Media Is Wrong: Matrixx Decision Not a Defeat for Big Pharma

Mar.25.11 | About: Matrixx Initiatives (MTXX)

The Supreme Court came down with a decision the other day [Matrixx Initiatives (MTXX) v. Siracusano) that the headlines say will have an impact on the drug industry. Looking at it, though, I don't see how anything's changed.

The silly-named Matrixx is the company that made Zicam, the zinc-based over-the-counter cold remedy that was such a big seller a few years back. You may or may not remember what brought it down - reports that some people suffered irreversible loss of their sense of smell after using the product. That's a steep price to pay for what may or may not have been any benefit at all (I never found the zinc-for-colds data very convincing, not that there were a lot of hard numbers to begin with).

This case grew out of a shareholder lawsuit, which alleged (as shareholder lawsuits do) that the company knew that there was trouble coming and had insufficiently informed its investors in time to keep them from losing buckets of their money. To get a little more specific about it, the suit claimed that Matrixx had received at least a dozen reports of anosmia between 1999 and 2003, but had said nothing about them - and more to the point, had continued to make positive statements about Zicam the whole way. The suit alleges that these statements were, therefore, false and misleading.

And that's what sent this case up the legal ladder, eventually to the big leagues of the Supreme Court. At what point does a company have an obligation to report such adverse events to the public and to its shareholders? Matrixx contended that the bar was statistical significance, and that anything short of that was not a "material event" that had to be addressed, but the Court explicitly shut that down in their decision:

Matrixx's premise that statistical significance is the only reliable indication of causation is flawed. Both medical experts and the Food and Drug Administration rely on evidence other than statistically significant data to establish an inference of causation. It thus stands to reason that reasonable investors would act on such evidence. Because adverse reports can take many forms, assessing their materiality is a fact-specific inquiry, requiring consideration of their source, content, and context ...

Assuming the complaint's allegations to be true, Matrixx received reports from medical experts and researchers that plausibly indicated a reliable causal link between Zicam and anosmia. Consumers likely would have viewed Zicam's risk as substantially outweighing its benefit. Viewing the complaint's allegations as a whole, the complaint alleges facts suggesting a significant risk to the commercial viability of Matrixx's leading product. It is substantially likely that a reasonable investor would have viewed this information as having significantly altered the "total mix" of information made available.

I think that's a completely reasonable way of looking at the situation. (Note: that "total mix" language is from an earlier decision, Basic, Inc. v. Levinson, that also dealt with disclosure of material information). The other issue in this case is what the law calls scienter, broadly defined as "intent to deceive". As the decision explains, this can be assumed to hold when a reasonable person would find it as good an explanation of a defendant's actions as any other that could be drawn. And in this case, since Zicam was Matrixx's entire reason to exist, and since a link with permanent damage to a customer's sense of smell would surely damage sales immensely (which is exactly what happened), a reasonable person would indeed find that the company had a willingness to keep such information quiet.

But here's the puzzling part - not the Court's decision, which is short, clear, and unanimous, but the press coverage. This is being headlined as a defeat for Big Pharma, but I don't see it. We'll leave aside the fact that Matrixx is not exactly Big Pharma, although I'm sure that they were, for a while, making the "Big Money" selling Zicam. No, the thing is, this decision leaves things exactly as they were before. (Nature's "Great Beyond" blog has it exactly right).

It's not like statistical significance was the cutoff for press-releasing adverse events before, and now the Supreme Court has yanked that away. No, Matrixx was trying to raise the bar up to that point, and the Court wasn't having it. "The materiality of adverse event reports cannot be reduced to a bright-line rule", the decision says, and there was no such rule before. The Court, in fact, had explicitly refused another attempt to make such a rule in that Basic case mentioned above. No, Matrixx really had a very slim chance of prevailing in this one; current practice and legal precedent were both against them. As far as I can tell, the Court granted certiorari in this case just to nail that down one more time, which should (one hopes) keep this line of argument from popping up again any time soon.

By the way, if you've never looked at a Supreme Court decision, let me recommend them as interesting material for your idle hours. They can make very good reading, and are often (though not invariably!) well-written and enjoyable, even for non-lawyers. I don't exactly have them on my RSS feed (do they have one?), but when there's an interesting topic being decided, I've never regretted going to the actual text of the decision rather than only letting someone else tell me what it means.

Disclosure: None