MATRIXX INITIATIVES, INC. v. SIRACUSANO

OPINION OF THE COURT
MATRIXX INITIATIVES, INC. V. SIRACUSANO
563 U. S. ____ (2011)

SUPREME COURT OF THE UNITED STATES
NO. 09-1156

MATRIXX INITIATIVES, INC., et al., PETITIONERS v. JAMES SIRACUSANO et al.

on writ of certiorari to the united states court of appeals for the ninth circuit

[March 22, 2011]

   Justice Sotomayor delivered the opinion of the Court.

   This case presents the question whether a plaintiff can state a claim for securities fraud under §10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, as amended, 15 U. S. C. §78j(b), and Securities and Exchange Commission (SEC) Rule 10b–5, 17 CFR §240.10b–5 (2010), based on a pharmaceutical company’s failure to disclose reports of adverse events associated with a product if the reports do not disclose a statistically significant number of adverse events. Respondents, plaintiffs in a securities fraud class action, allege that petitioners, Matrixx Initiatives, Inc., and three of its executives (collectively Matrixx), failed to disclose reports of a possible link between its leading product, a cold remedy, and loss of smell, rendering statements made by Matrixx misleading. Matrixx contends that respondents’ complaint does not adequately allege that Matrixx made a material representation or omission or that it acted with scienter because the complaint does not allege that Matrixx knew of a statistically significant number of adverse events requiring disclosure. We conclude that the materiality of adverse event reports cannot be reduced to a bright-line rule. Although in many cases reasonable investors would not consider reports of adverse events to be material information, respondents have alleged facts plausibly suggesting that reasonable investors would have viewed these particular reports as material. Respondents have also alleged facts “giving rise to a strong inference” that Matrixx “acted with the required state of mind.” 15 U. S. C. A. §78u–4(b)(2)(A) (Feb. 2011 Supp.). We therefore hold, in agreement with the Court of Appeals for the Ninth Circuit, that respondents have stated a claim under §10(b) and Rule 10b–5.

I

A

   Through a wholly owned subsidiary, Matrixx develops, manufactures, and markets over-the-counter pharmaceutical products. Its core brand of products is called Zicam. All of the products sold under the name Zicam are used to treat the common cold and associated symptoms. At the time of the events in question, one of Matrixx’s products was Zicam Cold Remedy, which came in several forms including nasal spray and gel. The active ingredient in Zicam Cold Remedy was zinc gluconate. Respondents allege that Zicam Cold Remedy accounted for approximately 70 percent of Matrixx’s sales.

   Respondents initiated this securities fraud class action against Matrixx on behalf of individuals who purchased Matrixx securities between October 22, 2003, and February 6, 2004.[Footnote 1] The action principally arises out of statements that Matrixx made during the class period relating to revenues and product safety. Respondents claim that Matrixx’s statements were misleading in light of reports that Matrixx had received, but did not disclose, about consumers who had lost their sense of smell (a condition called anosmia) after using Zicam Cold Remedy. Respondents’ consolidated amended complaint alleges the following facts, which the courts below properly assumed to be true. See Ashcroft v. Iqbal, 556 U. S. ___, ___ (2009) (slip op., at 14).

   In 1999, Dr. Alan Hirsch, neurological director of the Smell & Taste Treatment and Research Foundation, Ltd., called Matrixx’s customer service line after discovering a possible link between Zicam nasal gel and a loss of smell “in a cluster of his patients.” App. 67a–68a. Dr. Hirsch told a Matrixx employee that “previous studies had demonstrated that intranasal application of zinc could be problematic.” Id., at 68a. He also told the employee about at least one of his patients who did not have a cold and who developed anosmia after using Zicam.

   In September 2002, Timothy Clarot, Matrixx’s vice president for research and development, called Miriam Linschoten, Ph.D., at the University of Colorado Health Sciences Center after receiving a complaint from a per- son Linschoten was treating who had lost her sense of smell after using Zicam. Clarot informed Linschoten that Matrixx had received similar complaints from other customers. Linschoten drew Clarot’s attention to “previous studies linking zinc sulfate to loss of smell.” Ibid. Clarot gave her the impression that he had not heard of the studies. She asked Clarot whether Matrixx had done any studies of its own; he responded that it had not but that it had hired a consultant to review the product. Soon thereafter, Linschoten sent Clarot abstracts of the studies she had mentioned. Research from the 1930’s and 1980’s had confirmed “[z]inc’s toxicity.” Id., at 69a. Clarot called Linschoten to ask whether she would be willing to participate in animal studies that Matrixx was planning, but she declined because her focus was human research.

