ITEM 3. LEGAL PROCEEDINGS
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The Company is involved in various product liability claims and other legal proceedings. The Company’s legal expense for these lawsuits continues to have a significant impact on the results of operations as the Company defends itself against the various claims.
Among the principal matters pending to which the Company is a party are the following:
Product Liability Matters
General. Since 2003, many lawsuits have been filed against us alleging that our Zicam Cold Remedy nasal gel products have caused the permanent loss or diminishment of the sense of smell or smell and taste. Prior to the Company’s receipt of the FDA’s June 16, 2009 warning letter (see “Business — Introduction — FDA Warning Letter; Recall of Zicam Nasal Gel Products” in Part I, Item 1 of this Report), the number of lawsuits filed against the
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Company was steadily declining; in fact, the numbers of pending lawsuits, plaintiffs, new lawsuits and potential claimants were at their lowest levels since early 2004.
Since the Company’s receipt of the FDA warning letter, numerous product liability lawsuits have been filed against the Company, many of which cite the FDA warning letter as support for their claims. The lawsuits principally fall into two categories of product liability claims: (i) those alleging that our Zicam Cold Remedy nasal gel products caused the permanent loss or diminishment of the sense of smell or smell and taste (i.e., personal injury claims) and (ii) those seeking compensation for the purchase price of the Zicam Cold Remedy nasal gel products or various forms of equitable relief based on allegations that the Company misrepresented the safety and/or efficacy of such products to consumers (i.e., economic injury claims). All of the economic injury lawsuits have been filed as class actions but none of the classes has been certified to date (uncertified class actions are referred to as “putative” class actions). On October 9, 2009, a judicial panel ordered the centralization and transfer of a number of economic injury and personal injury actions pending in federal court to a federal court in the District of Arizona pursuant to federal multidistrict litigation procedures (see “Multi-District Litigation Matters” below for a discussion of the cases that have been consolidated and transferred). The Company intends to vigorously defend itself against each of these lawsuits.
Our Position and Our Response. We believe the claims made in these lawsuits are scientifically unfounded and misleading and we disagree strongly with the FDA’s allegations that Zicam Cold Remedy nasal gel products may be unsafe and that they were unlawfully marketed. The Company’s position is supported by the cumulative science, a multi-disciplinary panel of scientists, and the decisions of 10 separate federal judges in 10 different cases in multiple jurisdictions. In October 2009, in response to the Company’s request, the FDA advised the Company that it was unwilling to reverse its position. On November 16, 2009, the Company filed its response to the FDA’s warning letter. In its response, the Company reiterated its position that there is no valid scientific evidence that Zicam nasal Cold Remedy products are unsafe and requested the FDA to withdraw the warning letter. By letter dated March 4, 2010, the FDA reaffirmed its original position and denied the Company’s request.
Product Safety. There is no known causal link between the use of Zicam Cold Remedy nasal gel and impairment of smell or smell and taste. To date, no plaintiff has ever won a product liability case against the Company on those grounds. The Company believes that upper respiratory infections and nasal and sinus disease are the most likely causes of the smell dysfunctions reported by some consumers. One of the most common causes of smell disorders is the cold itself, the very condition our product is used to treat. Other causes are sinusitis and rhinitis, conditions which are sometimes present when our product is used.
Federal law requires that the testimony of a scientific or medical expert witness be reliable and based on valid scientific data and analysis before it can be allowed into evidence. To date, the Company has submitted motions in ten federal lawsuits against the Company challenging the reliability and admissibility of the testimony of expert witnesses who claim that Zicam Cold Remedy is capable of causing or has caused smell and taste loss. To date, the courts have ruled in the Company’s favor on all ten motions. Each court has ruled that the theory that Zicam Cold Remedy nasal gel causes smell loss, as promoted by the plaintiffs’ experts, has no reliable scientific support and was reached without application of proper scientific standards and procedures. Federal courts have made such rulings against the three most prominent causal experts that plaintiffs have hired to date as well as various other expert witnesses.
In addition, on April 3, 2008, jurors in a California case unanimously found that Zicam was not the cause of plaintiff’s smell loss.
