Corporate Governance

Matrixx v. Siracusana: Revisiting the Materiality Standard (Part 2)

By J Robert Brown Jr.

This case inolves the alleged failure of Matrixx, a pharmaceutical company, to disclose that there was evidence that one of its cold products, Zicam Cold Remedy, caused anosmia, or the loss of smell. 

As the case sets out, Matrixx received various modest indications that customers suffered anosmia when using Zicam.  In one of the exchanges, a doctor informed Matrixx about studies linking zinc sulfate to the loss of smell and sent an email with abstracts of the studies.  As the Amended Complaint states:  "Zinc's toxicity had been confirmed by studies from the 1930s and work with fish in the early 80s."  Consolidated Amended Complaint, at 7. 

In addition, Matrixx apparently had access to an abstract of a paper posted on the web that involved a study by some faculty at the University of Colorado on Zicam and anosmia.  Again, according to the amended complaint:

• Jafek, Linschoten and Murrow's abstract, entitled, 'Zicam® Induced Anosmia,' was posted along with the other scheduled presentation abstracts.  The University of Colorado School of Medicine research provided a detailed description of one of the patients they had diagnosed with anosmia following Zicam use.  A 55 year old man with previously normal taste and smell who had developed clear rhinitis and congestion and treated himself with Zicam.  On spraying his nose, he noted severe burning.  This was followed immediately by loss of smell.  In addition to the one detailed case, the University of Colorado researchers reported 10 other Zicam users with similar symptoms as of September of 2003.

Matrixx was apparently aware of the data.  In connection with the study, Mattrixx declined to allow the use of its name or the Zicam name.  

In addition, a number of plaintiffs filed actions related to Zicam and anosmia.  The Ninth Circuit listed four lawsuits filed before that date involving nine plaintiffs.  585 F.3d 1167 at 1179. 

The trial court dismissed the case.  See Siracusano v. Matrixx Initiatives, Inc., 2005 U.S. Dist. LEXIS 41102 (D. Ariz., Dec. 15, 2005).  The court noted that "courts have found adverse information related to the safety of a product is not material unless such reports provide reliable statistically significant information that a drug is unsafe."  While noting that other courts eschewed the "bright-line pleading standard," the court nonetheless concluded that other circuits in fact had held that a company "must have statistically significant information before statements related to a products drug safety become material."  The number of complaints, the court concluded, were not statistically significant. ("Even if there were data as to the reliability, the Court finds 12 user complaints is not statistically significant."). 

In addition, the court found the other sources of data to be insufficient to render the information material.  With respect to the actions filed against the Company, "[the complaint] fails to allege those user complaints were within the class period or that Defendants had any knowledge of the complaints." Finally, with respect to the study by the University of Colorado, the court concluded that the complaint had failed to "allege that during the class period, Defendants were presented with any evidence that the University of Colorado study was reliable, the methodology used, or that it was subject to peer review."

The Ninth Circuit reversed.  The relatively short analysis contains several different approaches.  On the one hand, the opinion rejected the district court's finding that the statistically insignificant nature of the data meant that it was immaterial as a matter of law.  In short, the court rejected the "bright-line" rule, pointing to the same approach in Basic.  On the other hand, the court also suggested that the significant of the data was itself a question for the jury. 

In the former case, the court left open the possibility that statistically insignificant evidence could in some instances be considered material.  In the latter, the court left open the possibility that statistically insignificant evidence could be immaterial as a matter of law but left it to the jury to determine the significance of the data.  

Finally, the court listed the data allegedly known to the Company (one report in 1999, another in 2002, the emailing of abstracts linking zinc sufate to loss of smell, the findings in the University of Colorado involving 10-11 patients, the four lawsuits involving nine plaintiffs, and evidence by doctors of other patients suffering anosmia following Zicam use, although without specifying that the Company was aware of these instances).  Based upon this "fact-specific" inquiry, the court concluded that plaintiffs had sufficiently met the threshold for materiality.  

For the cert petition and the reply, we have posted them on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on June 22, 2010 (boomark / email).