   By September 2003, one of Linschoten’s colleagues at the University of Colorado, Dr. Bruce Jafek, had observed 10 patients suffering from anosmia after Zicam use. Linschoten and Jafek planned to present their findings at a meeting of the American Rhinologic Society in a poster presentation entitled “Zicam® Induced Anosmia.” Ibid. (internal quotation marks omitted). The American Rhinologic Society posted their abstract in advance of the meeting. The presentation described in detail a 55-year-old man with previously normal taste and smell who experienced severe burning in his nose, followed immediately by a loss of smell, after using Zicam. It also reported 10 other Zicam users with similar symptoms.

   Matrixx learned of the doctors’ planned presentation. Clarot sent a letter to Dr. Jafek warning him that he did not have permission to use Matrixx’s name or the names of its products. Dr. Jafek deleted the references to Zicam in the poster before presenting it to the American Rhinologic Society.

   The following month, two plaintiffs commenced a product liability lawsuit against Matrixx alleging that Zicam had damaged their sense of smell. By the end of the class period on February 6, 2004, nine plaintiffs had filed four lawsuits.

   Respondents allege that Matrixx made a series of public statements that were misleading in light of the foregoing information. In October 2003, after they had learned of Dr. Jafek’s study and after Dr. Jafek had presented his findings to the American Rhinologic Society, Matrixx stated that Zicam was “ ‘poised for growth in the upcoming cough and cold season’ ” and that the company had “ ‘very strong momentum.’ ”[Footnote 2] Id., at 72a–74a. Matrixx further expressed its expectation 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.’ ” Id., at 74a. In January 2004, Matrixx raised its revenue guidance, predicting an increase in revenues of 80 percent and earnings per share in the 33-to-38-cent range.

   In its Form 10–Q filed with the SEC in November 2003, Zicam warned of the potential “ ‘material adverse effect’ ” that could result from product liability claims, “ ‘whether or not proven to be valid.’ ” Id., at 75a–76a. It stated that product liability actions could materially affect Matrixx’s “ ‘product branding and goodwill,’ ” leading to reduced customer acceptance.[Footnote 3] Id., at 76a. It did not disclose, however, that two plaintiffs had already sued Matrixx for allegedly causing them to lose their sense of smell.

   On January 30, 2004, Dow Jones Newswires reported that the Food and Drug Administration (FDA) was “ ‘looking into complaints that an over-the-counter common-cold medicine manufactured by a unit of Matrixx Initiatives, Inc. (MTXX) may be causing some users to lose their sense of smell’ ” in light of at least three product liability lawsuits. Id., at 79a–80a. Matrixx’s stock fell from $13.55 to $11.97 per share after the report. In response, on February 2, Matrixx issued a press release that stated:

   “All Zicam products are manufactured and marketed according to FDA guidelines for homeopathic medicine. Our primary concern is the health and safety of our customers and the distribution of fac- tual information about our products. Matrixx believes statements alleging that intranasal Zicam products caused anosmia (loss of smell) are completely unfounded and misleading.

   “In no clinical trial of intranasal zinc gluconate gel products has there been a single report of lost or diminished olfactory function (sense of smell). Rather, the safety and efficacy of zinc gluconate for the treatment of symptoms related to the common cold have been well established in two double-blind, placebo-controlled, randomized clinical trials. In fact, in neither study were there any reports of anosmia related to the use of this compound. The overall incidence of adverse events associated with zinc gluconate was extremely low, with no statistically significant difference between the adverse event rates for the treated and placebo subsets.

   “A multitude of environmental and biologic influences are known to affect the sense of smell. Chief among them is the common cold. As a result, the population most likely to use cold remedy products is already at increased risk of developing anosmia. Other common causes of olfactory dysfunction include age, nasal and sinus infections, head trauma, anatomical obstructions, and environmental irritants.” Id., at 77a–78a (internal quotation marks omitted).

