MATRIXX INITIATIVES, INC., ET AL., PETITIONERS
v.
JAMES SIRACUSANO, ET AL.
No. 09-1156.
Supreme Court of United States.
Argued January 10, 2011.
Decided 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 Securities 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 statements
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 conclude that the
materiality of adverse event reports cannot 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 alleged 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 pharmaceutical 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
approximately 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 February 6, 2004.[1] The action
principally arises out of statements 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 consumers
who had lost their sense of smell (a condition called anosmia) after
using Zicam Cold Remedy. Respondents' consolidated amended complaint
alleges the following 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 demonstrated 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 person Linschoten was treating who had lost her sense of smell
after using Zicam. Clarot informed Linschoten that Matrixx had received
similar complaints from other customers. 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 thereafter,
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 participate 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 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 Rhinologic 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 immediately
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 Rhinologic Society.
The following month, two plaintiffs commenced a product 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 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, predicting 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 "`looking 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
lawsuits. Id., at 79a-80a. Matrixx's stock fell from $13.55
to $11.97 per share after the report. In response, on February 2,
Matrixx issued a press release that stated:
"All Zicam products are manufactured and marketed 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 unfounded and misleading.
"In no clinical trial of intranasal zinc gluconate gel
products has there been a single report of lost or diminished olfactory
function (sense of smell). Rather, the safety and efficacy of zinc
gluconate for the treatment of symptoms related to the common cold
have been well established in two double-blind, placebo-controlled,
randomized clinical trials. In fact, in neither 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 extremely
low, with no statistically significant difference between the adverse
event rates for the treated and placebo subsets.
"A multitude of environmental and biologic influences
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, anatomical 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 lawsuits 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 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 presentation. Id., at 82a. According to the
Form 8-K, "`In the opinion of the panel, there is insufficient
scientific evidence 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 conducting "`animal and human studies to further characterize
these post-marketing complaints.'" Id., at 84a.
On the basis of these allegations, respondents claimed that Matrixx
violated §10(b) of the Securities Exchange Act and SEC Rule 10b-5
by making untrue statements of fact and failing to disclose material
facts necessary to make the statements not misleading in an effort
to maintain artificially high prices for Matrixx securities.
B
Matrixx moved to dismiss respondents' complaint, arguing that they
had failed to plead the elements of a material misstatement or omission
and scienter. The District Court granted the motion to dismiss. Relying
on In re Carter-Wallace, Inc., Securities Litigation,
220 F. 3d 36 (CA2 2000), it held that respondents had not alleged
a "statistically significant correlation between the use of
Zicam and anosmia so as to make failure to public[ly] disclose complaints
and the University of Colorado study a material omission." App.
to Pet. for Cert. 50a. The District Court similarly agreed that respondents
had not stated with particularity facts giving rise to a strong inference
of scienter. See 15 U. S. C. A. §78u-4(b)(2)(A) (Feb. 2011 Supp.).
It noted that the complaint failed to allege that Matrixx disbelieved
its statements about Zicam's safety or that any of the defendants
profited or attempted to profit from Matrixx's public statements.
App. to Pet. for Cert. 52a.
The Court of Appeals reversed. 585 F. 3d 1167 (CA9 2009). Noting that "`[t]he
determination [of materiality] requires delicate assessments of the
inferences a "reasonable shareholder" would draw from a
given set of facts and the significance of those inferences to him,'" id., at
1178 (quoting Basic Inc. v. Levinson, 485 U. S. 224, 236 (1988);
some internal quotation marks omitted; alterations in original),
the Court of Appeals held that the District Court had erred in requiring
an allegation of statistical significance to establish materiality.
It concluded, to the contrary, that the complaint adequately alleged "information
regarding the possible link between Zicam and anosmia" that
would have been significant to a reasonable investor. 585 F. 3d,
at 1179, 1180. Turning to scienter, the Court of Appeals concluded
that "[w]ithholding reports of adverse effects of and lawsuits
concerning the product responsible for the company's remarkable sales
increase is `an extreme departure from the standards of ordinary
care,'" giving rise to a strong inference of scienter. Id., at
1183.
