• Kirk Hartley

U.S. Supreme Court Approves Securities Fraud Claims for Failing to Disclose Information on Possible

Wow – I took a few days off for spring break with my daughters, and now return to find the US Supreme Court recognizing that product defect information may be important to investors. In this post, SCOTUS blog provided the gist of the story as follows:

"In Matrixx Initiatives, Inc. v. Siracusano, the Court held that a drug company’s investors, when suing for securities fraud, may rely on the company’s failure to disclose reports regarding the adverse effects of one of its drugs, even when the number of reports is not statistically significant. The WSJ Law Blog describes the unanimous decision as a “rare win” for securities-fraud plaintiffs. Indeed, Adam Liptak of the New York Times reports that the decision may be especially frustrating for businesses because it “reject[ed] the proposed categorical rule in favor of a contextual inquiry,” “provid[ing] only limited guidance to companies and lower courts.” NPR, the Christian Science Monitor, USA Today, JURIST, ABA Journal, and Bloomberg all have additional coverage of the decision."

The implications will take some time to fully show themselves, but one can hope his opinion foments significant and positive changes in disclosures for and thinking about product defects and risks. One can reasonably expect public companies to modify their approaches to annual report disclosures, 10Ks, 8Ks and press releases. Over time, one might also see spin-offs of or "going private" transactions for business units or entities selling toxins, or suspected toxins.

For a mental exercise, suppose you are the Chief Science Officer of Chemical Co. Suppose you sell XYZ chemical, and have issued annual reports that predict brisk sales and do not mention XYZ causing cancer. Suppose also that XYZ chemical is the subject of a new article in Nature (a prestigious and reputable science journal) which concludes that inhaling XYZ chemical changes epigenomes or alters cell signaling pathways, thus promoting or "causing" cancer. Or, suppose IARC or EPA issue papers finding that XYZ chemical "causes cancer." (For a not so hypothetical example, consider the findings mentioned in this recent post on formaldehyde.)

Now change the facts. What do you disclose to investors if you’ve previously said the product is safe, or have not addressed the topic at all?

The opinion also is especially interesting because of its discussion of a broad range of potentially material sources of information about product dangers:

"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 Prac- tices and Pharmacoepidemiologic Assessment 18 (2005)(capitalization omitted), http://www.fda.gov/downloads/ Regulating Information/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 Im- pact of Adverse Event Reporting (1996) (similar),http://www.fda.gov/downloads/safety/MedWatch/UCM168505.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 post marketing 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 post marketing 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)).

Companies, however, do not face a disclosure issue all the time. Instead, according to the Court:

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.


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