The US Supreme Court's recent decision in Matrixx Initiatives, Inc. v. Siracusano, No. 09-1156, (Mar. 22, 2011) (Matrixx Initiatives), marked the first time in over twenty years that the Court addressed the standard for materiality under the federal securities laws. Although there was widespread speculation that the Supreme Court might use Matrixx Initiatives as an opportunity to redefine materiality, it did not. Instead, the Court's opinion was narrowly tailored to resolve only the specific question presented: whether a pharmaceutical company's purported failure to disclose adverse events reports associated with its flagship product could be considered material even if the number of adverse events reports was itself statistically insignificant (Matrixx Initiatives at *3).

Shareholders asserted that Matrixx Initiatives and certain of its executives violated Section 10(b) of the Securities Exchange Act of 1934 when they failed to disclose reports that more than ten patients had suffered anosmia (the loss of sense of smell) after using Zicam, a cold remedy product (Matrixx Initiatives at **4-6, 12). Although Matrixx Initiatives did not view these reports as a reliable indication of causation, it had not conducted any studies of its own that disproved the purported link. When, approximately three months later, a nationally broadcast morning news program reported on the findings of one of the doctors who had sent information concerning the adverse events to Matrixx Initiatives, the Company's stock price plummeted.

Defendants argued that, as a general matter, adverse events reports associated with a pharmaceutical company's products cannot be material absent a sufficient number of reports to establish a statistically significant risk that the product is actually causing the events (Matrixx Initiatives at *8). The Court declined to adopt that bright-line rule. It reasoned that because neither medical experts nor the Food and Drug Administration limit the evidence they consider in assessing causation to statistically significant data, investors might also consider such information to be important (Matrixx Initiatives at **9-10).

Instead, the Court applied the prevailing "total mix" test, under which information is considered "material" if there is a "'substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly later the total mix of information made available." (Matrixx Initiatives at *8 (quoting Basic, Inc. v. Levinson, 485 US 224, 238 (1988))). Evaluating plaintiffs' allegations as a whole, it found that there was a substantial likelihood that a reasonable investor would have viewed the particular adverse event reports at issue to be material because the facts alleged suggested that anosmia posed a significant risk to the "commercial viability" of Zicam, which was the Company's leading product and accounted for approximately 70% of its sales (Matrixx Initiatives at *12). According to the Court, the information defendants allegedly concealed would likely have led consumers to determine that the risks associated with Zicam substantially outweighed the benefits, especially in light of the availability of many other products designed to alleviate symptoms associated with the common cold (Matrixx Initiatives).

Plaintiffs' attorneys will likely rely on Matrixx Initiatives to argue against dismissal for failure to plead materiality in securities-fraud class actions that similarly involve pharmaceutical companies and medical device manufacturers. In its opinion, however, the Court made clear that its ruling was closely tied to the facts of that particular case. It expressly warned that although it declined to adopt a bright-line rule with respect to statistical significance, its decision should not be read to suggest that "statistical significance (or the lack thereof) is irrelevant – only that it is not dispositive of every case." (Matrixx Initiatives at *10.) In addition, the Court cautioned that its application of the "total mix" test "does not mean that pharmaceutical manufacturers must disclose all reports of adverse events." (Matrixx Initiatives at *11.) To the contrary, the Court explained that "the mere existence of reports of adverse events – which says nothing in and of itself about whether the drug is causing the adverse events – will not satisfy this standard. Something more is needed . . .." Matrixx Initiatives The requirement that plaintiffs plead facts from which it can be inferred that the concealed information constituted a threat to a product's "commercial viability" likely will be a basis for distinguishing Matrixx Initiatives from most other cases.

Plaintiffs in cases against issuers outside of the life science sector will also likely try to use Matrixx Initiatives to characterise defendants' arguments as "bright-line rules" that should be rejected out of hand. Even though the Supreme Court's decision not to adopt the statistical significance test advocated by defendants in that case was context specific, all issuers should nonetheless be mindful of the holistic approach employed in Matrixx Initiatives when making decisions on disclosure.