UMASS Boston Matrixx Initiatives Inc vs James Siracusano Law Case

University Of Massachusetts Boston

Question Description

I’m working on a Law question and need guidance to help me study.

1.1 to 2 pages, single spaced, at standard type face (12 or 14 point).

2.It should briefly (in very few sentences) lay out the basic facts of the case. These are usually generally agreed upon by the time it gets to final appeal stage; i.e., the Supreme Court of a Federal District court.

3.What is much more important is the issue at law – the dispute about what the law means or how it should be interpreted.

4.What was the majority of the court’s decision in the case, and – more importantly – what was the basic reasoning behind this decision?

5.If you are asked to read a dissent in the case, what was the decision and reasoning in the minority?

6.Do you agree or disagree with the court’s decision? Explain why.

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(Slip Opinion) OCTOBER TERM, 2010 1 Syllabus NOTE: Where it is feasible, a syllabus (headnote) will be released, as is being done in connection with this case, at the time the opinion is issued. The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the convenience of the reader. See United States v. Detroit Timber & Lumber Co., 200 U. S. 321, 337. SUPREME COURT OF THE UNITED STATES Syllabus MATRIXX INITIATIVES, INC., ET AL. v. SIRACUSANO ET AL. CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT No. 09–1156. Argued January 10, 2011—Decided March 22, 2011 Respondents filed this securities fraud class action, alleging that peti tioners (hereinafter Matrixx) violated §10(b) of the Securities Ex change Act of 1934 and Securities and Exchange Commission Rule 10b–5 by failing to disclose reports of a possible link between Ma trixx’s leading product, Zicam Cold Remedy, and loss of smell (anos mia), rendering statements made by Matrixx misleading. Matrixx moved to dismiss the complaint, arguing that respondents had not pleaded the element of a material misstatement or omission and the element of scienter. The District Court granted the motion, but the Ninth Circuit reversed. It held that the District Court erred in re quiring an allegation of statistical significance to establish material ity, concluding instead that the complaint adequately alleged infor mation linking Zicam and anosmia that would have been significant to a reasonable investor. It also held that Matrixx’s withholding of information about reports of adverse effects and about pending law suits by Zicam users gave rise to a strong inference of scienter. Held: Respondents have stated a claim under §10(b) and Rule 10b–5. Pp. 8–22. (a) To prevail on their claim, respondents must prove, as relevant here, a material misrepresentation or omission by Matrixx and sci enter. See Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U. S. 148, 157. Matrixx contends that they failed to plead these required elements because they did not allege that the reports Matrixx received reflected statistically significant evidence that Zi cam caused anosmia. Pp. 8–9. (b) Respondents have adequately pleaded materiality. Pp. 9–19. (1) Under Basic Inc. v. Levinson, 485 U. S. 224, §10(b)’s material 2 MATRIXX INITIATIVES, INC. v. SIRACUSANO Syllabus ity 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.’ ” Id., at 231–232. The Court declined to adopt a bright-line rule for determining materiality in Basic, observ ing that “[a]ny approach that designates a single fact or occurrence as always determinative of an inherently fact-specific finding such as materiality, must necessarily be overinclusive or underinclusive.” Id., at 236. Here, Matrixx’s bright-line rule—that adverse event re ports regarding a pharmaceutical company’s products are not mate rial absent a sufficient number of such reports to establish a statisti cally significant risk that the product is causing the events—would “artificially exclud[e]” information that “would otherwise be consid ered significant to [a reasonable investor’s] trading decision.” Ibid. Matrixx’s premise that statistical significance is the only reliable in dication of causation is flawed. 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. Be cause adverse reports can take many forms, assessing their material ity is a fact-specific inquiry, requiring consideration of their source, content, and context. The question is whether a reasonable investor would have viewed the nondisclosed information “ ‘as having signifi cantly altered the “total mix” of information made available.’ ” Id., at 232. Something more than the mere existence of adverse event re ports 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. Pp. 9–16. (2) Applying Basic’s “total mix” standard here, respondents ade quately pleaded materiality. The complaint’s 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, and to “allo[w] the court to draw the reasonable inference that the defendant is liable,” Ashcroft v. Iqbal, 556 U. S. ___, ___. Assuming the complaint’s allegations to be true, Matrixx received reports from medical experts and researchers that plausibly indicated a reliable causal link between Zicam and anos mia. Consumers likely would have viewed Zicam’s risk as substan tially outweighing its benefit. Viewing the complaint’s allegations as a whole, the complaint alleges facts suggesting a significant risk to the commercial viability of Matrixx’s leading product. It is substan tially likely that a reasonable investor would have viewed this infor mation “ ‘as having significantly altered the “total mix” of informa tion made available.’ ” Basic, supra, at 232. Assuming the Cite as: 563 U. S. ____ (2011) 3 Syllabus complaint’s allegations to be true, Matrixx told the market that reve nues were going to rise 50 and then 80 percent when it had informa tion indicating a significant risk to its leading revenue-generating product. It also publicly dismissed reports linking Zicam and anos mia and stated that zinc gluconate’s safety was well established, when it had evidence of a biological link between Zicam’s key ingre dient and anosmia and had conducted no studies to disprove that link. Pp. 16–19. (c) Respondents have also adequately pleaded scienter, “ ‘a mental state embracing intent to deceive, manipulate, or defraud,’ ” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U. S. 308, 319. This Court assumes, without deciding, that the scienter requirement may be sat isfied by a showing of deliberate recklessness. Under the Private Se curities Litigation Reform Act of 1995, a complaint adequately pleads scienter “only if a reasonable person would deem the inference of sci enter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.” Id., at 324. Matrixx’s proposed bright-line rule requiring an allegation of statistical significance to establish a strong inference of scienter is once again flawed. The complaint’s allegations, “taken collectively,” 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 be cause it understood their likely effect on the market. Id., at 323, 324. “[A] reasonable person” would deem the inference that Matrixx acted with deliberate recklessness “at least as compelling as any [plausible] opposing inference.” Id., at 324. Pp. 19–22. 585 F. 3d 1167, affirmed. SOTOMAYOR, J., delivered the opinion for a unanimous Court. Cite as: 563 U. S. ____ (2011) 1 Opinion of the Court NOTICE: This opinion is subject to formal revision before publication in the preliminary print of the United States Reports. Readers are requested to notify the Reporter of Decisions, Supreme Court of the United States, Wash­ ington, D. C. 20543, of any typographical or other formal errors, in order that corrections may be made before the preliminary print goes to press. SUPREME COURT OF THE UNITED STATES _________________ No. 09–1156 _________________ MATRIXX INITIATIVES, INC., ET AL., PETITIONERS v. JAMES SIRACUSANO ET AL. ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT [March 22, 2011] JUSTICE SOTOMAYOR delivered the opinion of the Court. This case presents the question whether a plaintiff can state a claim for securities fraud under §10(b) of the Secu­ rities Exchange Act of 1934, 48 Stat. 891, as amended, 15 U. S. C. §78j(b), and Securities and Exchange Commission (SEC) Rule 10b–5, 17 CFR §240.10b–5 (2010), based on a pharmaceutical company’s failure to disclose reports of adverse events associated with a product if the reports do not disclose a statistically significant number of adverse events. Respondents, plaintiffs in a securities fraud class action, allege that petitioners, Matrixx Initiatives, Inc., and three of its executives (collectively Matrixx), failed to disclose reports of a possible link between its leading product, a cold remedy, and loss of smell, rendering state­ ments made by Matrixx misleading. Matrixx contends that respondents’ 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. We con­ clude that the materiality of adverse event reports cannot 2 MATRIXX INITIATIVES, INC. v. SIRACUSANO Opinion of the Court be reduced to a bright-line rule. Although in many cases reasonable investors would not consider reports of adverse events to be material information, respondents have al­ leged facts plausibly suggesting that reasonable investors would have viewed these particular reports as material. Respondents have also alleged facts “giving rise to a strong inference” that Matrixx “acted with the required state of mind.” 15 U. S. C. A. §78u–4(b)(2)(A) (Feb. 2011 Supp.). We therefore hold, in agreement with the Court of Appeals for the Ninth Circuit, that respondents have stated a claim under §10(b) and Rule 10b–5. I A Through a wholly owned subsidiary, Matrixx develops, manufactures, and