There was a time when it was relatively rare for the Supreme Court to take up securities cases. Until recently, the Court basically went several years between cases filed under the securities laws. Those days are clearly over, as the Court has granted cert petitions in several securities cases in recent years, including the Merck and National Australia Bank cases this term.
The Court has now granted cert in a securities suit for next term as well. On June 14, 2010, the Supreme Court granted the petition for a writ of certiorari in the Matrixx Initiative case.
The question presented is whether plaintiffs must allege that adverse event information is "statistically significant" in order to establish that the defendants’ alleged failure to disclose the information was material. Though the issues involved appear narrow, the case potentially could address broader issues of securities claim pleading sufficiency.
Matrixx Initiatives manufactured an internasal cold remedy called Zicam. In April 2004, plaintiff shareholders filed a securities class action lawsuit against Matrixx and three of its directors and officers, alleging that the defendants were aware that numerous Zicam users experienced loss of the sense of smell. The complaint alleges that the defendants were aware of these problems because of calls to the company’s customer service line; because of academic research, which was communicated to the company; and because of product liability lawsuits that had been filed against the company.
The district court granted the defendants’ motion to dismiss, finding that the complaint failed to adequately allege that the alleged omissions were material, because the complaint did not allege that the number of customer complaints was "statistically significant."
As discussed at greater length here, on October 28, 2009, the Ninth Circuit reversed the district court, holding that the district court "erred in relying on the statistical significance standard" in concluding that the complaint did not meet the materiality requirement. The Ninth Circuit said that a court "cannot determine as a matter of law whether such links [between Zicam and loss of smell] was statistically significant, because statistical significance is a matter of fact."
The Ninth Circuit said (citing Twombly and its progeny) that the appropriate test is whether the claim is "plausible on its face." The Ninth Circuit found that the complaint’s allegations of materiality were sufficient to "nudge" the plaintiffs’ claims from "conceivable to plausible."
On June 14, 2010, the U.S. Supreme Court granted the defendants’ petition for writ of certiorari, on the question whether the plaintiff can state a securities claim "based on a pharmaceutical company’s nondisclosure of adverse event reports even though the reports are not alleged to be statistically significant."
When the U.S. Supreme Court grants cert, there is always the question "why"? On the theory that the Court wouldn’t take the case if it thought the Ninth Circuit got it right, one view might be that the Court took the case simply to overturn the Ninth Circuit. However, as we say in connection with the Supreme Court’s consideration of the Merck case (about which refer here), this assumption is not always borne out by the Court’s actions.
Perhaps the more neutral explanation is that as a result of the Ninth Circuit’s opinion, there is now a split in the circuits on the issue of the need to plead "statistical significance." Several other circuits (on which the district court relied in dismissing the Matrixx case) have held that plaintiff alleged that adverse events were "statistically significant," which the Ninth Circuit rejected that view and instead adapted a view that statistical significance cannot be resolved at the pleading stage and instead the court must consider facial plausibility.
Even if resolution of this narrow issue is all the Supreme Court accomplishes by taking up the Matrixx case, its review will still be significant. As the Morrison & Foerster law firm pointed out in its memo discussing the Supreme Court’s cert petition grant, companies regularly receive many customer complaints. These companies need to know when they have sufficient information about a product’s potential adverse effects that it must disclose that information.
Companies and defense attorneys would like a bright-line answer to this question, whereas, the MoFo memo suggests, plaintiffs "will push for an amorphous case-by-case determination."
There is a possibility that the Supreme Court’s consideration of this case could involve more than just this narrow issue, as important as it might be. Among other things, the 10b-5 Daily suggests that the Court could extend itself to a broader review of the issues of pleading materiality generally. Given what the Ninth Circuit said about what determinations are appropriate at the pleading stage, and what must be left to the trier of fact, this possibility seems substantial.
I also think it is critical to the Ninth Circuit’s rejection of the use of the "statistically significant" standard that its analysis was made in reliance on what it saw as required by the Twombly line of cases. Given the Ninth Circuit’s conclusion that its holding was required by Twombly, it seems unlikely that the Supreme Court could address the Ninth Circuit’s analysis without discussing what is required by Twombly and the larger issues of pleading sufficiency at the motion to dismiss stage.
There is the further possibility that the Supreme Court could range further and address other aspects of the Ninth Circuit’s decision, including even perhaps the Ninth Circuit’s conclusion that the plaintiff had adequately alleged scienter.
The Ninth Circuit’s conclusion that the scienter allegations were sufficient was based on plaintiffs allegations that the "high level executives …would know the company was being sued in a product liability action," and also based on the fact that the various academic research results and customer complaints were communicated to the company’s director of research – though there were no allegations that the other two individual defendants were aware of this information.
The Ninth Circuit put a great deal of emphasis on what the defendants’ "would have known" as higher level executives, without necessarily considering whether the plaintiffs had alleged that the defendants did know the supposedly omitted information.
This aspect of the case raises the question whether scienter may be sufficiently alleged based on an individual officers’ officer or position, even without supporting allegations about whether the defendants knew or what information they were provided access to.
Of course, there is no way of knowing whether the Supreme Court will reach these issues, or whether it will narrowly address the immediate questions presented. That is always one of the great uncertainties (and interesting possibilities) when the Court grants cert, you never know where the case might go. The broader possibilities here, while present, may also be conjectural best.
In any event, the next Supreme Court term will involve yet another consideration at the highest judicial level of questions involving securities lawsuit pleading questions. Perhaps this will be one of the first cases to be considered by Justice Kagan (assuming for the sake of argument that she does indeed join Justice Sotomayor and the other seven justices on the Supreme Court bench next term.
Readers may be interested to know that on June 16, 2009, the FDA warned consumers (here) to stop using three Zicam intranasal products because the products may cause a loss of smell. As reflected here, a second securities class action lawsuit was filed after the company’s share price plunged following this announcement.
Why Do They Call Them Wells Notices?: If like me you have always wondered why a Wells Notice is called a Wells Notice, you will want to take a look at the recent post from the Compliance Building blog. Turns out there was, as we all suspected, someone named Wells – in fact, John W. Wells, an attorney who, in 1972 was appointed to chair a committee that made a number of recommendations, including the process now referred to as a Wells notice. Now we know.
My personal thanks to Doug Cornelius, the blog’s author, for answering a question I have always kind of wondered about.