Supreme Court debates what complaints companies must disclose to stockholders

Washington Post Staff Writer
Monday, January 10, 2011; 8:05 PM

Satan made a sustained appearance Monday at the Supreme Court's oral arguments. Not surprisingly, he complicated everything.

The case was about a company's duty to inform stockholders of a problem with its product that would likely cause stock prices to fall. The wide-ranging argument meandered into whether a company had a duty to disclose even irrational complaints, such as whether it was somehow tied to satanism.

The case centers on Matrixx Initiatives, and stockholders allege the company failed to disclose claims that in some users its nasal spray Zicam caused anosmia, the loss of the sense of smell.

When a doctor made such an allegation on ABC's "Good Morning America" on Feb. 6, 2004, the stock price dropped to $9.94 from $13.04.

Stockholders said Matrixx had been warned about such a possibility since 1999, but even after lawsuits were filed the company had issued statements saying such allegations were "completely unfounded and misleading."

Even though the product is now off the market, Matrixx said there was no attempt to deceive investors. The number of complaints about the product was "statistically insignificant" compared with the number of times it was used successfuly, the company said, and thus the information did not have to be disclosed.

"All drug companies receive on an almost daily basis anecdotal hearsay reports about alleged adverse health events following the use of their products," Washington lawyer Jonathan D. Hacker, representing Matrixx, told the court. In this case, there were but a "handful" of cases.

But Justice Ruth Bader Ginsburg said plaintiffs had not discovered more because a federal judge dismissed the case. And several justices took issue with Hacker's declaration that the number of incidents had to be statistically significant before the company had a duty to disclose.

Justice Elena Kagan offered the hypothetical example of a contact lens solution that was fine for hundreds of thousands of users but had caused blindness in 10 people. That would not be statistically significant, Kagan said.

"I'd stop using the product, and if I were holding stock in that company, I would sell the stock," she said.

But the justices struggled to decide what test should govern when a company must disclose information, scientific or not, that might cause a stockholder to reconsider his investment.

Washington lawyer David C. Frederick, representing the stockholders, said the court has decided it is a "mix" of available information that is important, and even the effects of irrational investors should be taken into account.

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