We granted certiorari, 560 U. S. ___ (2010), and we now affirm.
II
Section 10(b) of the Securities Exchange Act makes it unlawful for
any person to "use or employ, in connection with the purchase
or sale of any security . . . any manipulative or deceptive device
or contrivance in contravention of such rules and regulations as
the Commission may prescribe as necessary or appropriate in the public
interest or for the protection of investors." 15 U. S. C. §78j(b).
SEC Rule 10b-5 implements this provision by making it unlawful to,
among other things, "make any untrue statement of a material
fact or to omit to state a material fact necessary in order to make
the statements made, in the light of the circumstances under which
they were made, not misleading." 17 CFR §240.10b-5(b). We have
implied a private cause of action from the text and purpose of §10(b).
See Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
551 U. S. 308, 318 (2007).
To prevail on their claim that Matrixx made material misrepresentations
or omissions in violation of §10(b) and Rule 10b-5, respondents must
prove "(1) a material misrepresentation or omission by the defendant;
(2) scienter; (3) a connection between the misrepresentation or omission
and the purchase or sale of a security; (4) reliance upon the misrepresentation
or omission; (5) economic loss; and (6) loss causation." Stoneridge
Investment Partners, LLC v. Scientific-Atlanta, Inc., 552
U. S. 148, 157 (2008). Matrixx contends that respondents have failed
to plead both the element of a material misrepresentation or omission
and the element of scienter because they have not alleged that the
reports received by Matrixx reflected statistically significant evidence
that Zicam caused anosmia. We disagree.
A
We first consider Matrixx's argument that "adverse event reports
that do not reveal a statistically significant increased risk of
adverse events from product use are not material information." Brief
for Petitioners 17 (capitalization omitted).
1
To prevail on a §10(b) claim, a plaintiff must show that the defendant
made a statement that was "misleading as to a material fact." [4] Basic, 485
U. S., at 238. In Basic, we held that this materiality 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 (quoting TSC Industries, Inc. v. Northway, Inc., 426
U. S. 438, 449 (1976)). We were "careful not to set too low
a standard of materiality," for fear that management would "`bury
the shareholders in an avalanche of trivial information.'" 485
U. S., at 231 (quoting TSC Industries, 426 U. S., at 448-449).
Basic involved a claim that the defendant had made misleading
statements denying that it was engaged in merger negotiations when
it was, in fact, conducting preliminary negotiations. See 485 U.
S., at 227-229. The defendant urged a bright-line rule that preliminary
merger negotiations are material only once the parties to the negotiations
reach an agreement in principle. Id., at 232-233. We observed
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. We thus rejected the defendant's proposed rule, explaining that
it would "artificially exclud[e] from the definition of materiality
information concerning merger discussions, which would otherwise
be considered significant to the trading decision of a reasonable
investor." Ibid.
Like the defendant in Basic, Matrixx urges us to adopt a
bright-line rule that reports of adverse events [5]
associated with a pharmaceutical company's products cannot be material
absent a sufficient number of such reports to establish a statistically
significant risk that the product is in fact causing the events.
[6] Absent statistical significance, Matrixx argues,
adverse event reports provide only "anecdotal" evidence
that "the user of a drug experienced an adverse event at some
point during or following the use of that drug." Brief for Petitioners
17. Accordingly, it contends, reasonable investors would not consider
such reports relevant unless they are statistically significant because
only then do they "reflect a scientifically reliable basis for
inferring a potential causal link between product use and the adverse
event." Id., at 32.
As in Basic, Matrixx's categorical rule would "artificially
exclud[e]" information that "would otherwise be considered
significant to the trading decision of a reasonable investor." 485
U. S., at 236. Matrixx's argument rests on the premise that statistical
significance is the only reliable indication of causation. This premise
is flawed: As the SEC points out, "medical researchers . . .
consider multiple factors in assessing causation." Brief for
United States as Amicus Curiae 12. Statistically significant
data are not always available. For example, when an adverse event
is subtle or rare, "an inability to obtain a data set of appropriate
quality or quantity may preclude a finding of statistical significance." Id., at
15; see also Brief for Medical Researchers as Amici Curiae 11.
