In a unanimous decision, the Supreme Court ruled that investors have a right to sue a company for its failure to disclose reports of adverse drug effects to shareholders–even if those reports do not rise to the level of "statistical significance."
The ruling allows the case, Matrixx Initiatives v. Siracusano, to move forward. This case grew out of a shareholder lawsuit, which alleged that the company knew that its over-the-counter cold remedy, Zicam, was linked to adverse effects–the loss of sense of smell and insomnia–but failed to inform its investors–so that they could take action to prevent them from losing their money.
The suit claimed that Matrixx had received at least a dozen reports of anosmia between 1999 and 2003, but had failed to report these to shareholders. Instead, the company continued to make positive statements about Zicam which were false and misleading.
Matrixx claimed the reports did not reach "statistical significance" and, therefore, did not have to be disclosed. The Court explicitly shut that argument down in their decision:
Writing for the unanimous court, Justice Sonia Sotomayor said that "medical researchers and the FDA often reach initial conclusions based on evidence that is not statistically significant."
During arguments on January 10, Justice Roberts made it clear that the issue before the court was not whether Zicam caused anosmia, but whether investors should have been informed earlier about reports of anosmia drifting in from physicians and patients. “I’m an investor in Matrixx; I worry whether my stock price is going to go down,” he said. “You can have some psychic come out and say Zicam is going to cause a disease, with no support whatsoever, but if it causes the stock to go down 20 percent, it seems to me that’s material.”
If Justice Roberts has stock in Matrixx, does that not constitute a financial conflict of interest?? Why did he not recuse himself from the case??
Nature , The Great Beyond, reports that according to law professor, J. Robert Brown, the decision essentially maintains the status quo, and is unlikely to affect drug safety lawsuits brought by consumers, says.
Below, two reports with slightly different interpretations of the decision–one by NPR, the other by NATURE
Vera Hassner Sharav
Supreme Court Allows Investors to Sue Pharmacos Over AE Reporting Lapses
Supreme Court Rebuffs Big Pharma In Zicam Suit
by NINA TOTENBERG
March 23, 2011
In a unanimous ruling with particular significance for the pharmaceutical industry, the U.S. Supreme Court has allowed investors to sue the maker of Zicam cold remedies.
The decision firmly rebuffs an effort by corporations seeking to make it more difficult to bring investor lawsuits.
Usually, lawsuits against a drug manufacturer are brought by consumers who allege they were harmed by the product. But Tuesday’s case involved a class action brought by investors against Matrixx Initiatives Inc., the maker of Zicam products.
The investors charge that they were defrauded because the company failed to disclose early reports that Zicam nasal spray and gel caused a permanent loss of smell in some consumers.
When a case like this goes to court, the people who are suing have to make an initial showing that there is enough evidence to justify the suit’s going forward.
So, how do you do that? What do you have to show? Matrixx tried to raise the bar so that adverse reports would have to be statistically significant and reliably linked to the product. But the Supreme Court rejected that argument as "flawed."
The case stems from events in 2003 and 2004 when Matrixx’s stock was booming. Seventy percent of its sales came from Zicam products, and in January 2004, the company raised its revenue guidance, predicting an 80 percent increase in the coming year.
Matrixx did not disclose, however, that it had received reports from three medical researchers about a possible link between Zicam and a loss of smell in at least 10 patients. The company also failed to disclose that three lawsuits had been filed charging its products resulted in a loss of smell. Nor did it disclose that the Food and Drug Administration was conducting an investigation into complaints.
When the Dow Jones Newswires disclosed some of this information in late January 2004, the company’s stock plummeted.
Matrixx promptly issued a press release suggesting that clinical studies showed no connection between its product and a loss of smell.
The stock price rebounded, only to fall again when news organizations reported more information suggesting a potential link.
The investors who bought stock during this period went to court, claiming that the company’s actions amounted to fraud — an attempt to keep the company’s stock price artificially high by failing to disclose material facts that, if known, would have affected the market.
The company sought to have the case dismissed as too speculative, but the Supreme Court said there was ample evidence to justify the case’s going forward.
Writing for the unanimous court, Justice Sonia Sotomayor said that medical researchers and the FDA often reach initial conclusions based on evidence that is not statistically significant.
