In a unanimous ruling with particular significance for the pharmaceutical industry, the U.S. Supreme Court has allowed investors to sue the maker of Zicam cold remedies.
The decision firmly rebuffs an effort by corporations seeking to make it more difficult to bring investor lawsuits.
Usually, lawsuits against a drug manufacturer are brought by consumers who allege they were harmed by the product. But Tuesday's case involved a class action brought by investors against Matrixx Initiatives Inc., the maker of Zicam products.
The investors charge that they were defrauded because the company failed to disclose early reports that Zicam nasal spray and gel caused a permanent loss of smell in some consumers.
When a case like this goes to court, the people who are suing have to make an initial showing that there is enough evidence to justify the suit's going forward.
So, how do you do that? What do you have to show? Matrixx tried to raise the bar so that adverse reports would have to be statistically significant and reliably linked to the product. But the Supreme Court rejected that argument as "flawed."
The case stems from events in 2003 and 2004 when Matrixx's stock was booming. Seventy percent of its sales came from Zicam products, and in January 2004, the company raised its revenue guidance, predicting an 80 percent increase in the coming year.
Matrixx did not disclose, however, that it had received reports from three medical researchers about a possible link between Zicam and a loss of smell in at least 10 patients. The company also failed to disclose that three lawsuits had been filed charging its products resulted in a loss of smell. Nor did it disclose that the Food and Drug Administration was conducting an investigation into complaints.
When the Dow Jones Newswires disclosed some of this information in late January 2004, the company's stock plummeted.
Matrixx promptly issued a press release suggesting that clinical studies showed no connection between its product and a loss of smell.
The stock price rebounded, only to fall again when news organizations reported more information suggesting a potential link.
The investors who bought stock during this period went to court, claiming that the company's actions amounted to fraud — an attempt to keep the company's stock price artificially high by failing to disclose material facts that, if known, would have affected the market.
The company sought to have the case dismissed as too speculative, but the Supreme Court said there was ample evidence to justify the case's going forward.
Writing for the unanimous court, Justice Sonia Sotomayor said that medical researchers and the FDA often reach initial conclusions based on evidence that is not statistically significant.
Drug manufacturers do not have to report every adverse event, she said. "Something more" is required, but she said there was plenty of that "something more" in this case.
The allegations here, viewed as a whole, said Sotomayor, suggest "a significant risk to the commercial viability of Matrixx's leading product."
What's more, she said, the allegations, taken collectively, suggest that "Matrixx elected not to disclose the reports of adverse events not because it believed they were meaningless but because it understood their likely effect on the market."
Experts on both sides of the case agreed Tuesday's ruling was a clear defeat not just for Matrixx but for corporate America.
"The decision will make compliance with the securities laws more difficult" for corporations, said James Martin, who filed a brief in the case on behalf of lawyers who represent corporations.
This is "a classic access to justice kind of case," said David Frederick, who argued and won the case on behalf of the investors in Tuesday's case. "The court has let the courthouse doors remain open for these kinds of claims."
The decision may have come as a surprise to those who view the current court as pro-business. But Columbia law professor John Coffee, a securities law expert, says the business community tried to push the envelope too far.
"What this case shows is while the Supreme Court may be pro-business, they are not the running dogs" of the corporate community, he says. "They are not going to change ... settled law."
The case now goes back to the lower courts for trial. Since it was first brought, hundreds of personal injury suits have been filed against Matrixx alleging a loss of smell; some have been settled while others are still pending.
In the years since this case was filed, the FDA has ordered the problem products taken off the market, and Matrixx has been bought by private investment firm H.I.G. Capital LLC.
In a second decision Tuesday, the court ruled that workers do not have to make written complaints about unlawful wage-and-hour practices in order to be protected from retaliation by their employers.
Kevin Kasten voiced complaints to a shift supervisor at Saint-Gobain Performance Plastics that the company was placing time clocks in a location that illegally prevented workers from getting paid for the time they spent putting on and taking off their work gear.
Kasten says he was fired in retaliation for his complaints.
But two lower courts ruled that an employee must file a written complaint in order to get protection from retaliation.
By a 6-2 vote, the Supreme Court disagreed.
Writing for the majority, Justice Stephen Breyer said that employees who make a formal complaint, even if it is oral, are protected from retaliation by federal labor laws.
This broader interpretation is more consistent with the objectives of the federal wage-and-hour laws, he said, because it protects "those who would find it difficult to reduce their complaints to writing, particularly the illiterate, less educated, or overworked workers."
Justices Antonin Scalia and Clarence Thomas dissented from the opinion. They believed that neither oral nor written complaints to employers were protected. Instead, they would have ruled that only those employees who file "an official grievance ... with a court or agency" are protected from retaliation.