THE GUM FRAUD HEADS TO THE SUPREME COURT
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Supreme Court to rule on drugmakers’ duty to disclose ‘adverse events’
1/3/2011 COMMENTS (0)
By Matthew McNally, Westlaw Journals
The U.S. Supreme Court is set to hear arguments in a securities fraud case that has the pharmaceutical industry alarmed over the prospect of having to disclose to investors so-called “adverse event reports” even when they are statistically trivial.
Adverse event reports are anecdotal complaints from users indicating harm from a pharmaceutical product.
The case involves Zicam, an over-the-counter cold remedy marketed by defendant Matrixx Initiatives Inc.
According to a 2004 class-action complaint, Matrixx and top executives knew as early as 1999 of a possible link between Zicam and anosmia, or loss of the sense of smell.
The complaint alleged Zicam’s active ingredient, zinc gluconate, could cause anosmia when administered with nasal spray or gel swab.
The company nevertheless hid the risk and issued a series of public statements between October 2003 and February 2004 touting Zicam’s success, the suit said.
After a morning television show reported the risk Feb. 6, 2004, Matrixx’ share price fell nearly 25 percent that day, it said.
The defendants allegedly violated the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. 240.10b-5.
In a 2005 decision U.S. District Judge Mary Murguia of the District of Arizona dismissed the suit, ruling that the shareholder plaintiffs failed to establish two key elements of a securities fraud case. Siracusano v. Matrixx Initiatives, 2005 WL 3970117 (D. Ariz. 2005).
They failed to show the allegedly false statements were “material” and that the defendants had “scienter,” or an intent to deceive investors, the judge said.
Specifically, the judge found that “12 user complaints [were] not statistically significant” and that the defendants’ failure to mention them was not a “material omission” from their public statements.
She also found the facts insufficient to establish scienter because the defendants did not know there was a statistically significant link between Zicam and anosmia.
A three-judge panel of the 9th U.S. Circuit Court of Appeals reversed and reinstated the lawsuit. Siracusano v. Matrixx Initiatives, 585 F.3d 1167 (9th Cir. 2009).
The panel rejected the “statistical significance” test, ruling that a “reasonable shareholder” would have considered the user complaints to be important information.
The panel also found sufficient evidence of scienter, noting that Matrixx was involved in an anosmia-related lawsuit during the class period but failed to disclose it.
The Supreme Court agreed in June to hear the case and has scheduled oral argument for Jan. 10.
In their brief to the high court, the defendants say the 9th Circuit’s decision conflicts with rulings by the 1st, 2nd and 3rd circuits.
Those courts have held that drug companies have no duty to disclose adverse event reports unless there is statistically significant evidence that the reported harm may be caused by, and not simply randomly associated with, a drug’s use, according to the defendants.
“The 9th Circuit’s rule would effectively compel pharmaceutical companies to disclose all AERs (to avoid potential securities fraud liability), flooding the market with trivial or meaningless information that would only obscure genuinely important information and thereby undermine sound investment decision-making,” the brief says.
Numerous amici briefs have been filed supporting both sides in the dispute.
In a Dec. 6 order, the high court granted a request by the U.S. solicitor general to argue on behalf of the Justice Department and the Securities and Exchange Commission.
In a joint amicus brief, the agencies have urged the court to uphold the 9th Circuit’s application of the “reasonable investor” standard and to reject the “statistical significance” test in the pharmaceutical context.
“When users of a drug experience an adverse event, a company may face product-liability litigation and incur related expenses, even if reliable proof of causation is lacking,” the brief says.
“A reasonable investor would therefore attach significance to information bearing on the likelihood that such suits might be filed,” it adds.
Matrixx Initiatives Inc. et al. v. Siracusano et al., No. 09-1156, oral argument scheduled (U.S. Jan. 10, 2011). |
