Tuesday, January 11, 2011
On January 10 the U.S. Supreme Court heard oral argument ( Download MatrixxOralArgument09-1156) in Matrixx Initiatives, Inc. v. Siracusano, 585 F.3d 1167 (9th Cir. 2009), where investors brought a class action against a pharmaceutical company and three of its executives, alleging that defendants violated federal securities laws by failing to disclose material information regarding one of the company's products. Reversing the district court, the 9th Circuit held that investors adequately pled materiality and scienter under the Private Securities Litigation Reform Act (PSLRA). Defendants sought Supreme Court review and framed the question as "whether plaintiffs could state a Rule 10b-5 claim based on nondisclosure of adverse events reports even though the reports were not alleged to be statistically significant."
The justices expressed little enthusiasm for the defendants' argument that there should be a bright-line "statistically significant" materiality test. Justice Breyer expressed his skepticism most forcefully when defendants' counsel stated "we think the answer is statistical significance," and he interjected "oh no, it can't be." Justice Kagan made the point that the FDA itself did not use a statistically significant test in making decisions about what it should regulate. Justice Sotomayor reminded defendants' counsel that cert was granted on a limited question of "whether in a complaint that alleges only adverse reports can you prove materialilty and scienter without proving statistical importance" and that "many of the amici here have done a wonderful job of explaining why statistical importance can't be a measure because it depends on the nature of the study at issue." She also noted that defendants had backed away from an absolute rule in their brief, "so you've already answered the question presented."
Assuming that Supreme Court will not adopt a "statistically significant" requirement, what illumination, if any, will the Court supply to the Northway/Basic materiality test? The Justices expressed concern about potential overbreadth in an extended colloquy with plaintiff's counsel over the materiality of allegations about a Satanic connection to a product. Plaintiff's counsel suggested the importance of "credible medical professionals describing the harms based on credible scientific theories" and the effect on a "predominant product line" in shaping a disclosure duty. In questioning the DOJ attorney arguing on behalf of the U.S. (in support of defendant), Chief Justice Roberts asked if there was any way that consideration of many Basic factors would support a summary judgment in favor of the defendants. In response, the government attorney pointed to PSLRA's safe harbor provision for forward looking statements and a scenario where the product at issue was such a small percentage of the company's income that a reasonable investor would not care if it failed. While expressing concern, the justices did not offer much guidance on whether or how they would refine the Northway/Basic test.