Matrixx Initiatives, Inc. is a pharmaceutical company that sells an over-the-counter cold remedy through its wholly owned subsidiary Zicam LLC. Between 1999 and 2003, Matrixx received several complaints from physicians and Zicam consumers alleging a connection between the use of Matrixx's leading product, Zicam Cold Remedy, and loss of smell (anosmia). Even after being notified of an American Rhinologic Society presentation that described eleven Zicam users who lost their sense of smell after using the product, Matrixx made announcements that Zicam was "poised for growth in the upcoming cough and cold season" and that the company expected that revenues would "be up in excess of 50% and that earnings, per share for the full year [would] be in the 25 to 30 cent range." In an SEC report, Zicam reported the potential "material adverse effect" that could result from consumer complaints of anosmia but did not disclose that two consumers had already sued.
In early 2004, Matrixx's stock price fell by about 22% when Dow Jones Newswires reported that, in light of at least three lawsuits, the Food and Drug Administration was investigating complaints that Zicam may have caused some users to lose their sense of smell.
Matrixx revived its stock price with a press release stating that there had been no reports of loss of smell in clinical trials of Zicam and that anosmia can result from the common cold. The stock price fell again when Good Morning America reported that more than a dozen Zicam users had lost their sense of smell. Matrixx reported to the SEC that, after meeting with "physicians and scientists to review current information on smell disorders," it concluded that "there is insufficient scientific evidence at this time to determine if [Zicam], when used as recommended, affects a person's ability to smell." A few weeks later, Matrixx stated that it would begin "animal and human studies to further characterize these postmarketing complaints." Shareholders brought a class action against Matrixx alleging that it violated SEC Rule 10b-5 and section 10(b) of the 1934 Act when it made misleading statements that failed to disclose reports of the possible link between Zicam and anosmia in an effort to maintain artificially high prices for Matrixx securities.
Matrixx argued that the adverse event reports were not material information, as no statistically significant relationship was shown between reports of anosmia and use of the Zicam product. Plaintiffs countered that materiality should be determined by the "total mix of information" test.
Did Matrixx have a legal obligation to disclose information about possible side effects of its drug when there was no statistical information that linked use of the drug with the side effects? What types of information will the court review to determine whether using the drug causes the side effect? What standard will the court apply to address evidence of the claim? Have the plaintiffs stated a valid claim under Rule 10b–5 and section 10(b), or will the court grant Matrixx’s motion to dismiss? Did Matrixx act ethically?