Product Effectiveness. Our claims and advertising are subject to the requirements of the Federal Trade Commission Act, which is enforced by the FTC. On March 21, 2006, the FTC’s East Central Region (Cleveland, Ohio office), initiated a detailed inquiry to determine whether the Company engaged in unfair or deceptive acts or practices in violation of the Federal Trade Commission Act in connection with the Company’s advertising and promotional activities for several of the Company’s nasal and oral cold remedy products, including Zicam Cold Remedy Nasal Gel and Zicam Cold Remedy Swabs — the products that are the subject of the FDA warning letter. As part of the inquiry, the FTC requested and received, among other things, the Company’s documentation regarding product safety, including side effects, adverse events and consumer complaints, and efficacy, including the scientific proof establishing the efficacy claims made by the Company. Following a nearly year-long process,
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during which the Company provided the FTC with over 65,000 pages of documentation and met with the FTC to discuss the information, on March 5, 2007, the FTC notified the Company that it was no longer pursuing the inquiry.
Total Pending Product Liability Lawsuits. As of May 30, 2010, the Company is aware of 176 pending product liability lawsuits against the Company, involving 671 plaintiffs. Of those cases, 127 are pending in Federal court and 49 are pending in State court (see below).
Active Pending Cases as of May 30, 2010 (Pending in Federal Courts); Consolidation and Transfer Pursuant to Multi-District Litigation Procedures. Of the 127 product liability cases, involving 310 plaintiffs, pending against the Company in Federal court as of May 30, 2010, 112 of them are personal injury cases, involving 279 plaintiffs, and 15 of them are economic injury cases, involving 31 plaintiffs. In August 2009, the Company filed a motion to consolidate and transfer all of the personal injury and economic injury matters, including any purported class actions, pending against the Company in federal court to the District of Arizona, pursuant to federal multidistrict litigation (“MDL”) procedures. On October 9, 2009, the Judicial Panel on Multidistrict Litigation (“Panel”) established MDL No. 2096, In Re: Zicam Cold Remedy Marketing and Sales Practices Litigation, and centralized the economic injury and personal injury actions that involve common questions of fact before a federal court in the District of Arizona. With one exception, the Panel transferred all of the economic injury cases at issue in the original MDL request. The Panel also began the MDL transfer process for the remaining economic injury and personal injury matters pending against the Company in federal courts across the country. The plaintiffs in these remaining cases will have the opportunity to object to the MDL transfer of their specific case. The Panel determined that the case of Hohman et. al. vs. Matrixx Initiatives, Inc. et. al. (filed June 18, 2009, Northern District of Illinois) did not involve sufficient common questions of fact to allow for consolidation and transfer to the MDL at that time. The Company expects any federal economic injury and personal injury matters filed in the future to be transferred and consolidated pursuant to the MDL transfer process, subject to the plaintiffs’ opportunity to object.
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Active Pending Cases as of May 30, 2010 (Pending in State Courts). The Company is aware of the following state court cases, covering 361 named plaintiffs, which have been filed against and/or served on the Company as of May 30, 2010:
Personal Injury:
Date Filed Court Named Plaintiff
4/14/2004 Broward County, FL Hood, M.
11/3/2006 Maricopa County, AZ Poole, D.
10/31/2007 Maricopa County, AZ Medel, D.
9/19/2008 Maricopa County, AZ Brooks, J.
11/14/2008 Maricopa County, AZ McGill, C.
2/10/2009 Cook County, IL Coleman, S.
5/13/2009 Maricopa County, AZ Howes, G.
6/22/2009 Broward County, FL Schaffer, F.
7/2/2009 Macon County, IL Rohr, B.
7/22/2009 San Francisco County, CA Richardson, N.
7/31/2009 McClean County, IL Wood, C.
8/10/2009 San Francisco County, CA Lane, V.
9/24/2009 San Francisco County, CA DeRosier, M.
9/30/2009 Maricopa County, AZ Hoffman, D.
10/5/2009 San Francisco County, CA Nissim, S.
10/7/2009 Lahaina County, HI Welsch, M.
10/19/2009 Broward County, FL Bunin, S.
10/20/2009 King County, WA Touhey, W.
10/30/2009 Maricopa County, AZ Glasser, M.
10/30/2009 Maricopa County, AZ Ambrose, R.
12/23/2009 Maricopa County, AZ Kimball, D.
12/24/2009 San Francisco County, CA Bradley, L.
