May 8, 2011
Recent SCOTUS opinion on the use of case reports as causation evidence
The U.S. Supreme Court has weighed in on the issue of statistical significance in case reports, opining that the idea that such significance be present in order to establish causation is "flawed." Matrixx Initiatives Inc., et al., No. 09-1156 (U.S. Sup. Ct.).
In the March 22 unanimous decision written by Associate Justice Sonia Sotomayor, the Supreme Court found that an intermediate appellate court was correct in reversing a ruling in favor of defendant Matrixx Initiatives Inc., since a "reasonable investor" would have relied on any information of adverse reports relating to the defendant's product.
The underlying action was filed by James Siracusano, who alleged that Matrixx Initiatives Inc. had violated the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 when it did not disclose evidence of a potential link between Zicam Cold Remedy and the loss of smell.
Matrixx filed to dismiss the lawsuit on grounds that the plaintiff had not "pleaded the element of a material misstatement or omission and the element of scienter." While the District Court overseeing the case granted the motion, the U.S. 9th Circuit Court of Appeals reversed, leading to the instant appeal.
On appeal, Matrixx urged the Supreme Court to reverse the 9th Circuit's ruling, arguing that the reports it received regarding Zicam and the loss of smell were not based on statistically significant evidence.
In reversing the decision, however, the Supreme Court cited Basic Inc. v. Levinson, in which it states that the "materiality requirement is satisfied when there is "'a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available.'"
In the instant circumstances, adopting Matrixx's position would effectively exclude information that "would otherwise be considered significant to [a reasonable investor's] trading decision," the Supreme Court opined in its headnote. "Matrixx's premise that statistical significance is only reliable indication of causation is flawed," the Supreme Court said.
"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.... Something more than the mere existence of adverse event reports is needed to satisfy that standard, but that something more is not limited to statistical significance and can come from the source, content, and context of the reports."
As such, the Supreme Court upheld the 9th Circuit's decision and found that "the complaint's allegations, 'taken collective,' give rise to a 'cogent and compelling' inference that Matrixx elected not to disclose adverse event reports not because it believed they were meaningless but because it understood their likely effect on the market."