Osakwe blog

Matrixx Initiatives v. Siracusano: When must drug companies report adverse incidents to shareholders?

In , the Supreme Court will decide whether it's a violation of securities law for a drug company not to report adverse incidents to shareholders on the theory that the number of incidents didn't reach the threshold to be considered statistically significant.

How did this case arise?

Matrixx is a seller of cold remedies, including a product named Zicam Cold Remedy.

Between 1999 and 2004, Matrixx received 12 reports of Zicam users suffering anosmia, loss of the sense of smell. The shareholders contend that these reports and lawsuits are material information concerning Zicam that Matrixx was required to report. The shareholders did not claim that the number of incidents was statistically significant.

Because Matrixx did not report this information, the shareholders charged that the drug company violated a section of the Security and Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5.

How did this case come before the Supreme Court?

The stockholders filed suit against Matrixx in district court. The district court dismissed the claims on motion by Matrixx, relying on a decision from the 2nd U.S. Circuit Court of Appeals setting forth the statisical significance standard for determining materiality. The court also noted that the petition had not provided any basis for concluding that the 12 user reports were reliable or accurate.

The appeals court reversed the district court. That court said materiality should be determined by the trier of fact without reliance on "bright-line" rules like whether the reports meet the threshold for statistical significance.

What will the Supreme Court decide?

The court heard this case in January, and in deciding it will resolve a . The 1st, 2nd and 3rd Circuits have ruled that 10(b) of the Securities and Exchange Act of 1934 and the SEC's implementing rule 10b-5 do not require drug companies to notify shareholders of adverse drug reactions until the reports of such incidents are sufficient in number to be statistically significant. The 9th Circuit rejected the statistical significance test used by those courts.

Who will be affected?

This case is important to drug manufacturers, their investors and consumers. If the court were to rule in favor of a statistical significance test, reporting would be limited and some potential investors and consumers might suffer from the lack of early alerts to adverse events. If the court requires every incident to be reported, drug companies face reporting burdens and risk unjustified loss of investors and customers.