markets over-the-counter pharmaceu­ tical products. Its core brand of products is called Zicam. All of the products sold under the name Zicam are used to treat the common cold and associated symptoms. At the time of the events in question, one of Matrixx’s products was Zicam Cold Remedy, which came in several forms including nasal spray and gel. The active ingredient in Zicam Cold Remedy was zinc gluconate. Respondents allege that Zicam Cold Remedy accounted for approxi­ mately 70 percent of Matrixx’s sales. Respondents initiated this securities fraud class action against Matrixx on behalf of individuals who purchased Matrixx securities between October 22, 2003, and Febru­ ary 6, 2004.1 The action principally arises out of state­ ments that Matrixx made during the class period relating to revenues and product safety. Respondents claim that Matrixx’s statements were misleading in light of reports that Matrixx had received, but did not disclose, about —————— 1 According to the complaint, Matrixx securities were traded on the NASDAQ National Market. App. 99a. Cite as: 563 U. S. ____ (2011) 3 Opinion of the Court consumers who had lost their sense of smell (a condition called anosmia) after using Zicam Cold Remedy. Respon­ dents’ consolidated amended complaint alleges the follow­ ing facts, which the courts below properly assumed to be true. See Ashcroft v. Iqbal, 556 U. S. ___, ___ (2009) (slip op., at 14). In 1999, Dr. Alan Hirsch, neurological director of the Smell & Taste Treatment and Research Foundation, Ltd., called Matrixx’s customer service line after discovering a possible link between Zicam nasal gel and a loss of smell “in a cluster of his patients.” App. 67a–68a. Dr. Hirsch told a Matrixx employee that “previous studies had dem­ onstrated that intranasal application of zinc could be problematic.” Id., at 68a. He also told the employee about at least one of his patients who did not have a cold and who developed anosmia after using Zicam. In September 2002, Timothy Clarot, Matrixx’s vice president for research and development, called Miriam Linschoten, Ph.D., at the University of Colorado Health Sciences Center after receiving a complaint from a per­ son Linschoten was treating who had lost her sense of smell after using Zicam. Clarot informed Linschoten that Matrixx had received similar complaints from other cus­ tomers. Linschoten drew Clarot’s attention to “previous studies linking zinc sulfate to loss of smell.” Ibid. Clarot gave her the impression that he had not heard of the studies. She asked Clarot whether Matrixx had done any studies of its own; he responded that it had not but that it had hired a consultant to review the product. Soon there­ after, Linschoten sent Clarot abstracts of the studies she had mentioned. Research from the 1930’s and 1980’s had confirmed “[z]inc’s toxicity.” Id., at 69a. Clarot called Linschoten to ask whether she would be willing to partici­ pate in animal studies that Matrixx was planning, but she declined because her focus was human research. By September 2003, one of Linschoten’s colleagues at 4 MATRIXX INITIATIVES, INC. v. SIRACUSANO Opinion of the Court the University of Colorado, Dr. Bruce Jafek, had observed 10 patients suffering from anosmia after Zicam use. Linschoten and Jafek planned to present their findings at a meeting of the American Rhinologic Society in a poster presentation entitled “Zicam® Induced Anosmia.” Ibid. (internal quotation marks omitted). The American Rhi­ nologic Society posted their abstract in advance of the meeting. The presentation described in detail a 55-year­ old man with previously normal taste and smell who experienced severe burning in his nose, followed immedi­ ately by a loss of smell, after using Zicam. It also reported 10 other Zicam users with similar symptoms. Matrixx learned of the doctors’ planned presentation. Clarot sent a letter to Dr. Jafek warning him that he did not have permission to use Matrixx’s name or the names of its products. Dr. Jafek deleted the references to Zicam in the poster before presenting it to the American Rhi­ nologic Society. The following month, two plaintiffs commenced a prod­ uct liability lawsuit against Matrixx alleging that Zicam had damaged their sense of smell. By the end of the class period on February 6, 2004, nine plaintiffs had filed four lawsuits. Respondents allege that Matrixx made a series of public statements that were misleading in light of the foregoing information. In October 2003, after they had learned of Dr. Jafek’s study and after Dr. Jafek had presented his findings to the American Rhinologic Society, Matrixx stated that Zicam was “ ‘poised for growth in the upcoming cough and cold season’ ” and that the company had “ ‘very strong momentum.’ ”2 Id., at 72a–74a. Matrixx further —————— 2 At oral argument, counsel for the United States, which submitted an amicus curiae brief in support of respondents, suggested that some of these statements might qualify as nonactionable “puffery.” Tr. of Oral Arg. 51–52. This question is not before us, as Matrixx has not ad­ vanced such an argument. Cite as: 563 U. S. ____ (2011) 5 Opinion of the Court expressed its expectation that revenues would “ ‘be up in excess of 50% and that earnings, per share for the full year [would] be in the 25 to 30 cent range.’ ” Id., at 74a. In January 2004, Matrixx raised its revenue guidance, pre­ dicting an increase in revenues of 80 percent and earnings per share in the 33-to-38-cent range. In its Form 10–Q filed with the SEC in November 2003, Zicam warned of the potential “ ‘material adverse effect’ ” that could result from product liability claims, “ ‘whether or not proven to be valid.’ ” Id., at 75a–76a. It stated that product liability actions could materially affect Matrixx’s “ ‘product branding and goodwill,’ ” leading to reduced customer acceptance.3 Id., at 76a. It did not disclose, however, that two plaintiffs had already sued Matrixx for allegedly causing them to lose their sense of smell. On January 30, 2004, Dow Jones Newswires reported that the Food and Drug Administration (FDA) was “ ‘look­ ing into complaints that an over-the-counter common-cold medicine manufactured by a unit of Matrixx Initiatives, Inc. (MTXX) may be causing some users to lose their sense of smell’ ” in light of at least three product liability law­ suits. Id., at 79a–80a. Matrixx’s stock fell from $13.55 to $11.97 per share after the report. In response, on Febru­ ary 2, Matrixx issued a press release that stated: “All Zicam products are manufactured and mar­ keted according to FDA guidelines for homeopathic medicine. Our primary concern is the health and safety of our customers and the distribution of factual information about our products. Matrixx believes statements alleging that intranasal Zicam products caused anosmia (loss of smell) are completely un­ —————— 3 Respondents also allege that Matrixx falsely reported its financial results in the Form 10–Q by failing to reserve for or disclose potential liability, in violation of Generally Accepted Accounting Principles. The Court of Appeals did not rely on these allegations. 6 MATRIXX INITIATIVES, INC. v. SIRACUSANO Opinion of the Court founded and misleading. “In no clinical trial of intranasal zinc gluconate gel products has there been a single report of lost or di­ minished olfactory function (sense of smell). Rather, the safety and efficacy of zinc gluconate for the treat­ ment of symptoms related to the common cold have been well established in two double-blind, placebo­ controlled, randomized clinical trials. In fact, in nei­ ther study were there any reports of anosmia related to the use of this compound. The overall incidence of adverse events associated with zinc gluconate was ex­ tremely low, with no statistically significant difference between the adverse event rates for the treated and placebo subsets. “A multitude of environmental and biologic influ­ ences are known to affect the sense of smell. Chief among them is the common cold. As a result, the population most likely to use cold remedy products is already at increased risk of developing anosmia. Other common causes of olfactory dysfunction include age, nasal and sinus infections, head trauma, ana­ tomical obstructions, and environmental irritants.” Id., at 77a–78a (internal quotation marks omitted). The day after Matrixx issued this press release, its stock price bounced back to $13.40 per share. On February 6, 2004, the end of the class period, Good Morning America, a nationally broadcast morning news program, highlighted Dr. Jafek’s findings. (The complaint does not allege that Matrixx learned of the news story before its broadcast.) The program reported that Dr. Jafek had discovered more than a dozen patients suffering from anosmia after using Zicam. It also noted that four law­ suits had been filed against Matrixx. The price of Matrixx stock plummeted to $9.94 per share that same day. Zicam again issued a press release largely repeating its February Cite as: 563 U. S. ____ (2011) 7 Opinion of the Court 2 statement. On February 19, 2004, Matrixx filed a Form 8–K with the SEC stating that it had “ ‘convened a two-day meeting of physicians and scientists to review current information on smell disorders’ ” in response to Dr. Jafek’s presenta­ tion. Id., at 82a. According to the Form 8–K, “ ‘In the opinion of the panel, there is insufficient scientific evi­ dence at this time to determine if zinc gluconate, when used as recommended, affects a person’s ability to smell.’ ” Ibid. A few weeks later, a reporter quoted Matrixx as stating that it would begin ...
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Running head: CASE ANALYSIS

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