Drug company loses case in argument about not disclosing 'statistically insignificant report'

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Supreme Court has ruled again drug company Mattrixx Initiatives in the Zicam

Cold Remedy case.

The U.S. Supreme Court ruled on Tuesday that a class-action lawsuit by investors

against Matrixx Initiatives can go forward after the company failed to disclose

initial reports of adverse side effects from consumers who used its cold

treatment Zicam.

Frances Twitty | Getty Images

Writing the court's unanimous opinion, Justice Sotomayor ruled that the

investors have stated a sufficient claim under federal securities law for the

lawsuit to proceed.

The investors argued that Matrixx, which has been sold to a private equity firm,

violated federal securities law by failing to disclose by early 2004 as many as

23 reports of people losing their sense of smell after using Zicam.

In 2009, more than 130 reports of the same problem prompted U.S. regulators to

warn Matrixx to stop selling two intranasal forms of Zicam. Matrixx pulled those

versions of Zicam, the company's flagship product, while disputing claims the

product was unsafe.

A federal judge initially dismissed the investor lawsuit, but a U.S. appeals

court concluded the plaintiffs had shown enough of a case that the suit could go

forward. The Supreme Court upheld that ruling.

Matrixx in its appeal to the Supreme Court argued that it did not have to

disclose the initial reports because they were not statistically significant.

Sotomayor rejected that argument as flawed.

On such adverse reports, she said the proper question was whether a reasonable

investor would have viewed the non-disclosed information as having significantly

altered the total mix of information.

She said the lawsuit's allegations, taken together, give rise to a compelling

inference that Matrixx decided not to disclose the reports not because it

believed they were meaningless, but because it understood their likely negative

effect.

Manufacturers of prescription drugs, medical devices and dietary supplements

have supported Matrixx in arguing broad disclosure of early complaints would

cause confusion and harm rather than help investors or consumers.

The Obama administration supported the investors, who argued Matrixx had a duty

to disclose the early cases because the information posed a major threat to its

business.

http://www.cnbc.com/id/42210901