Moreover, ethical considerations may prohibit researchers from conducting
randomized clinical trials to confirm a suspected causal link for
the purpose of obtaining statistically significant data. See id., at
10-11.
A lack of statistically significant data does not mean that medical
experts have no reliable basis for inferring a causal link between
a drug and adverse events. As Matrixx itself concedes, medical experts
rely on other evidence to establish an inference of causation. See
Brief for Petitioners 44-45, n. 22. [7] We note
that courts frequently permit expert testimony on causation based
on evidence other than statistical significance. See, e.g., Best v. Lowe's
Home Centers, Inc., 563 F. 3d 171, 178 (CA6 2009); Westberry v. Gislaved
Gummi AB, 178 F. 3d 257, 263-264 (CA4 1999) (citing cases); Wells v. Ortho
Pharmaceutical Corp., 788 F. 2d 741, 744-745 (CA11 1986). We
need not consider whether the expert testimony was properly admitted
in those cases, and we do not attempt to define here what constitutes
reliable evidence of causation. It suffices to note that, as these
courts have recognized, "medical professionals and researchers
do not limit the data they consider to the results of randomized
clinical trials or to statistically significant evidence." Brief
for Medical Researchers as Amici Curiae 31.
The FDA similarly does not limit the evidence it considers for purposes
of assessing causation and taking regulatory action to statistically
significant data. In assessing the safety risk posed by a product,
the FDA considers factors such as "strength of the association," "temporal
relationship of product use and the event," "consistency
of findings across available data sources," "evidence of
a dose-response for the effect," "biologic plausibility," "seriousness
of the event relative to the disease being treated," "potential
to mitigate the risk in the population," "feasibility of
further study using observational or controlled clinical study designs," and "degree
of benefit the product provides, including availability of other
therapies." [8] FDA, Guidance for Industry:
Good Pharmacovigilance Practices and Pharmacoepidemiologic Assessment
18 (2005) (capitalization omitted), http://www.fda.gov/downloads/
RegulatingInformation/Guidances/UCM126834.pdf (all Internet materials
as visited Mar. 17, 2011, and available in Clerk of Court's case
file); see also Brief for United States as Amicus Curiae 19-20
(same); FDA, The Clinical Impact of Adverse Event Reporting 6 (1996)
(similar), http://www.fda.gov/downloads/safety/MedWatch/UCM1685
05.pdf. It "does not apply any single metric for determining
when additional inquiry or action is necessary, and it certainly
does not insist upon `statistical significance.'" Brief for
United States as Amicus Curiae 19.
Not only does the FDA rely on a wide range of evidence of causation,
it sometimes acts on the basis of evidence that suggests, but does
not prove, causation. For example, the FDA requires manufacturers
of over-the-counter drugs to revise their labeling "to include
a warning as soon as there is reasonable evidence of an association
of a serious hazard with a drug; a causal relationship need not have
been proved." 21 CFR §201.80(e). More generally, the FDA may
make regulatory decisions against drugs based on postmarketing evidence
that gives rise to only a suspicion of causation. See FDA, The Clinical
Impact of Adverse Event Reporting, supra, at 7 ("[A]chieving
certain proof of causality through postmarketing surveillance is
unusual. Attaining a prominent degree of suspicion is much more likely,
and may be considered a sufficient basis for regulatory decisions" (footnote
omitted)). [9]
This case proves the point. In 2009, the FDA issued a warning letter
to Matrixx stating that "[a] significant and growing body of
evidence substantiates that the Zicam Cold Remedy intranasal products
may pose a serious risk to consumers who use them." App. 270a.
The letter cited as evidence 130 reports of anosmia the FDA had received,
the fact that the FDA had received few reports of anosmia associated
with other intranasal cold remedies, and "evidence in the published
scientific literature that various salts of zinc can damage olfactory
function in animals and humans." Ibid. It did not cite
statistically significant data.