The day after Matrixx issued this press release, its stock price bounced back to $13.40 per share.

   On February 6, 2004, the end of the class period, Good Morning America, a nationally broadcast morning news program, highlighted Dr. Jafek’s findings. (The complaint does not allege that Matrixx learned of the news story before its broadcast.) The program reported that Dr. Jafek had discovered more than a dozen patients suffering from anosmia after using Zicam. It also noted that four lawsuits had been filed against Matrixx. The price of Matrixx stock plummeted to $9.94 per share that same day. Zicam again issued a press release largely repeating its February 2 statement.

   On February 19, 2004, Matrixx filed a Form 8–K with the SEC stating that it had “ ‘convened a two-day meeting of physicians and scientists to review current information on smell disorders’ ” in response to Dr. Jafek’s presentation. Id., at 82a. According to the Form 8–K, “ ‘In the opinion of the panel, there is insufficient scientific evidence at this time to determine if zinc gluconate, when used as recommended, affects a person’s ability to smell.’ ” Ibid. A few weeks later, a reporter quoted Matrixx as stating that it would begin conducting “ ‘animal and human studies to further characterize these post-marketing complaints.’ ” Id., at 84a.

   On the basis of these allegations, respondents claimed that Matrixx violated §10(b) of the Securities Exchange Act and SEC Rule 10b–5 by making untrue statements of fact and failing to disclose material facts necessary to make the statements not misleading in an effort to maintain artificially high prices for Matrixx securities.

B

   Matrixx moved to dismiss respondents’ complaint, arguing that they had failed to plead the elements of a material misstatement or omission and scienter. The District Court granted the motion to dismiss. Relying on In re Carter-Wallace, Inc., Securities Litigation, 220 F. 3d 36 (CA2 2000), it held that respondents had not alleged a “statistically significant correlation between the use of Zicam and anosmia so as to make failure to public[ly] disclose complaints and the University of Colorado study a material omission.” App. to Pet. for Cert. 50a. The District Court similarly agreed that respondents had not stated with particularity facts giving rise to a strong inference of scienter. See 15 U. S. C. A. §78u–4(b)(2)(A) (Feb. 2011 Supp.). It noted that the complaint failed to allege that Matrixx disbelieved its statements about Zicam’s safety or that any of the defendants profited or attempted to profit from Matrixx’s public statements. App. to Pet. for Cert. 52a.

   The Court of Appeals reversed. 585 F. 3d 1167 (CA9 2009). Noting that “ ‘[t]he determination [of materiality] requires delicate assessments of the inferences a “reasonable shareholder” would draw from a given set of facts and the significance of those inferences to him,’ ” id., at 1178 (quoting Basic Inc. v. Levinson, 485 U. S. 224, 236 (1988); some internal quotation marks omitted; alterations in original), the Court of Appeals held that the District Court had erred in requiring an allegation of statistical significance to establish materiality. It concluded, to the contrary, that the complaint adequately alleged “information regarding the possible link between Zicam and anosmia” that would have been significant to a reasonable investor. 585 F. 3d, at 1179, 1180. Turning to scienter, the Court of Appeals concluded that “[w]ithholding reports of adverse effects of and lawsuits concerning the product responsible for the company’s remarkable sales increase is ‘an extreme departure from the standards of ordinary care,’ ” giving rise to a strong inference of scienter. Id., at 1183.

   We granted certiorari, 560 U. S. ___ (2010), and we now affirm.

II

   Section 10(b) of the Securities Exchange Act makes it unlawful for any person to “use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.” 15 U. S. C. §78j(b). SEC Rule 10b–5 implements this provision by making it unlawful to, among other things, “make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.” 17 CFR §240.10b–5(b). We have implied a private cause of action from the text and purpose of §10(b). See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U. S. 308, 318 (2007).

   To prevail on their claim that Matrixx made material misrepresentations or omissions in violation of §10(b) and Rule 10b–5, respondents must prove “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U. S. 148, 157 (2008). Matrixx contends that respondents have failed to plead both the element of a material misrepresentation or omission and the element of scienter because they have not alleged that the reports received by Matrixx reflected statistically significant evidence that Zicam caused anosmia. We disagree.

