January 10, 2011

Matrixx Argued

Oral argument took place in the Matrixx case this morning. The case addresses the issue of materiality, in particular whether adverse event reports (i.e., reports by users of a drug that they experienced an adverse event after using the drug) are material information even if they are not statistically significant. Also, there was a lot of talk about Satan. Seriously.

A few highlights (based on the transcript):

(1) Petitioner (Matrixx) argued that the key issue is whether the plaintiff has plead facts from which "you can draw a reliable inference that the product is the cause" of the adverse events. In the case of adverse event reports, that reliable inference exists if the adverse event reports are statistically significant. The justices were aggressively skeptical of that position right from the outset. First, a number of justices (Sotomayor, Kennedy, Ginsburg, Scalia, Roberts) wondered if the real issue is whether the company knew about information that could affect its stock price, even if that information was not credible. Second, Justices Kagan and Breyer disagreed that a reasonable investor would only want to know about adverse effects that were statistically significant. As Justice Breyer put it - "look, Albert Einstein had the theory of relativity without any empirical evidence . . . So I can't see how we can say this statistical evidence always works or always doesn't work."

(2) Respondent (investors) had a somewhat easier time, with Justice Breyer even inviting counsel to draft a disclosure rule for drug companies. Counsel responded that he would start with the "total mix of information" test for materiality and "where there is credible medical professionals describing the harms based on credible scientific theories to back up the link, a very serious health effect risk for products with many substitutes, and the effect in on a predominant line, then the company ought to disclose that information."

(3) The argument took a bit of a turn for Respondent, however, when counsel stated that even irrational information - such as a group of people believing that a product "has some link to satanic influences" - might need to be disclosed. Chief Justice Roberts wondered how companies could determine what should be disclosed under that standard and asked if it would matter whether the "product has particular satanic susceptibility"? In response to Respondent's argument that the scienter requirement might limit a company's liability for failing to disclose material, yet irrational, information, Justice Scalia noted that there was no difference between scienter and materiality in that "scienter is withholding something that is material that is known to be material and once . . . Satan is material, if the company thinks Satan is involved here, it has to put it in its report."

All of the briefs and other background materials can be found here. Bloomberg and the Washington Post have coverage of the argument.

Disclosure: The author of The 10b-5 Daily submitted an amicus brief on behalf SIFMA and the U.S. Chamber of Commerce in support of petitioner.

Posted by Lyle Roberts at January 10, 2011 11:33 PM | TrackBack
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