Given that medical professionals and regulators act on the basis of
evidence of causation that is not statistically significant, it stands
to reason that in certain cases reasonable investors would as well.
As Matrixx acknowledges, adverse event reports "appear in many
forms, including direct complaints by users to manufacturers, reports
by doctors about reported or observed patient reactions, more detailed
case reports published by doctors in medical journals, or larger
scale published clinical studies." Brief for Petitioners 17.
As a result, assessing the materiality of adverse event reports is
a "fact-specific" inquiry, Basic, 485 U. S.,
at 236, that requires consideration of the source, content, and context
of the reports. This is not to say that statistical significance
(or the lack thereof) is irrelevant—only that it is not dispositive
of every case.
Application of Basic's "total mix" standard does
not mean that pharmaceutical manufacturers must disclose all reports
of adverse events. Adverse event reports are daily events in the
pharmaceutical industry; in 2009, the FDA entered nearly 500,000
such reports into its reporting system, see FDA, Reports Received
and Reports Entered in AERS by Year (as of Mar. 31, 2010), http://www.fda.gov/Drugs/GuidanceComplianceRegulatory
Information/Surveillance/AdverseDrugEffects/ucm070434. htm. The
fact that a user of a drug has suffered an adverse event, standing
alone, does not mean that the drug caused that event. See FDA, Annual
Adverse Drug Experience Report: 1996, p. 2 (1997), http://drugand
devicelaw.net/Annual%20Adverse%20Drug%20Experience %20Report%'96.pdf.
The question remains whether a reasonable investor would
have viewed the nondisclosed information "`as having significantly altered
the "total mix" of information made available.'" Basic, 485
U. S., at 232 (quoting TSC Industries, 426 U. S., at 449;
emphasis added). For the reasons just stated, the mere existence
of reports of adverse events—which says nothing in and of itself
about whether the drug is causing the adverse events—will not satisfy
this standard. Something more is needed, but that something more
is not limited to statistical significance and can come from "the
source, content, and context of the reports," supra, at
15. This contextual inquiry may reveal in some cases that reasonable
investors would have viewed reports of adverse events as material
even though the reports did not provide statistically significant
evidence of a causal link. [10]
Moreover, it bears emphasis that §10(b) and Rule 10b-5(b) do not create
an affirmative duty to disclose any and all material information.
Disclosure is required under these provisions only when necessary "to
make . . . statements made, in the light of the circumstances under
which they were made, not misleading. 17 CFR §240.10b-5(b); see also Basic, 485
U. S., at 239, n. 17 ("Silence, absent a duty to disclose, is
not misleading under Rule 10b-5"). Even with respect to information
that a reasonable investor might consider material, companies can
control what they have to disclose under these provisions by controlling
what they say to the market.
2
Applying Basic's "total mix" standard in this case,
we conclude that respondents have adequately pleaded materiality.
This is not a case about a handful of anecdotal reports, as Matrixx
suggests. Assuming the complaint's allegations to be true, as we
must, Matrixx received information that plausibly indicated a reliable
causal link between Zicam and anosmia. That information included
reports from three medical professionals and researchers about more
than 10 patients who had lost their sense of smell after using Zicam.
Clarot told Linschoten that Matrixx had received additional reports
of anosmia. (In addition, during the class period, nine plaintiffs
commenced four product liability lawsuits against Matrixx alleging
a causal link between Zicam use and anosmia.) [11]
Further, Matrixx knew that Linschoten and Dr. Jafek had presented
their findings about a causal link between Zicam and anosmia to a
national medical conference devoted to treatment of diseases of the
nose. [12] Their presentation described a patient
who experienced severe burning in his nose, followed immediately
by a loss of smell, after using Zicam—suggesting a temporal relationship
between Zicam use and anosmia.
