Supreme Court to Resolve Circuit Split Over Materiality "Standard"

Last week, the Supreme Court granted certiorari to resolve a relatively new Circuit split over a pharmaceutical company’s duty to disclose negative information it receives about its products.  See Siracusano v. Matrixx Initiatives, Inc., 585 F.3d 1167 (9th Cir. 2009), cert. granted, 78 U.S.L.W. 3581 (U.S. June 14, 2010) (No. 09-1156).

In Siracusano, the plaintiffs alleged that Matrixx Initiatives made false and misleading statements in violation of Section 10(b) and Rule 10b-5 because it failed to reveal certain reports it had received about one of its products causing anosmia, the loss of the sense of smell.  Because the plaintiffs did not allege that the reports of anosmia were “statistically significant,” the district court held that the plaintiffs failed to allege adequately that the misstatements and omissions were material and, therefore, potentially actionable under the federal securities laws.  In doing so, the district court relied on the statistically significant standard constructed by the Second Circuit in In re Carter-Wallace, Inc. Securities Litigation, 150 F.3d 153 (2d Cir. 1998).  In In re Carter-Wallace, Inc. Securities Litigation, the Second Circuit held that a pharmaceutical company’s failure to disclose complaints about the drug was not materially misleading until the company had knowledge that the drug had caused “a statistically significant number of” medical problems.  This same statistical significance standard has been adopted by the Third Circuit, Oran v. Stafford, 226 F.3d 275 (3d Cir. 2000), and the First Circuit, New Jersey Carpenters  Pension and Annuity Funds v. Biogen IDEC Inc., 537 F.3d 35 (1st Cir. 2008).         

The Ninth Circuit, however, reversed the district court’s holding on materiality and declined to adopt the statistically significant test used by the First, Second, and Third Circuits.  Pointing to the Supreme Court’s decision in Basic Inc. v. Levinson, 485 U.S. 224 (1988), the Ninth Circuit held that a bright line rule to determine materiality was inappropriate and that questions of materiality should be left to the trier of fact.  See Siracusano, 585 F.3d at 1178. 

As a result, the Supreme Court granted certiorari to decide the following question: 

Whether a plaintiff can state a claim under § 10(b) of the Securities Exchange Act and SEC Rule 10b-5 based on a pharmaceutical company's nondisclosure of adverse event reports even though the reports are not alleged to be statistically significant.

Obviously, the Supreme Court’s resolution of this question could alter how pharmaceutical companies interact with the investing public.  The defendant’s petition for certiorari noted that the FDA receives literally hundreds of thousands of adverse event reports each year.  At the same time, the case also presents the Supreme Court with an opportunity to expand upon the materiality standard for claims brought under Section 10(b) and Rule 10b-5 articulated in Basic Inc. v. Levinson, which could have ramifications for cases outside the pharmaceutical context.