Drug manufacturers do not have to report every adverse event, she said. "Something more" is required, but she said there was plenty of that "something more" in this case.
The allegations here, viewed as a whole, said Sotomayor, suggest "a significant risk to the commercial viability of Matrixx’s leading product."
What’s more, she said, the allegations, taken collectively, suggest that "Matrixx elected not to disclose the reports of adverse events not because it believed they were meaningless but because it understood their likely effect on the market."
Experts on both sides of the case agreed Tuesday’s ruling was a clear defeat not just for Matrixx but for corporate America.
"The decision will make compliance with the securities laws more difficult" for corporations, said James Martin, who filed a brief in the case on behalf of lawyers who represent corporations.
This is "a classic access to justice kind of case," said David Frederick, who argued and won the case on behalf of the investors in Tuesday’s case. "The court has let the courthouse doors remain open for these kinds of claims."
The decision may have come as a surprise to those who view the current court as pro-business. But Columbia law professor John Coffee, a securities law expert, says the business community tried to push the envelope too far.
"What this case shows is while the Supreme Court may be pro-business, they are not the running dogs" of the corporate community, he says. "They are not going to change … settled law."
The case now goes back to the lower courts for trial. Since it was first brought, hundreds of personal injury suits have been filed against Matrixx alleging a loss of smell; some have been settled while others are still pending.
In the years since this case was filed, the FDA has ordered the problem products taken off the market, and Matrixx has been bought by private investment firm H.I.G. Capital LLC.
NATURE, The Great Beyond
In a unanimous decision, the US Supreme Court ruled yesterday that a pharmaceutical company may be required to notify investors of safety reports regarding its products, even if those reports do not rise to the level of statistical significance.
The ruling allows a case against over-the-counter healthcare firm Matrixx Initiatives to move forward. Investors sued the company, based in Scottsdale, Arizona, arguing that it should have notified them earlier about reports that some of its popular zinc gluconate cold medications may have robbed some users of their sense of smell.
When news of the possible link finally became public, Matrixx stock plummeted. The company no longer makes the formulations of Zicam linked to the inability to smell (anosmia), but other formulations of the drug remain on the market.
Matrixx tried to shoot down the lawsuit by arguing that the adverse event reports it received about Zicam were not statistically significant. But Judge Sonia Sotomayor, writing for the court, said that test would be too stringent. “Both medical experts and the Food and Drug Administration (FDA) rely on evidence other than statistically significant data to establish an inference of causation,” she wrote. “It thus stands to reason that reasonable investors would act on such evidence.”
That decision essentially maintains the status quo, and is unlikely to affect drug safety lawsuits brought by consumers, says J. Robert Brown, a law professor at the University of Denver Sturm College of Law.
Sotomayor cited the FDA’s own guidelines to back up her point. According to those guidelines, the FDA takes in a range of evidence when determining whether there is a link between a drug and an adverse event. This evidence ranges from the biological plausibility of a link to the evidence of a dose response. In an amicus brief to the court, the United States said the FDA “does not apply any single metric for determining when additional inquiry or action is necessary, and it certainly does not insist upon ‘statistical significance’”.
Indeed, the justices seemed critical of the proposed statistical significance requirement right from the start. During arguments heard on 10 January, Justice Roberts made it clear that the issue before the court was not whether Zicam caused anosmia, but whether investors should have been informed earlier about reports of anosmia drifting in from physicians and patients. “I’m an investor in Matrixx; I worry whether my stock price is going to go down,” he said. “You can have some psychic come out and say Zicam is going to cause a disease, with no support whatsoever, but if it causes the stock to go down 20 percent, it seems to me that’s material.”
That, argued Matrixx’s attorneys, was precisely the problem: companies receive many such reports, and they vary widely in their quality. Making all of them public could unnecessarily frighten consumers, Matrixx argued.
In the decision handed down yesterday, Judge Sotomayor agreed that “something more than the mere existence of adverse event reports is needed”, but said the bar should not be raised all the way to the level of statistical significance. That, says Brown, is how the system already evaluates adverse event reports. “These reports are never looked at in isolation,” he says. “You always look at how many reported the condition, or who reported it. You always are looking at reports plus context.”