A

   We first consider Matrixx’s argument that “adverse event reports that do not reveal a statistically significant increased risk of adverse events from product use are not material information.” Brief for Petitioners 17 (capitalization omitted).

1

   To prevail on a §10(b) claim, a plaintiff must show that the defendant made a statement that was “misleading as to a material fact.”[Footnote 4] Basic, 485 U. S., at 238. In Basic, we held that this materiality requirement is satisfied when there is “ ‘a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.’ ” Id., at 231–232 (quoting TSC Industries, Inc. v. Northway, Inc., 426 U. S. 438, 449 (1976)). We were “careful not to set too low a standard of materiality,” for fear that management would “ ‘bury the shareholders in an avalanche of trivial information.’ ” 485 U. S., at 231 (quoting TSC Industries, 426 U. S., at 448–449).

   Basic involved a claim that the defendant had made misleading statements denying that it was engaged in merger negotiations when it was, in fact, conducting preliminary negotiations. See 485 U. S., at 227–229. The defendant urged a bright-line rule that preliminary merger negotiations are material only once the parties to the negotiations reach an agreement in principle. Id., at 232–233. We observed that “[a]ny approach that designates a single fact or occurrence as always determinative of an inherently fact-specific finding such as materiality, must necessarily be overinclusive or underinclusive.” Id., at 236. We thus rejected the defendant’s proposed rule, explaining that it would “artificially exclud[e] from the definition of materiality information concerning merger discussions, which would otherwise be considered sig- nificant to the trading decision of a reasonable investor.” Ibid.

   Like the defendant in Basic, Matrixx urges us to adopt a bright-line rule that reports of adverse events[Footnote 5] associated with a pharmaceutical company’s products cannot be material absent a sufficient number of such reports to establish a statistically significant risk that the product is in fact causing the events.[Footnote 6] Absent statistical significance, Matrixx argues, adverse event reports provide only “anecdotal” evidence that “the user of a drug experienced an adverse event at some point during or following the use of that drug.” Brief for Petitioners 17. Accordingly, it contends, reasonable investors would not consider such reports relevant unless they are statistically significant because only then do they “reflect a scientifically reliable basis for inferring a potential causal link between product use and the adverse event.” Id., at 32.

   As in Basic, Matrixx’s categorical rule would “artificially exclud[e]” information that “would otherwise be considered significant to the trading decision of a reasonable investor.” 485 U. S., at 236. Matrixx’s argument rests on the premise that statistical significance is the only reliable indication of causation. This premise is flawed: As the SEC points out, “medical researchers . . . consider multiple factors in assessing causation.” Brief for United States as Amicus Curiae 12. Statistically significant data are not always available. For example, when an adverse event is subtle or rare, “an inability to obtain a data set of appropriate quality or quantity may preclude a finding of statistical significance.” Id., at 15; see also Brief for Medical Researchers as Amici Curiae 11. Moreover, ethical considerations may prohibit researchers from conducting randomized clinical trials to confirm a suspected causal link for the purpose of obtaining statistically significant data. See id., at 10–11.

   A lack of statistically significant data does not mean that medical experts have no reliable basis for inferring a causal link between a drug and adverse events. As Matrixx itself concedes, medical experts rely on other evidence to establish an inference of causation. See Brief for Petitioners 44–45, n. 22.[Footnote 7] We note that courts frequently permit expert testimony on causation based on evidence other than statistical significance. See, e.g., Best v. Lowe’s Home Centers, Inc., 563 F. 3d 171, 178 (CA6 2009); Westberry v. Gislaved Gummi AB, 178 F. 3d 257, 263–264 (CA4 1999) (citing cases); Wells v. Ortho Pharmaceutical Corp., 788 F. 2d 741, 744–745 (CA11 1986). We need not consider whether the expert testimony was properly admitted in those cases, and we do not attempt to define here what constitutes reliable evidence of causation. It suffices to note that, as these courts have recognized, “medical professionals and researchers do not limit the data they consider to the results of randomized clinical trials or to statistically significant evidence.” Brief for Medical Researchers as Amici Curiae 31.

