Corporate Governance

Matrixx v. Siracusana: Revisiting the Materiality Standard (Part 7)

By J Robert Brown Jr.

This case is also a duty to disclose case.  

Just because information is material does not automatically mean it must be disclosed.  Instead, a company must have a duty to disclose.  Most duty arises out of the obligation to be complete.  Once a company makes a public statement, for any reason, it must include all information necessary to make the statement accurate and complete.  

The completeness concept is a two step analysis.  First, the omitted information must be material and second, the information must be necessary to make the relevant statement accurate and complete.  Not every statement by a company will, therefore, trigger an obligation to reveal undisclosed material information. 

Plaintiffs in this case assert a number of alleged misstatements.  Many involve optimistic statements about future earnings.  The need to disclose information about the adverse health effects of Zicam in these instances is more attenuated.  The information not only must be material but Matrixx also must know that the information is likely to impact future earnings.    

Statements that go directly to the safety of the drug are, however, in a different category.  Petitioners did, according to the complaint, opine on the safety of Zicam.  According to the complaint: 

• All Zicam products are manufactured and marketed according to FDA guidelines for homeopathic medicine. Our primary concern is the health and safety of our customers and the distribution of factual information about our products. Matrixx believes statements alleging that intranasal Zicam products cause anosmia (loss of smell) are completely unfounded and misleading.
• In no clinical trial of intranasal zinc gluconate gel products has there been a single report of lost or diminished olfactory function (sense of smell).  Rather, the safety and efficacy of zinc gluconate for the treatment of symptoms related to the common cold have been well established in two double-blind, placebo-controlled, randomized clinical trials. In fact, in neither study were there any reports of anosmia related to the use of this compound. The overall incidence of adverse events associated with zinc gluconate was extremely low, with no statistically significant difference between the adverse event rates for the treated and placebo subsets.
• A multitude of environmental and biologic influences are known to affect the sense of smell. Chief among them is the common cold. As a result, the population most likely to use cold remedy products is already at increased risk of developing anosmia. Other common causes of olfactory dysfunction include age, nasal and sinus infections, head trauma, anatomical obstructions, and environmental irritants.

The Ninth Circuit indicated that the press release was apparently issued in response to a public report "alleging that the FDA is investigating consumer complaints regarding instranasal zinc gluconate-induced loss of smell." 

Petitioners must argue that as a matter of law, this statement, including the representation that the company "believes statements alleging that intranasal Zicam products cause anosmia (loss of smell) are completely unfounded and misleading" does not trigger any kind of duty to disclose the adverse event reports or the other information about the medical effects of the product known to the company.  A belief can be challenged under the antifraud provisions, as the Court in Virginia Bankshares more or less held.  The question is whether this statement triggered an obligation to disclose the contrary information about the safety of the drug allegedly known to the Company. 

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 25, 2010 (boomark / email).