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Supreme Court: Investors can sue firm for not disclosing drug side effect

Supreme Court rules 9 to 0, clearing the way for a class-action suit. Justice Sonia Sotomayor writes that knowledge of the side effect, even if it was extremely rare, would likely have swayed 'reasonable investors.'

By Staff writer / March 22, 2011



Washington

When reports surfaced that some consumers of the now-discontinued cold remedy Zicam had lost their sense of smell, the manufacturer, Matrixx Initiatives, Inc., saw shares of its stock lose value.

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The drug company issued statements in defense of the product, first dismissing the incidence of the loss of sense of smell as statistically insignificant, then saying there was no scientific basis for linking Zicam to the apparent side effect.

On Tuesday, in a 9-to-0 decision, the US Supreme Court cleared the way for an investor class-action lawsuit to move forward against Matrixx, saying the company had an obligation to reveal details of the observed side effects to investors even though the company’s information did not rise to the level of statistically significant data.

At issue in the case was whether the information the company withheld from investors was important enough to justify an investor lawsuit under federal securities law.

The company said its disclosure obligation arose only when it possessed statistically significant information about the side effects of its product.

On Tuesday, the Supreme Court said there is no bright line rule requiring statistically significant information.

Instead, the court embraced a “total mix” standard of whether a reasonable investor would have viewed the non disclosed information as significantly altering the total mix of information available to the investing public.

“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,” wrote Justice Sonia Sotomayor in the 22-page decision.

The case stems from an investor lawsuit claiming Matrixx Initiatives fraudulently withheld information about the adverse side effects in an effort to prevent its stock price from plunging.

Federal securities laws require companies to disclose key information to investors, including detrimental information that might lead to a lower stock price.

Amid reports that its product was causing customers to lose their sense of smell, the company made a series of public statements suggesting the suspect product (Zicam) was “poised for growth in the upcoming cough and cold season,” and that the company had “very strong momentum.”

The company also told investors it expected an 80 percent increase in revenues.

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