Tuesday, March 22, 2011

Today's SCOTUS Decision in Matrixx Initiatives v. Siracusano: More on Pleading

Today the Supreme Court issued a unanimous opinion (per Justice Sotomayor) in Matrixx Initiatives, Inc. v. Siracusano (No. 09-1156), affirming the Ninth Circuit’s conclusion that the plaintiffs’ complaint adequately stated a claim for securities fraud. The Court rejects the arguments by the defendant Matrixx (manufacturer of the cold remedy Zicam) that “[plaintiffs’] complaint does not adequately allege that Matrixx made a material representation or omission or that it acted with scienter because the complaint does not allege that Matrixx knew of a statistically significant number of adverse events requiring disclosure.” [Slip Op. at 1.] Although the case involves securities-fraud claims in particular, the opinion contains several references to Twombly and Iqbal and may have a bearing on pleading standards more generally. Here's a quick summary:

The Court begins its discussion [Slip Op. at 3] by stating that the plaintiffs’ complaint “alleges the following facts, which the courts below properly assumed to be true. See Ashcroft v. Iqbal, 556 U. S. ___, ___ (2009).” It recounts over the next four pages events relevant to plaintiffs’ securities fraud claims.

Analyzing the issue of materiality, the Court states [Slip Op. at 17]: “Assuming the complaint’s allegations to be true, as we must, Matrixx received information that plausibly indicated a reliable causal link between Zicam and anosmia.” In footnote 12, the Court rejects Matrixx’s argument that certain studies relied on by the plaintiffs were unreliable with the following discussion:

Matrixx contends that Dr. Jafek and Linschoten’s study was not reliable because they did not sufficiently rule out the common cold as a cause for their patients’ anosmia. We note that the complaint alleges that, in one instance, a consumer who did not have a cold lost his sense of smell after using Zicam. More importantly, to survive a motion to dismiss, respondents need only allege “enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U. S. 544, 570 (2007).

Here’s the Court’s conclusion on whether the complaint adequately pleaded the materiality requirement [Slip Op. at 18]:

We believe that these allegations suffice to “raise a reasonable expectation that discovery will reveal evidence” satisfying the materiality requirement, Bell Atlantic Corp. v. Twombly, 550 U. S. 544, 556 (2007), and to “allo[w] the court to draw the reasonable inference that the defendant is liable for the misconduct alleged,” Iqbal, 556 U. S., at ___. The information provided to Matrixx by medical experts revealed a plausible causal relationship between Zicam Cold Remedy and anosmia. Consumers likely would have viewed the risk associated with Zicam (possible loss of smell) as substantially outweighing the benefit of using the product (alleviating cold symptoms), particularly in light of the existence of many alternative products on the market. Importantly, Zicam Cold Remedy allegedly accounted for 70 percent of Matrixx’s sales. Viewing the allegations of the complaint as a whole, the complaint alleges facts suggesting a significant risk to the commercial viability of Matrixx’s leading product.

As to whether the complaint adequately pleaded scienter, the Court uses the PSLRA’s heightened pleading standard, which requires a plaintiff to “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U. S. C. § 78u–4(b)(2)(A). Citing Tellabs, the Court explains [Slip Op. at 20]:

This standard requires courts to take into account “plausible opposing inferences.” Tellabs, 551 U.S., at 323. A complaint adequately pleads scienter under the PSLRA “only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.” Id. at 324.

The Court holds [Slip Op. at 21] that “[t]he inference that Matrixx acted recklessly (or intentionally, for that matter) is at least as compelling, if not more compelling, than the inference that it simply thought the reports did not indicate anything meaningful about adverse reactions.” After summarizing the key allegations in the complaint, the Court concludes [Slip Op. at 22]:

These allegations, “taken collectively,” give rise to a “cogent and compelling” inference that Matrixx elected not to disclose the reports of adverse events not because it believed they were meaningless but because it understood their likely effect on the market. Tellabs, 551 U. S., at 323, 324. “[A] reasonable person” would deem the inference that Matrixx acted with deliberate recklessness (or even intent) “at least as compelling as any opposing inference one could draw from the facts alleged.” Id. at 324.

