“What do you think about Satan?” Justice Scalia asked a lawyer for the government, who was just starting his argument.
The case, Matrixx Initiatives v. Siracusano, No. 09-1156, was a class action against Matrixx Initiatives, an Arizona company accused of committing securities fraud by failing to tell investors of reports that its main product, a nasal spray and gel called Zicam, might have caused some users to lose their sense of smell. The condition is known as anosmia.
After a link between Zicam and anosmia was reported on “Good Morning America” in 2004, the company’s stock dropped 24 percent. In 2009, the Food and Drug Administration warned consumers not to use the products, which had been sold as over-the-counter homeopathic medicines, and Matrixx recalled them.
Satan came into the case by way of analogy. Matrixx contended that it should not have been required to disclose small numbers of unreliable reports of adverse effects, which were all it said were available in 2004.
“For years many consumers would not purchase products from Procter & Gamble because of a ridiculous rumor that the company was Satanic,” Matrixx said in a recent brief. “But no decision of this court bases securities-law disclosure obligations on how ignorant or paranoid people might react to unreliable or even false information.”
The Supreme Court has said that companies may be sued under the securities law for making statements that omit material information, and it has defined material information as the sort of thing that reasonable investors would believe significantly alters the “total mix” of available information.
Much of the argument revolved around whether reasonable investors would want to know about false and outlandish assertions like the one about Satanism so long as the assertions might affect the price of securities.
“A reasonable investor is going to worry about the fact that thousands of unreasonable investors are going to dump their Matrixx stock,” Chief Justice John G. Roberts said.
Justice Scalia disagreed. “It seems to me ridiculous to hold companies to irrational standards,” he said.
Though the justices were divided about how to handle reports of Satanism and the like, Matrixx did not appear to get much traction for its main argument — that a failure to disclose reports of adverse effects should give rise to securities fraud liability only if the reports were collectively statistically significant.
It said the plaintiffs had found at most 23 reports of anosmia before the “Good Morning America” report, and it added that anosmia can have many causes.
“All drug companies receive on an almost daily basis anecdotal hearsay reports about alleged adverse health events following the use of their products,” Jonathan Hacker, a lawyer for Matrixx, told the justices.
But the justices appeared almost uniformly skeptical of imposing a requirement of statistical significance, particularly at the very outset of a case.
Justice Elena Kagan said that the F.D.A. itself did not use that standard, and she added that she could imagine situations in which small numbers of reports of serious harm would meet the securities laws’ requirement of materiality.
Imagine, she said, that a drug company sold a single product, a new contact lens solution that hundreds of thousands of people had used without incident. But 10 went blind, and three who used it in only one eye went blind in that eye.
“There is no way that anybody would tell that you these 10 cases are statistically significant,” Justice Kagan said.
Nonetheless, she asked Mr. Hacker, “would you stop using that product and would a reasonable investor want to know about those 10 cases?” He said no.
Justice Kagan responded that “there are a lot of contact lens solutions in the world.”
“I’d stop using the product,” she said, “and if I were holding stock in that company, I would sell the stock.”
Pratik A. Shah, the government lawyer asked about rumors of Satanism by Justice Scalia, said there were circumstances in which a company should have to disclose such rumors.
Investors would almost certainly think it material to know, he said, for instance, “however ridiculous it is and untrue it is, that 10 percent of our consumer base has decided to boycott our products.”
Justice Scalia pressed the point.
“So the government’s position is that reports of adverse effects that have no scientific basis, so long as they would affect, irrationally, consumers, have to be disclosed?” he asked. Mr. Shah said yes, if the company had made affirmative statements about the subjects at issue. Matrixx had called attributing anosmia to Zicam “completely unfounded and misleading.”
Justice Scalia summarized the discussion near the end of the argument in the case.
“If Satan comes in,” he said, “surely lousy science comes in as well.”