and three of its executives (collectively Matrixx), failed to disclose reports of a possible link between its leading product, a cold remedy, and loss of smell, rendering statements made by Matrixx misleading. Matrixx contends that respondents' complaint does not adequately allege that Matrixx made a material representation or omission or that it acted with scienter because the complaint does not allege that Matrixx knew of a statistically significant number of adverse events requiring disclosure. We conclude that the materiality of adverse event reports cannot be reduced to a bright-line rule. Although in many cases reasonable investors would not consider reports of adverse events to be material information, respondents have alleged facts plausibly suggesting that reasonable investors would have viewed these particular reports as material. Respondents have also alleged facts "giving rise to a strong inference" that Matrixx "acted with the required state of mind." 15 U.S.C.A. § 78u–4(b)(2)(A) (Feb.2011 Supp.). We therefore hold, in agreement with the Court of Appeals for the Ninth Circuit, that respondents have stated a claim under § 10(b) and Rule 10b–5.

I

A

Through a wholly owned subsidiary, Matrixx develops, manufactures, and markets over-the-counter pharmaceutical products. Its core brand of products is called Zicam. All of the products sold under the name Zicam are used to treat the common cold and associated symptoms. At the time of the events in question, one of Matrixx's products was Zicam Cold Remedy, which came in several forms including nasal spray and gel. The active ingredient in Zicam Cold Remedy was zinc gluconate. Respondents allege that Zicam Cold Remedy accounted for approximately 70 percent of Matrixx's sales.

Respondents initiated this securities fraud class action against Matrixx on behalf of individuals who purchased Matrixx securities between October 22, 2003, and February 6, 2004.¹ The action principally arises out of statements that Matrixx made during the class period relating to revenues and product safety. Respondents claim that Matrixx's statements were misleading in light of reports that Matrixx had received, but did not disclose, about consumers who had lost their sense of smell (a condition called anosmia) after using Zicam Cold Remedy. Respondents' consolidated amended complaint alleges the following facts, which the courts below properly assumed to be true. See Ashcroft v. Iqbal, 556 U.S. 662, ––––, 129 S.Ct. 1937, 1949 – 1950, 173 L.Ed.2d 868 (2009).

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 a loss of smell "in a cluster of his patients." App. 67a–68a. Dr. Hirsch told a Matrixx employee that "previous studies had demonstrated that intranasal application of zinc could be problematic." Id., at 68a. He also told the employee about at least one of his patients who did not have a cold and who developed anosmia after using Zicam.

In September 2002, Timothy Clarot, 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 Linschoten was treating who had lost her sense of smell after using Zicam. Clarot informed Linschoten that Matrixx had received similar complaints from other customers. Linschoten drew Clarot's attention to "previous studies linking zinc sulfate to loss of smell." Ibid. Clarot gave her the impression that he had not heard of the studies. She asked Clarot whether Matrixx had done any studies of its own; he responded that it had not but that it had hired a consultant to review the product. Soon thereafter, Linschoten sent Clarot abstracts of the studies she had mentioned. Research from the 1930's and 1980's had confirmed "[z]inc's toxicity." Id., at 69a. Clarot called Linschoten to ask whether she would be willing to participate in animal studies that Matrixx was planning, but she declined because her focus was human research.

By September 2003, one of Linschoten's colleagues at the University of Colorado, Dr. Bruce Jafek, had observed 10 patients suffering from anosmia after Zicam use. Linschoten and Jafek planned to present their findings at a meeting of the American Rhinologic Society in a poster presentation entitled "Zicam® Induced Anosmia." Ibid. (internal quotation marks omitted). The American Rhinologic Society posted their abstract in advance of the meeting. The presentation described in detail a 55–year–old man with previously normal taste and smell who experienced severe burning in his nose, followed immediately by a loss of smell, after using Zicam. It also reported 10 other Zicam users with similar symptoms.

Matrixx learned of the doctors' planned presentation. 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. Dr. Jafek deleted the references to Zicam in the poster before presenting it to the American Rhinologic Society.

The following month, two plaintiffs commenced a product liability lawsuit against Matrixx alleging that Zicam had damaged their sense of smell. By the end of the class period on February 6, 2004, nine plaintiffs had filed four lawsuits.

Respondents allege that Matrixx made a series of public statements that were misleading in light of the foregoing information. In October 2003, after they had learned of Dr. Jafek's study and after Dr. Jafek had presented his findings to the American Rhinologic Society, Matrixx stated that Zicam was " ‘poised for growth in the upcoming cough

and cold season’ " and that the company had " ‘very strong momentum.’ "²

Id., at 72a–74a. Matrixx further expressed its expectation that revenues would " ‘be up in excess of 50% and that earnings, per share for the full year [would] be in the 25 to 30 cent range.’ " Id., at 74a. In January 2004, Matrixx raised its revenue guidance, predicting an increase in revenues of 80 percent and earnings per share in the 33–to–38–cent range.

In its Form 10–Q filed with the SEC in November 2003, Zicam warned of the potential " ‘material adverse effect’ " that could result from product liability claims, " ‘whether or not proven to be valid.’ " Id., at 75a–76a. It stated that product liability actions could materially affect Matrixx's " ‘product branding and goodwill,’ " leading to reduced customer acceptance.³ Id., at 76a. It did not disclose, however, that two plaintiffs had already sued Matrixx for allegedly causing them to lose their sense of smell.

On January 30, 2004, Dow Jones Newswires reported that the Food and Drug Administration (FDA) was " ‘looking into complaints that an over-the-counter common-cold medicine manufactured by a unit of Matrixx Initiatives, Inc. (MTXX) may be causing some users to lose their sense of smell’ " in light of at least three product liability lawsuits. Id., at 79a–80a. Matrixx's stock fell from $13.55 to $11.97 per share after the report. In response, on February 2, Matrixx issued a press release that stated:

"All Zicam products are manufactured and marketed according to FDA guidelines for homeopathic medicine. Our primary concern is the health and safety of our customers and the distribution of factual information about our products. Matrixx believes statements alleging that intranasal Zicam products caused anosmia (loss of smell) are completely unfounded and misleading.

"In no clinical trial of intranasal zinc gluconate gel products has there been a single report of lost or diminished olfactory function (sense of smell). Rather, the safety and efficacy of zinc gluconate for the treatment of symptoms related to the common cold have been well established in two double-blind, placebo-controlled, randomized clinical trials. In fact, in neither study were there any reports of anosmia related to the use of this compound. The overall incidence of adverse events associated with zinc gluconate was extremely low, with no statistically significant difference between the adverse event rates for the treated and placebo subsets.

"A multitude of environmental and biologic influences are known to

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