Critically, both Dr. Hirsch and Linschoten had also drawn Matrixx's
attention to previous studies that had demonstrated a biological
causal link between intranasal application of zinc and anosmia. [13]
Before his conversation with Linschoten, Clarot, Matrixx's vice president
of research and development, was seemingly unaware of these studies,
and the complaint suggests that, as of the class period, Matrixx
had not conducted any research of its own relating to anosmia. See, e.g., App.
84a (referencing a press report, issued after the end of the class
period, noting that Matrixx said it would begin conducting "`animal
and human studies to further characterize these post-marketing complaints'").
Accordingly, it can reasonably be inferred from the complaint that
Matrixx had no basis for rejecting Dr. Jafek's findings out of hand.
We believe that these 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 (2007), and to "allo[w] the court to draw the
reasonable inference that the defendant is liable for the misconduct
alleged," Iqbal, 556 U. S., at ___ (slip op., at 14).
The information provided to Matrixx by medical experts revealed a
plausible causal relationship between Zicam Cold Remedy and anosmia.
Consumers likely would have viewed the risk associated with Zicam
(possible loss of smell) as substantially outweighing the benefit
of using the product (alleviating cold symptoms), particularly in
light of the existence of many alternative products on the market.
Importantly, Zicam Cold Remedy allegedly accounted for 70 percent
of Matrixx's sales. Viewing the allegations of the complaint as a
whole, the complaint alleges facts suggesting a significant risk
to the commercial viability of Matrixx's leading product.
It is substantially likely that a reasonable investor would have viewed
this information "`as having significantly altered the "total
mix" of information made available.'" Basic, 485
U. S., at 232 (quoting TSC Industries, 426 U. S., at 449).
Matrixx told the market that revenues were going to rise 50 and then
80 percent. Assuming the complaint's allegations to be true, however,
Matrixx had information indicating a significant risk to its leading
revenue-generating product. Matrixx also stated that reports indicating
that Zicam caused anosmia were "`completely unfounded and misleading'" and
that "`the safety and efficacy of zinc gluconate for the treatment
of symptoms related to the common cold have been well established.'" App.
77a-78a. Importantly, however, Matrixx had evidence of a biological
link between Zicam's key ingredient and anosmia, and it had not conducted
any studies of its own to disprove that link. In fact, as Matrixx
later revealed, the scientific evidence at that time was "`insufficient
. . . to determine if zinc gluconate, when used as recommended, affects
a person's ability to smell.'" Id., at 82a.
Assuming the facts to be true, these were material facts "necessary
in order to make the statements made, in the light of the circumstances
under which they were made, not misleading." 17 CFR §240.10b-5(b).
We therefore affirm the Court of Appeals' holding that respondents
adequately pleaded the element of a material misrepresentation or
omission.
B
Matrixx also argues that respondents failed to allege facts plausibly
suggesting that it acted with the required level of scienter. "To
establish liability under §10(b) and Rule 10b-5, a private plaintiff
must prove that the defendant acted with scienter, `a mental state
embracing intent to deceive, manipulate, or defraud.'" Tellabs, 551
U. S., at 319 (quoting Ernst & Ernst v. Hochfelder, 425
U. S. 185, 193-194, and n. 12 (1976)). We have not decided whether
recklessness suffices to fulfill the scienter requirement. See Tellabs, 551
U. S., at 319, n. 3. Because Matrixx does not challenge the Court
of Appeals' holding that the scienter requirement may be satisfied
by a showing of "deliberate recklessness," see 585 F. 3d,
at 1180 (internal quotation marks omitted), we assume, without deciding,
that the standard applied by the Court of Appeals is sufficient to
establish scienter. [14]
Under the PSLRA, a plaintiff must "state with particularity facts
giving rise to a strong inference that the defendant acted with the
required state of mind." 15 U. S. C. A. §78u-4(b)(2)(A) (Feb.
2011 Supp.). This standard requires courts to take into account "plausible
opposing inferences." Tellabs, 551 U. S., at 323. A
complaint adequately pleads scienter under the PSLRA "only if
a reasonable person would deem the inference of scienter cogent and
at least as compelling as any opposing inference one could draw from
the facts alleged." Id., at 324. In making this determination,
the court must review "all the allegations holistically." Id., at
326. The absence of a motive allegation, though relevant, is not
dispositive. Id., at 325.
