Supreme Court Rejects Bright Line Test of “Statistical Significance” for Materiality

Kegler Brown Litigation Newsletter

In a unanimous decision authored by Justice Sonia Sotomayor, the Court concluded that the plaintiffs had stated a claim where the defendant failed to disclose reports of adverse events associated with a product, even if the reports did not disclose a statistically significant number of adverse events. The Court held that the materiality of the adverse events could not be reduced to a bright-line test based on statistical significance. Such a bright-line test would "artificially exclude evidence that would otherwise be considered significant to the trading decision of a reasonable investor."

The Court’s opinion went on to say that pharmaceutical manufacturers need not disclose all reports of adverse events. The existence of such adverse events, which can be common occurrences, “says nothing in and of itself about whether the drug is causing the adverse events.” Something more than the “mere existence of reports of adverse events” is necessary, the decision states, but that “something more” is not limited to statistical significance, and can come from the source, content and context of the reports. The question becomes whether a reasonable investor would have viewed the non-disclosed information (i.e., reports of adverse events) “‘as having significantly altered the “total mix” of information made available.’" The Court’s opinion re-emphasized that, absent a duty to speak, silence cannot be the basis of liability under the federal securities laws. Disclosure, according to the Court, is required only when necessary to make previous statements, in the light of the circumstances under which they were made, not misleading. "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." The Court determined that the complaint alleged facts "suggesting a significant risk to commercial viability of Matrixx's leading product," and that such allegations sufficed to “raise a reasonable expectation that discovery will reveal evidence” thereby satisfying the materiality requirement of the federal securities laws.

Finally, the Court considered the requirement under the Private Securities Litigation Reform Act (“PSLRA”) that a plaintiff must “state with particularity facts giving rise to a strong inference that the Defendant acted with the required state of mind.” That state of mind is scienter--that “mental state embracing intent to deceive, manipulate, or defraud.” The Court was to clear to point out that it had NOT and was NOT deciding whether recklessness alone sufficed to fulfill the scienter requirement under the PSLRA. The Court found only that in this case the allegations “‘taken collectively,’ give rise to a “cogent and compelling” inference that Matrixx elected not to disclose the adverse event reports not because it believed they were meaningless but because it understood their likely effect on the market.” Thus, in agreeing with the Court of Appeals that the plaintiffs had adequately pleaded scienter, the Court concluded that a reasonable person would deem the inference that Matrixx acted with deliberate recklessness at least as compelling as any [plausible] opposing inference.