   The FDA similarly does not limit the evidence it considers for purposes of assessing causation and taking regulatory action to statistically significant data. In assessing the safety risk posed by a product, the FDA considers factors such as “strength of the association,” “temporal relationship of product use and the event,” “consistency of findings across available data sources,” “evidence of a dose-response for the effect,” “biologic plausibility,” “seriousness of the event relative to the disease being treated,” “potential to mitigate the risk in the population,” “feasibility of further study using observational or controlled clinical study designs,” and “degree of benefit the product provides, including availability of other therapies.”[Footnote 8] FDA, Guidance for Industry: Good Pharmacovigilance Prac- tices and Pharmacoepidemiologic Assessment 18 (2005) (capitalization omitted), http://www.fda.gov/downloads/ RegulatingInformation/Guidances/UCM126834.pdf (all Internet materials as visited Mar. 17, 2011, and available in Clerk of Court’s case file); see also Brief for United States as Amicus Curiae 19–20 (same); FDA, The Clinical Im- pact of Adverse Event Reporting 6 (1996) (similar), http://www.fda.gov/downloads/safety/MedWatch/UCM168505.pdf. It “does not apply any single metric for determining when additional inquiry or action is necessary, and it certainly does not insist upon ‘statistical significance.’ ” Brief for United States as Amicus Curiae 19.

   Not only does the FDA rely on a wide range of evidence of causation, it sometimes acts on the basis of evidence that suggests, but does not prove, causation. For example, the FDA requires manufacturers of over-the-counter drugs to revise their labeling “to include a warning as soon as there is reasonable evidence of an association of a serious hazard with a drug; a causal relationship need not have been proved.” 21 CFR §201.80(e). More generally, the FDA may make regulatory decisions against drugs based on postmarketing evidence that gives rise to only a suspicion of causation. See FDA, The Clinical Impact of Adverse Event Reporting, supra, at 7 (“[A]chieving certain proof of causality through postmarketing surveillance is unusual. Attaining a prominent degree of suspicion is much more likely, and may be considered a sufficient basis for regulatory decisions” (footnote omitted)).[Footnote 9]

   This case proves the point. In 2009, the FDA issued a warning letter to Matrixx stating that “[a] significant and growing body of evidence substantiates that the Zicam Cold Remedy intranasal products may pose a serious risk to consumers who use them.” App. 270a. The letter cited as evidence 130 reports of anosmia the FDA had received, the fact that the FDA had received few reports of anosmia associated with other intranasal cold remedies, and “evidence in the published scientific literature that various salts of zinc can damage olfactory function in animals and humans.” Ibid. It did not cite statistically significant data.

   Given that medical professionals and regulators act on the basis of evidence of causation that is not statistically significant, it stands to reason that in certain cases reasonable investors would as well. As Matrixx acknowledges, adverse event reports “appear in many forms, including direct complaints by users to manufacturers, reports by doctors about reported or observed patient reactions, more detailed case reports published by doctors in medical journals, or larger scale published clinical studies.” Brief for Petitioners 17. As a result, assessing the materiality of adverse event reports is a “fact-specific” inquiry, Basic, 485 U. S., at 236, that requires consideration of the source, content, and context of the reports. This is not to say that statistical significance (or the lack thereof) is irrelevant—only that it is not dispositive of every case.

   Application of Basic’s “total mix” standard does not mean that pharmaceutical manufacturers must dis- close all reports of adverse events. Adverse event reports are daily events in the pharmaceutical industry; in 2009, the FDA entered nearly 500,000 such reports into its reporting system, see FDA, Reports Received and Reports Entered in AERS by Year (as of Mar. 31, 2010), http://www.fda.gov/Drugs/GuidanceComplianceRegulatoryInformation /Surveillance/ AdverseDrugEffects/ ucm070434. htm. The fact that a user of a drug has suffered an adverse event, standing alone, does not mean that the drug caused that event. See FDA, Annual Adverse Drug Experience Report: 1996, p. 2 (1997), http://drugand devicelaw.net/Annual%20Adverse%20Drug%20Experience %20Report%201996.pdf. The question remains whether a reasonable investor would have viewed the nondisclosed information “ ‘as having significantly altered the “total mix” of information made available.’ ” Basic, 485 U. S., at 232 (quoting TSC Industries, 426 U. S., at 449; emphasis added). For the reasons just stated, the mere existence of reports of adverse events—which says nothing in and of itself about whether the drug is causing the adverse events—will not satisfy this standard. Something more is needed, but that something more is not limited to statistical significance and can come from “the source, content, and context of the reports,” supra, at 15. This contextual inquiry may reveal in some cases that reasonable investors would have viewed reports of adverse events as material even though the reports did not provide statistically significant evidence of a causal link.[Footnote 10]