Matrixx argues, in summary fashion, that because respondents do not
allege that it knew of statistically significant evidence of causation,
there is no basis to consider the inference that it acted recklessly
or knowingly to be at least as compelling as the alternative inferences. "Rather," it
argues, "the most obvious inference is that petitioners did
not disclose the [reports] simply because petitioners believed they
were far too few... to indicate anything meaningful about adverse
reactions to use of Zicam." Brief for Petitioners 49. Matrixx's
proposed bright-line rule requiring an allegation of statistical
significance to establish a strong inference of scienter is just
as flawed as its approach to materiality.
The inference that Matrixx acted recklessly (or intentionally, for
that matter) is at least as compelling, if not more compelling, than
the inference that it simply thought the reports did not indicate
anything meaningful about adverse reactions. According to the complaint,
Matrixx was sufficiently concerned about the information it received
that it informed Linschoten that it had hired a consultant to review
the product, asked Linschoten to participate in animal studies, and
convened a panel of physicians and scientists in response to Dr.
Jafek's presentation. It successfully prevented Dr. Jafek from using
Zicam's name in his presentation on the ground that he needed Matrixx's
permission to do so. Most significantly, Matrixx issued a press release
that suggested that studies had confirmed that Zicam does not cause
anosmia when, in fact, it had not conducted any studies relating
to anosmia and the scientific evidence at that time, according to
the panel of scientists, was insufficient to determine whether Zicam
did or did not cause anosmia. [15]
These allegations, "taken collectively," give rise to a "cogent
and compelling" inference that Matrixx elected not to disclose
the reports of adverse events not because it believed they were meaningless
but because it understood their likely effect on the market. Tellabs, 551
U. S., at 323, 324. "[A] reasonable person" would deem
the inference that Matrixx acted with deliberate recklessness (or
even intent) "at least as compelling as any opposing inference
one could draw from the facts alleged." Id., at 324.
We conclude, in agreement with the Court of Appeals, that respondents
have adequately pleaded scienter. Whether respondents can ultimately
prove their allegations and establish scienter is an altogether different
question.
* * *
For the reasons stated, the judgment of the Court of Appeals for the
Ninth Circuit is
Affirmed.
-
According to the complaint, Matrixx securities
were traded on the NASDAQ National Market. App. 99a.
-
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 advanced
such an argument.
-
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.
-
Under the Private Securities Litigation
Reform Act of 1995 (PSLRA), when a plaintiff's claim is based
on alleged misrepresentations or omissions of a material fact, "the
complaint shall specify each statement alleged to have been misleading,
[and] the reason or reasons why the statement is misleading." 15
U. S. C. §78u-4(b)(1).
-
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." 21
CFR §314.80(a) (2010). Federal law imposes certain obligations
on pharmaceutical manufacturers to report adverse events to the
FDA. During the class period, manufacturers of over-the-counter
drugs such as Zicam Cold Remedy had no obligation to report adverse
events to the FDA. In 2006, Congress enacted legislation to require
manufacturers of over-the-counter drugs to report any "serious
adverse event" to the FDA within 15 business days. See 21
U. S. C. §§379aa(b), (c).
-
"A study that is statistically significant
has results that are unlikely to be the result of random error
. . . ." Federal Judicial Center, Reference Manual on Scientific
Evidence 354 (2d ed. 2000). To test for significance, a researcher
develops a "null hypothesis"—e.g., the assertion
that there is no relationship between Zicam use and anosmia.
See id., at 122. The researcher then calculates the
probability of obtaining the observed data (or more extreme data)
if the null hypothesis is true (called the p-value). Ibid. Small p-values
are evidence that the null hypothesis is incorrect. See ibid. Finally,
the researcher compares the p-value to a preselected
value called the significance level. Id., at 123. If
the p-value is below the preselected value, the difference
is deemed "significant." Id., at 124.
