Cadwalader Clients & Friends Memo: In Matrixx Decision the Supreme Court Rejects Bright-Line Materiality Test for Motions to Dismiss Securities Fraud Claims

Cadwalader Clients & Friends Memo: In Matrixx Decision the Supreme Court Rejects Bright-Line Materiality Test for Motions to Dismiss Securities Fraud Claims

On March 22, 2011, the United States Supreme Court, in a unanimous decision written by Justice Sonia Sotomayor, stated that the "materiality" element of a claim for securities fraud under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, "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,'" and held that materiality "cannot be reduced to a bright-line rule." The Court ruled that on a motion to dismiss, a court must assess - on a case by case basis - the totality of available information and not focus solely on the presence or absence of a single type of information.

Background

In Matrixx, plaintiffs alleged that Matrixx Initiatives, Inc. ("Matrixx") and three of its executives violated Section 10(b) by failing to disclose adverse event reports regarding a potential link between Matrixx's leading product, its over-the-counter cold remedy Zicam, and anosmia (loss of the sense of smell). "The FDA defines an '[a]dverse drug experience' as '[a]ny adverse event associated with the use of a drug in humans, whether or not considered drug related.'" Plaintiffs alleged that Matrixx's positive statements during the class period relating to Zicam's safety and the company's anticipated increases in revenues were misleading in light of reports that more than ten patients had lost their sense of smell after using Zicam. Defendants moved to dismiss the complaint, arguing that plaintiffs failed to plead adequately a material misrepresentation or omission and scienter. The United States District Court for the District of Arizona granted the motion to dismiss, holding that the adverse event reports were not material because plaintiffs did not allege that they demonstrated a statistically significant causal connection between the use of Zicam and anosmia. The Ninth Circuit reversed, holding that the district court had erred in requiring plaintiffs to allege statistical significance to establish materiality. The defendants filed a petition for certiorari, which the Supreme Court granted. [footnotes omitted; available in full article]

Please click on the Attachment: link at the top of the post to view or download the entire article