   Moreover, it bears emphasis that §10(b) and Rule 10b–5(b) do not create an affirmative duty to disclose any and all material information. Disclosure is required under these provisions only when necessary “to make . . . statements made, in the light of the circumstances under which they were made, not misleading. 17 CFR §240.10b–5(b); see also Basic, 485 U. S., at 239, n. 17 (“Silence, absent a duty to disclose, is not misleading under Rule 10b–5”). Even with respect to information that a reasonable investor might consider material, companies can control what they have to disclose under these provisions by controlling what they say to the market.

2

   Applying Basic’s “total mix” standard in this case, we conclude that respondents have adequately pleaded materiality. This is not a case about a handful of anecdotal reports, as Matrixx suggests. Assuming the complaint’s allegations to be true, as we must, Matrixx received information that plausibly indicated a reliable causal link between Zicam and anosmia. That information included reports from three medical professionals and researchers about more than 10 patients who had lost their sense of smell after using Zicam. Clarot told Linschoten that Matrixx had received additional reports of anosmia. (In addition, during the class period, nine plaintiffs commenced four product liability lawsuits against Matrixx alleging a causal link between Zicam use and anosmia.)[Footnote 11] Further, Matrixx knew that Linschoten and Dr. Jafek had presented their findings about a causal link between Zicam and anosmia to a national medical conference devoted to treatment of diseases of the nose.[Footnote 12] Their presentation described a patient who experienced severe burning in his nose, followed immediately by a loss of smell, after using Zicam—suggesting a temporal relationship between Zicam use and anosmia.

   Critically, both Dr. Hirsch and Linschoten had also drawn Matrixx’s attention to previous studies that had demonstrated a biological causal link between intranasal application of zinc and anosmia.[Footnote 13] Before his conversation with Linschoten, Clarot, Matrixx’s vice president of research and development, was seemingly unaware of these studies, and the complaint suggests that, as of the class period, Matrixx had not conducted any research of its own relating to anosmia. See, e.g., App. 84a (referencing a press report, issued after the end of the class period, noting that Matrixx said it would begin conducting “ ‘animal and human studies to further characterize these post-marketing complaints’ ”). Accordingly, it can reasonably be inferred from the complaint that Matrixx had no basis for rejecting Dr. Jafek’s findings out of hand.

   We believe that these allegations suffice to “raise a reasonable expectation that discovery will reveal evidence” satisfying the materiality requirement, Bell Atlantic Corp. v. Twombly, 550 U. S. 544, 556 (2007), and to “allo[w] the court to draw the reasonable inference that the defendant is liable for the misconduct alleged,” Iqbal, 556 U. S., at ___ (slip op., at 14). The information provided to Matrixx by medical experts revealed a plausible causal relationship between Zicam Cold Remedy and anosmia. Consumers likely would have viewed the risk associated with Zicam (possible loss of smell) as substantially outweighing the benefit of using the product (alleviating cold symptoms), particularly in light of the existence of many alternative products on the market. Importantly, Zicam Cold Remedy allegedly accounted for 70 percent of Matrixx’s sales. Viewing the allegations of the complaint as a whole, the complaint alleges facts suggesting a significant risk to the commercial viability of Matrixx’s leading product.

   It is substantially likely that a reasonable investor would have viewed this information “ ‘as having significantly altered the “total mix” of information made available.’ ” Basic, 485 U. S., at 232 (quoting TSC Industries, 426 U. S., at 449). Matrixx told the market that revenues were going to rise 50 and then 80 percent. Assuming the complaint’s allegations to be true, however, Matrixx had information indicating a significant risk to its leading revenue-generating product. Matrixx also stated that reports indicating that Zicam caused anosmia were “ ‘completely unfounded and misleading’ ” and that “ ‘the safety and efficacy of zinc gluconate for the treatment of symptoms related to the common cold have been well established.’ ” App. 77a–78a. Importantly, however, Matrixx had evidence of a biological link between Zicam’s key ingredient and anosmia, and it had not conducted any studies of its own to disprove that link. In fact, as Matrixx later revealed, the scientific evidence at that time was “ ‘insufficient . . . to determine if zinc gluconate, when used as recommended, affects a person’s ability to smell.’ ” Id., at 82a.

