Opinion analysis: Chalk one up for the Ninth Circuit

By Ronald Mann
on Mar 24, 2011 at 7:10 am

After a long string of rebukes from the Court, the Ninth Circuit finally got an affirmance on Tuesday, in Matrixx Initiatives, Inc. v. Siracusano, No. 09-1156.  This case involves a securities class action under Rule 10b-5.  The plaintiffs (including Siracusano) allege that Matrixx made materially misleading statements about its product Zicam Cold Remedy, when it failed to disclose reports that some users of Zicam lost their sense of smell.  Rejecting a contrary decision from the Second Circuit, the Ninth Circuit held that scattered reports of customer incidents could be material even if they did not involve statistically significant findings.  Justice Sotomayor wrote for a unanimous Court, affirming the Ninth Circuit’s decision in a brief, almost cursory, opinion.

You would not have expected the Ninth Circuit’s first victory in so many months to come in a pro-plaintiff securities-law case in which it intentionally created a conflict with the Second Circuit. And the drug company’s brief does a skillful job of defending what the Ninth Circuit has done.  The major theme of the brief is predictability and certainty: pharmaceutical companies get thousands (if not tens of thousands) of reports each year of possible adverse incidents related to their pharmaceuticals.  Given the number of users of Zicam the number of incidents alleged in the complaint is fairly characterized as minuscule.  How, the drug company asks, are pharmaceutical companies (or manufacturers more broadly) supposed to guess whether some trivial level of complaints must be blown up into a major problem that requires formal disclosure? From that premise, the drug company argues for a Daubert-like bright-line rule that anecdotal incidents that do not rise to the level of statistical significance can never be material.

But Justice Sotomayor’s is having none of this.  Her biggest objection to the drug company’s proposed bright-line rule is that the FDA (represented by the Solicitor General, which appeared as an amicus in support of the plaintiffs) has never limited itself to statistically significant data for purposes of assessing causation.  Referring repeatedly to the Solicitor General’s filing, the Court emphasized that the FDA “does not apply any single metric for determining when additional inquiry or action is necessary, and it certainly does not insist upon ‘statistical significance.’” There is a notable parallel here to Global Tech, No 10-6 (argued in February; still under submission), where the Justices (at least at argument) appeared conspicuously unimpressed by the proposed bright-line rule that inducement of patent infringement can never be “activ[e]” unless the defendant has actual knowledge of the patent in question.

Having rejected that bright-line contention, the Court then turned to the adequacy of the allegations to withstand a motion to dismiss.  Given the difficulty lower courts have had applying the Court’s recent decisions in Bell Atlantic v. Twombly (2007) and Ashcroft v. Iqbal (2009), this part of the opinion doubtless will end up being read (and cited) much more commonly than the earlier portion.  Most importantly, the Court’s analysis buttresses the perspective that Iqbal does not signal a major shift in the Court’s approach to motions to dismiss; in large part the decision turns on the unusually implausible allegations presented in that case.  Here, the Court recounts one after another of Matrixx’s lucid reasons for doubting the truth of the plaintiffs’ allegations, and responds, time and again, that the allegations are adequate because they are plausible.  (Indeed, the Court uses some form of the word “plausible” seven times in the span of four pages.)

The final section of the opinion takes a similar approach to allegations that plaintiffs failed adequately to allege scienter (the relevant state of mind under Rule 10b-5).  Responding to congressional legislation establishing a heightened pleading standard for securities class actions, the Court – in Tellabs v. Makor Rights & Issues (2007) – a previously had concluded that a complaint was adequate only if “a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw.”  Here, the Court’s affirmance of the complaint as adequate provides a conspicuous roadmap for a trial court that wants to apply this test with laxity.  The absence of any direct evidence that Matrixx believed there was a relationship between Zicam and the consumer complaints made a variety of non-malicious inferences plausible.  The Court’s cursory determination that none of them were more compelling than the malicious inference on which the plaintiffs rely signals how easily that pleading standard can be satisfied.

In the end, then, the opinion in this case is more likely to stand for its generous review of allegations in complaints than it is to make any important contribution to the substance of securities law.