-
Matrixx and its amici list as
relevant factors the strength of the association between the
drug and the adverse effects; a temporal relationship between
exposure and the adverse event; consistency across studies; biological
plausibility; consideration of alternative explanations; specificity
(i.e., whether the specific chemical is associated with
the specific disease); the dose-response relationship; and the
clinical and pathological characteristics of the event. Brief
for Petitioners 44-45, n. 22; Brief for Consumer Healthcare Products
Assn. et al. as Amici Curiae 12-13. These factors are
similar to the factors the FDA considers in taking action against
pharmaceutical products. See infra, at 13-14.
-
See also n. 7, supra.
-
See also GAO, M. Crosse et al., Drug Safety:
Improvement Needed in FDA's Postmarket Decision-making and Oversight
Process 7 (GAO-06-402, 2006) ("If FDA has information that
a drug on the market may pose a significant health risk to consumers,
it weighs the effect of the adverse events against the benefit
of the drug to determine what actions, if any, are warranted.
This decision-making process is complex and encompasses many
factors, such as the medical importance and utility of the drug,
the drug's extent of usage, the severity of the disease being
treated, the drug's efficacy in treating this disease, and the
availability of other drugs to treat the same disorder"),
http://www.gao.gov/new.items/d06402.pdf; Federal Judicial Center, supra n.
6, at 33 ("[R]isk assessors may pay heed to any evidence
that points to a need for caution, rather than assess the likelihood
that a causal relationship in a specific case is more likely
than not").
-
We note that our conclusion accords
with views of the SEC, as expressed in an amicus curiae brief
filed in this case. See Brief for United States as Amicus
Curiae 11-12; see also TSC Industries, Inc. v. Northway,
Inc., 426 U. S. 438, 449, n. 10 (1976) ("[T]he SEC's
view of the proper balance between the need to insure adequate
disclosure and the need to avoid the adverse consequences of
setting too low a threshold for civil liability is entitled to
consideration").
-
It is unclear whether these plaintiffs
were the same individuals whose symptoms were reported by the
medical professionals.
-
Matrixx contends that Dr. Jafek and
Linschoten's study was not reliable because they did not sufficiently
rule out the common cold as a cause for their patients' anosmia.
We note that the complaint alleges that, in one instance, a consumer
who did not have a cold lost his sense of smell after using Zicam.
More importantly, to survive a motion to dismiss, respondents
need only allege "enough facts to state a claim to relief
that is plausible on its face." Bell Atlantic Corp. v. Twombly, 550
U. S. 544, 570 (2007). For all the reasons we state in the opinion,
respondents' allegations plausibly suggest that Dr. Jafek and
Linschoten's conclusions were based on reliable evidence of a
causal link between Zicam and anosmia.
-
Matrixx contends that these studies
are not reliable evidence of causation because the studies used
zinc sulfate, whereas the active ingredient in Matrixx is zinc
gluconate. Respondents' complaint, however, alleges that the
studies confirmed the toxicity of "zinc." App. 68a.
Matrixx further contends that studies relating to fish cannot
reliably prove causation with respect to humans. The complaint
references several studies, however, only one of which involved
fish. In any event, the existence of the studies suggests a plausible
biological link between zinc and anosmia, which, in combination
with the other allegations, is sufficient to survive a motion
to dismiss.
-
Under the PSLRA, if the alleged misstatement
or omission is a "forward-looking statement," the
required level of scienter is "actual knowledge." 15
U. S. C. §78u-5(c)(1)(B). Matrixx has not argued that the statements
or omissions here are "forward-looking statement[s]."
-
One of Matrixx's amici argues
that "the most cogent inference regarding Matrixx's state
of mind is that it delayed releasing information regarding anosmia
complaints in order to provide itself an opportunity to carefully
review all evidence regarding any link between Zicam and anosmia." Brief
for Washington Legal Foundation as Amicus Curiae 26.
We do not doubt that this may be the most cogent inference in
some cases. Here, however, the misleading nature of Matrixx's
press release is sufficient to render the inference of scienter
at least as compelling as the inference suggested by amicus.