--A

http://lawprofessors.typepad.com/civpro/2011/03/todays-scotus-decision-in-matrixx-initiatives-v-siracusano-more-on-pleading.html

Recent Decisions, Supreme Court Cases, Twombly/Iqbal | Permalink

Comments

I don't understand the Court's quotation to Twombly. On 18, the Court notes that the plaintiff has adequately pleaded materiality because the plaintiff's allegations "suffice to 'raise a reasonable expectation that discovery will reveal evidence' satisfying the materiality requirement." at 18 (quoting Twombly).

What evidence are the plaintiffs going to find through discovery? The information that Matrixx learned from the medial experts was either material or it was not material. More discovery isn't going to change that. This seems like a legal determination that a reasonable investor could have believed that this information given to Matrixx by the experts was material. And then it will be a question of fact for the jury whether it was or not. What additional discovery is going to change that?

The Court appears to be saying that more discovery will show a real causal link between Zicam and anosmia. What discovery are the plaintiffs going to find that proves this link? The materiality requirement, which is where the Court does its work on Twombly, has nothing to do with the defendants' knowledge of the link—it only matters whether a reasonable investor could have thought it was material.

The Court states that "it can reasonably be inferred from the complaint that Matrixx had no basis for rejecting Dr. Jafek's findings out of hand." I don't see how this is relevant to materiality.

A reasonable investor either would or would not care about the information the experts gave to Matrixx, but Matrixx's actions and its basis for dismissing the Dr.'s findings are irrelevant.

There's no need for a "reasonable expectation that discovery will reveal reveal evidence" on materiality. Whether a reasonable investor could have thought that information was material is a legal determination.

Further, the Court says that "[t]he information provided to Matrixx by medical experts revealed a plausible causal relationship between Zicam . . . and anosmia." What the Court should have written is that a reasonable investor could have reasonably believed that there was a causal connection between Zicam and anosmia based on the information revealed.

Posted by: anon | Mar 22, 2011 4:47:54 PM

I don't understand the Court's quotation to Twombly. On 18, the Court notes that the plaintiff has adequately pleaded materiality because the plaintiff's allegations "suffice to 'raise a reasonable expectation that discovery will reveal evidence' satisfying the materiality requirement." at 18 (quoting Twombly).

What evidence are the plaintiffs going to find through discovery? The information that Matrixx learned from the medial experts was either material or it was not material. More discovery isn't going to change that. This seems like a legal determination that a reasonable investor could have believed that this information given to Matrixx by the experts was material. And then it will be a question of fact for the jury whether it was or not. What additional discovery is going to change that?
The Court appears to be saying that more discovery will show a real causal link between Zicam and anosmia. What discovery are the plaintiffs going to find that proves this link? The materiality requirement, which is where the Court does its work on Twombly, has nothing to do with the defendants' knowledge of the link—it only matters whether a reasonable investor could have thought it was material.

The Court states that "it can reasonably be inferred from the complaint that Matrixx had no basis for rejecting Dr. Jafek's findings out of hand." I don't see how this is relevant to materiality.
A reasonable investor either would or would not care about the information the experts gave to Matrixx, but Matrixx's actions and its basis for dismissing the Dr.'s findings are irrelevant.

There's no need for a "reasonable expectation that discovery will reveal reveal evidence" on materiality. Whether a reasonable investor could have thought that information was material is a legal determination.
Further, the Court says that "[t]he information provided to Matrixx by medical experts revealed a plausible causal relationship between Zicam . . . and anosmia." What the Court should have written is that a reasonable investor could have reasonably believed that there was a causal connection between Zicam and anosmia based on the information revealed.

Posted by: anon | Mar 22, 2011 5:20:41 PM

This is a solid, well reasoned opinion. Here is my lingering question: How does the PSLRA heightened pleading standard as applied in Matrixx differ, if at all, from the plausibility standard imposed by the SCT in Iqbal? To be clear, I'm not suggesting that the Iqbal complaint would have survived the PSLRA standard. I'm just saying that the standards themselves appear to be quite similar; indeed, they are both premised on the plausibility of inferences to be drawn from facts. Actually, the Iqbal standard might even be stricter for a complaint that is "consistent with a defendant's liability . . . stops short of the line between possibility and plausibility." The PSLRA at-least-as-compelling standard seems a bit more generous.

Posted by: Allan Ides | Mar 27, 2011 1:52:17 PM

Post a comment