Investors Benefit From U.S. Supreme Court’s Rejection of Statistical Significance Test

On March 22, 2011,  the United States Supreme Court  delivered a unanimous opinion that is quite favorable to investors and the lawyers who represent them.

Plaintiffs  in this securities class action alleged that Matrixx Initiatives, Inc., the maker of a popular zinc-based cold remedy called Zicam, and three of its executives, failed to disclose customer reports that they lost their sense of smell when they used the nasal spray product, a condition known as anosmia.They argued that the condition was material information  that should have been disclosed to investors  since Zicam nasal spray lead to markedly increased sales at Matrixx. 
Fortunately, the Supreme Court rejected Matrixx’s argument that it should adopt a “bright line” rule that reports like those at issue must be  based on “statistically significant” information in order for the plaintiff’s case to proceed, observing that both the FDA and medical experts rely on evidence other than that which is statistically significant. The Supreme Court reiterated a standard for determining whether information is material to a shareholder that has long been the rule in securities cases:“whether a reasonable investor would have viewed the nondisclosed information as having significantly altered the total mix of information made available.”  So, rather than adopting a specific rule that would require plaintiffs to allege a specific number or percentage of reported problems in order for their case to survive,  the Supreme Court opted to maintain the rule that courts should revew the information in question in the context of the situation.

This sensible approach acknowledges that every case is different and must be evaluated on its own facts.