12/29/2009 Maricopa County, AZ Johnson, K.
1/19/2010 Maricopa County, AZ Remming, C.
1/19/2010 Maricopa County, AZ Baietty, J.
1/19/2010 Maricopa County, AZ Colello, M.
1/20/2010 Maricopa County, AZ Marshall, C.
1/20/2010 Maricopa County, AZ Alex, R.
1/25/2010 Maricopa County, AZ Viviani, D.
1/29/2010 Maricopa County, AZ Turner, B.
2/3/2010 Maricopa County, AZ Druien, C.
2/3/2010 Maricopa County, AZ Cramer, H.
2/8/2010 Maricopa County, AZ Shannon, L.
2/11/2010 Maricopa County, AZ Jacobs, M.
2/24/2010 Erie County, NY Gollwitzer, L.
3/1/2010 King County, WA Waddleton, V.
3/1/2010 Maricopa County, AZ Allen, D.
3/5/2010 San Francisco County, CA Elbaum, J.
3/19/2010 Maricopa County, AZ Hurley, E.
3/29/2010 Maricopa County, AZ Daley, S.
4/1/2010 Maricopa County, AZ Alston, B.
4/19/2010 Maricopa County, AZ Miller, R.
4/19/2010 Maricopa County, AZ Maxfield, W.
4/19/2010 Maricopa County, AZ Colbert, D.
5/4/2010 Maricopa County, AZ Maaskant, P.
5/6/2010 Lexington County, SC Spradley, D.
5/11/2010 Maricopa County, AZ Brooks, D.
5/13/2010 San Francisco County, CA Parson, J.
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Putative Class Action for Economic injury:
Date Filed Court Named Plaintiff
6/30/2009 St. Louis County, MO West, G.
From December 31, 2009 through May 30, 2010, 77 new product liability cases were filed against the Company and 3 product liability cases were voluntarily dismissed without prejudice.
Cases Dismissed Subsequent to December 31, 2009 (Federal Courts). None of the federal court cases pending against the Company were dismissed subsequent to December 31, 2009.
Cases Dismissed Subsequent to December 31, 2009 (State Courts). There were three state court cases pending against the Company dismissed subsequent to December 31, 2009:
Date Filed Court Named Plaintiff Date Dismissed
10/16/2009 San Francisco County, CA Bobrink 1/29/2010
8/20/2009 Whatcom County, WA Adams 3/11/2010
11/20/2009 Providence County, Rhode Island Dugas 3/29/2010
Potential Claimants. Approximately 435 potential claimants have advised the Company by means of a written notice that they are considering filing a lawsuit against, or are interested in pursuing settlement negotiations with, the Company. The Company is in the process of determining the nature or basis of their purported claims and when or if these potential claimants will ultimately file one or more lawsuits against the Company.
Plaintiffs’ law firms may continue to solicit potential claimants and, as a result, additional lawsuits may be filed against us. We cannot predict the outcome of the litigation, but we will defend ourselves vigorously. If any liability were to result from one or more of these or future lawsuits, we believe our financial results could be materially impacted. Our financial results also could be materially impacted by the adverse publicity that may result from the lawsuits.
Litigation Reserves. As of December 31, 2005, the Company established a reserve of $1.3 million for any future payment of settlement or losses related to the Cold Remedy litigation. This reserve was based on certain assumptions, some of which are described below, and was the amount, excluding defense costs, the Company believed it could reasonably estimate would be spent to resolve the remaining cases that had been filed or to resolve matters with the potential claimants. Some of the significant factors that were considered in the establishment of the reserve were as follows: the actual costs incurred by the Company up to that time in resolving several claims; the development of the Company’s legal defense strategy; settlements; and the number of cases that remained pending against the Company. There are events, such as the dismissal of any of the cases, the filing of new lawsuits, threatened claims, the outcome of a trial, rulings on pending evidentiary motions, or adverse publicity that may have an impact on the Company’s conclusions as to the adequacy of the reserve for the pending product liability lawsuits. The Company maintained a $740,000 reserve balance as of March 31, 2010, compared to $785,000 at March 31, 2009. The decline in the reserve balance was due to settlements of certain claims. However, following the Company’s receipt of the FDA’s warning letter and the resulting increase in the number of product liability lawsuits being filed, the amounts that may be spent to resolve matters with actual and potential claimants could be higher than our reserve. The Company will continue to review the product liability situation and will adjust the litigation reserve in the future when we can reasonably estimate changes in the amounts and likelihood of resolving the claims. Litigation is inherently unpredictable and excessive verdicts do occur. Although we believe we have substantial defenses in these matters, we could, in the future, incur judgments or enter into settlements of claims that could have a material adverse effect on our results of operations in any particular period.
