One sign that Jon Hacker was in hot water before the Supreme Court came early on Monday, when Justice Antonin Scalia called his client’s cold medication “zircon,” instead of Zicam.
Zircon is a faux diamond, probably not the best reference when the issue before the Court in Matrixx Initiatives v. Siracusano was securities fraud, and Hacker was representing the alleged fraudster.
Matrixx’s lawyer Hacker, a partner at O’Melveny & Myers and Supreme Court expert, was making his first argument at the Court. He was passionate in insisting that Matrixx was not committing fraud when it failed to disclose a handful of cases in which users of Zicam, an over-the-counter cold medication, reported they lost their sense of smell. Plaintiffs need to show a statistically significant number of adverse reports before they can go ahead with a securities fraud class action, Hacker said.
“All drug companies receive on an almost daily basis anecdotal hearsay reports about alleged adverse health events,” Hacker said, and can’t be held to account for not disclosing all of them to shareholders.
But several justices seemed to think Hacker’s argument failed the smell test, so to speak, especially when the issue is a loss in shareholder value. Even if doubts cast on a drug are irrational or statistically insignificant, justices said, they may be important enough to disclose.
“I’m an investor in Matrixx,” Chief Justice John Roberts Jr. said hypothetically. “I worry whether my stock price is going to go down. You can have some psychic come out and say ‘Zicam is going to cause a disease’ with no support whatsoever, but if it causes the stock to go down 20%, it seems to me that’s material.”
Justice Anthony Kennedy piled on, as did Stephen Breyer, and Justice Ruth Bader Ginsburg also pointed out that as reports were beginning to surface in the news about Zicam’s impact on smell, the company issued a statement falsely asserting the concerns were “completely unfounded.” That, she seemed to think, was enough to go ahead with a claim of fraud.
The questioning came fast and furious, giving Hacker little chance to complete a thought. He seemed to gain ground briefly when he said that requiring a company to disclose even unfounded claims would cause self-inflicted damage to the company that even shareholders would not want.
Hacker said such a rule would force companies to tell the public, “A false report about us is about to come out. It requires the company to first ring the bell and then un-ring it in the same statement, and that’s not a good rule for companies. Shareholders wouldn’t want that rule, to require companies to denigrate their product and then do their best to explain why the allegation is untrue.”
Still, several justices seemed convinced that some standard other than “statistical significance” was needed to take into account the reality that even one adverse report can topple a product. Justice Elena Kagan posited a contact lens solution that was used by millions and was linked to 10 cases of blindness. “Would you stop using that product, and would a reasonable investor want to know about those ten cases?” she asked. Hacker replied he would want to know more about the facts, but Kagan interrupted to say, “I’d stop using the product, and if I were holding stock in that company, I would sell the stock.”
By the time David Frederick of Kellogg, Huber, Hansen, Todd, Evans & Figel, a veteran adversary of drug companies, rose on behalf of the shareholders, he was able to take the seemingly high road, arguing for a test that considers “the total mix of information available to investors.” Not every adverse report makes a plausible securities fraud case, he said. But in the Zicam case there was plenty of evidence that zinc ions, part of the medication, could cause the loss of smell. That, along with the handful of adverse reports, created a connection that “the company should have taken seriously and disclosed to investors,” Frederick said.
Frederick got some pushback from Breyer, who worried that if drug companies “have to disclose too much, what will happen is people won’t pay attention.” Scalia also said, “It seems ridiculous to hold companies to irrational standards.”
Arguing in support of Frederick, assistant to the solicitor general Pratik Shah summed things up with a well-executed argument focusing on the statements a company has made. Fraud occurs, Shah said, if a company has promised shareholders that sales will double while knowing that sales in fact might drop because of undisclosed events, rational or irrational. “A company creates a duty to disclose once they have spoken,” said Shah.
As the argument ended, it seemed that crafting a workable bright-line standard for deciding how much evidence is needed to launch a shareholder fraud suit would be as elusive as a cure to the common cold.
Tony Mauro can be contacted at firstname.lastname@example.org.