Intellectual Property Protection
On December 10, 2008, GMP Technologies, LLC (“GMP”) filed suit against the Company in the United States District Court for the Northern District of Illinois (Case No. 08CV7077) in response to a major retailer removing from its store shelves a private label swab product produced for the retailer by GMP. The complaint, as amended effective May 11, 2009, alleged that the retailer discontinued sales of the private label swab product after having
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been made aware of the Company’s patents relating to Zicam Cold Remedy Swabs (“Swab Patents”), and that the Company acted in bad faith in informing the retailer of the Swab Patents. GMP sought to have the court determine that GMP’s product did not infringe the Swab Patents and to have the Company’s Swab Patents declared invalid. In addition, GMP sought damages for its losses related to the retailer’s cancellation of the private label product following the Company’s providing notice to the retailer of the Swab Patents. The Company denied any wrongdoing and asserted a counterclaim alleging that GMP was infringing the Swab Patents. On February 9, 2010, the parties voluntarily dismissed the case and counterclaim without prejudice and with each party bearing its own costs.
Securities Litigation Matters
Two class action lawsuits were filed in April and May 2004 against the Company, our previous President and Chief Executive Officer, Carl J. Johnson, and William J. Hemelt, our President and Chief Executive Officer, alleging violations of federal securities laws. On January 18, 2005, the cases were consolidated and the court appointed James V. Siracusano as lead plaintiff. The amended complaint also includes our Vice President of Research and Development, Timothy L. Clarot, as a defendant and was filed March 4, 2005. The consolidated case is Siracusano, et al. vs. Matrixx Initiatives, Inc., et al., in the United States District Court, District of Arizona, Case No. CV04-0886 PHX DKD. Among other things, the lawsuit alleges that between October 2003 and February 2004, we made materially false and misleading statements regarding our Zicam Cold Remedy products, including failing to adequately disclose to the public the details of allegations that our products caused damage to the sense of smell and of certain product liability lawsuits pending at that time. We filed a motion to dismiss this lawsuit and, on March 8, 2006, the Company received an Order dated December 15, 2005 granting the motion to dismiss the case, without prejudice. On April 3, 2006, the plaintiff appealed the Order to the United States District Court of Appeals, Ninth Circuit. On October 28, 2009, the Ninth Circuit Court reversed the decision of the United States District Court, District of Arizona. On December 23, 2009, the Ninth Circuit denied the Company’s petition for rehearing. On January 15, 2010, the Ninth Circuit granted Matrixx’s request to stay the issuance of a mandate while the Company petitions the United States Supreme Court for certiorari review.
A separate putative class action was filed on July 17, 2009 against the Company; William J. Hemelt, our President and Chief Executive Officer; Samuel C. Cowley, our Executive Vice President of Business Development, General Counsel and Secretary; Timothy L. Clarot, our Vice President of Research & Development; and Carl J. Johnson, our former President and Chief Executive Officer, alleging violations of federal securities laws. Shapiro et al. vs. Matrixx Initiatives, Inc. et al., in the United States District Court, District of Arizona, Case No. 2:09-cv-01479-ECV (the “Shapiro” action). The lawsuit alleges that the Company and the named officers failed to disclose to the FDA and to the public information about adverse events regarding the Zicam Cold Remedy nasal gel products and that the Company and such officers made false and misleading statements regarding the Company’s compliance with FDA regulations. The motion for lead plaintiff and approval of lead counsel is pending. The Company believes these allegations are without merit and intends to vigorously defend the lawsuit.
In accordance with and subject to the provisions of the Company’s Certificate of Incorporation, Messrs. Hemelt, Cowley, Clarot and Johnson will be indemnified by the Company for their expenses incurred in defending each of these lawsuits and for any other losses which they may suffer as a result of these lawsuits. The Company has submitted each of these matters to its insurance carriers. If any liability were to result from these lawsuits that is not covered by insurance, we believe our financial results could be materially impacted.
Shareholder Derivative Lawsuits
On September 11, 2009, a shareholder derivative lawsuit was filed by Timothy Hall, on behalf of the Company, against all of the Company’s current directors and the following current and former officers of the Company: William Hemelt, Samuel Cowley and Carl Johnson. The lawsuit alleges, among other things, that the officers and directors named in the complaint violated their fiduciary duties to the Company by (i) misrepresenting the safety of the Zicam Cold Remedy nasal gel products, (ii) failing to warn consumers that use of the Zicam Cold Remedy nasal products could result in anosmia and (iii) failing to disclose reports of anosmia to the FDA and otherwise misrepresenting the Company’s compliance with FDA regulations. Timothy Hall v. William J. Hemelt, et al., United States District Court, District of Arizona.
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On September 18, 2009, a shareholder derivative lawsuit was filed by Theodore C. Klatt, on behalf of the Company, against all of the Company’s current directors and the following current and former officers of the Company: William Hemelt, Samuel Cowley, Carl Johnson, Timothy Clarot and James Marini. The lawsuit alleges, among other things, that the officers and directors named in the complaint violated their fiduciary duties to the Company by (i) misrepresenting the safety of the Zicam Cold Remedy nasal gel products, (ii) failing to warn consumers and shareholders that use of the Zicam Cold Remedy nasal products could result in anosmia and (iii) failing to disclose reports of anosmia to the FDA and otherwise misrepresenting the Company’s compliance with FDA regulations (Theodore C. Klatt v. William J. Hemelt, et al., United States District Court, District of Arizona).
On October 14, 2009, the parties filed a stipulation to transfer the Klatt action and consolidate it with the Hall action. On November 4, 2009, the stipulation was granted. On January 19, 2010, the Company moved for a stay of the consolidated derivative action pending the outcome of the Shapiro action (discussed under “Securities Litigation Matters” above), which the Court granted on March 1, 2010.
On November 20, 2009, a shareholder derivative lawsuit was filed by Bette-Ann Liguori, on behalf of the Company, against all of the Company’s current directors and certain of their spouses, and the following current and former officers and directors of the Company and certain of their spouses: Carl Johnson, Timothy Clarot, Timothy Connors, Lynn Romero, Michael Voevodsky, James Marini, and Edward Faber (Liguori v. Egan, et al., Superior Court of the State of Arizona, County of Maricopa). The lawsuit alleges, among other things, that the officers and directors named in the complaint violated their fiduciary duties to the Company by (i) misrepresenting the safety of the Zicam Cold Remedy nasal gel products, (ii) failing to warn consumers and shareholders that use of the Zicam Cold Remedy nasal products could result in anosmia and (iii) failing to disclose reports of anosmia to the FDA and otherwise misrepresenting the Company’s compliance with FDA regulations. On January 19, 2010, the Company filed a motion to stay the action pending the outcome of the Shapiro action or, in the alternative, pending the outcome of the consolidated derivative action filed in Federal court. On May 18, 2010, the court granted defendants’ motion and ordered the parties to file a status report in six months.
In accordance with and subject to the provisions of the Company’s Certificate of Incorporation, each of the named directors and current and former officers will be indemnified by the Company for their expenses incurred in defending each of these lawsuits and for any other losses that they may suffer as a result of these lawsuits.
Related Legal Matters — Informal Inquiries
The Company has received an inquiry from several county district attorneys in one state regarding enforcement of certain consumer protection statutes involving our product packaging size. The Company is cooperating fully, but is unsure about what actions may be taken. The matter could result in fines or litigation over the Company’s alleged non-compliance with the applicable package size statutes. Based on information available to the Company, the Company does not believe this matter would have a material adverse impact on its operations, liquidity or cash flow.
Legal Expense
The Company is incurring significant legal expense for the lawsuits referenced above. For the year ended March 31, 2010, legal expense for product liability litigation, responding to the FDA warning letter and other regulatory matters, and litigating claims with one of its former manufacturers was approximately $7.2 million, compared to $2.6 million for the year ended March 31, 2009, and $2.5 million for the year ended March 31, 2008. Product liability legal expense has significantly increased as a result of the numerous lawsuits filed since the Company’s receipt of the FDA’s warning letter. |