   Assuming the facts to be true, these were material facts “necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.” 17 CFR §240.10b–5(b). We therefore affirm the Court of Appeals’ holding that respondents adequately pleaded the element of a material misrepresentation or omission.

B

   Matrixx also argues that respondents failed to allege facts plausibly suggesting that it acted with the required level of scienter. “To establish liability under §10(b) and Rule 10b–5, a private plaintiff must prove that the defendant acted with scienter, ‘a mental state embracing intent to deceive, manipulate, or defraud.’ ” Tellabs, 551 U. S., at 319 (quoting Ernst & Ernst v. Hochfelder, 425 U. S. 185, 193–194, and n. 12 (1976)). We have not decided whether recklessness suffices to fulfill the scienter requirement. See Tellabs, 551 U. S., at 319, n. 3. Because Matrixx does not challenge the Court of Appeals’ holding that the scienter requirement may be satisfied by a showing of “deliberate recklessness,” see 585 F. 3d, at 1180 (internal quotation marks omitted), we assume, without deciding, that the standard applied by the Court of Appeals is sufficient to establish scienter.[Footnote 14]

   Under the PSLRA, a plaintiff must “state with par- ticularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U. S. C. A. §78u–4(b)(2)(A) (Feb. 2011 Supp.). This standard requires courts to take into account “plausible opposing inferences.” Tellabs, 551 U. S., at 323. A complaint adequately pleads scienter under the PSLRA “only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.” Id., at 324. In making this determination, the court must review “all the allegations holistically.” Id., at 326. The absence of a motive allegation, though relevant, is not dispositive. Id., at 325.

   Matrixx argues, in summary fashion, that because respondents do not allege that it knew of statistically significant evidence of causation, there is no basis to consider the inference that it acted recklessly or knowingly to be at least as compelling as the alternative inferences. “Rather,” it argues, “the most obvious inference is that petitioners did not disclose the [reports] simply because petitioners believed they were far too few . . . to indicate anything meaningful about adverse reactions to use of Zicam.” Brief for Petitioners 49. Matrixx’s proposed bright-line rule requiring an allegation of statistical significance to establish a strong inference of scienter is just as flawed as its approach to materiality.

   The inference that Matrixx acted recklessly (or intentionally, for that matter) is at least as compelling, if not more compelling, than the inference that it simply thought the reports did not indicate anything meaningful about adverse reactions. According to the complaint, Matrixx was sufficiently concerned about the information it received that it informed Linschoten that it had hired a consultant to review the product, asked Linschoten to participate in animal studies, and convened a panel of physicians and scientists in response to Dr. Jafek’s presentation. It successfully prevented Dr. Jafek from using Zicam’s name in his presentation on the ground that he needed Matrixx’s permission to do so. Most significantly, Matrixx issued a press release that suggested that studies had confirmed that Zicam does not cause anosmia when, in fact, it had not conducted any studies relating to anosmia and the scientific evidence at that time, according to the panel of scientists, was insufficient to determine whether Zicam did or did not cause anosmia.[Footnote 15]

   These allegations, “taken collectively,” give rise to a “cogent and compelling” inference 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. Tellabs, 551 U. S., at 323, 324. “[A] reasonable person” would deem the inference that Matrixx acted with deliberate recklessness (or even intent) “at least as compelling as any opposing inference one could draw from the facts alleged.” Id., at 324. We conclude, in agreement with the Court of Appeals, that respondents have adequately pleaded scienter. Whether respondents can ultimately prove their allegations and establish scienter is an altogether different question.

*  *  *

   For the reasons stated, the judgment of the Court of Appeals for the Ninth Circuit is

Affirmed.

Footnote 1

 According to the complaint, Matrixx securities were traded on the NASDAQ National Market. App. 99a.

Footnote 2

 At oral argument, counsel for the United States, which submitted an amicus curiae brief in support of respondents, suggested that some of these statements might qualify as nonactionable “puffery.” Tr. of Oral Arg. 51–52. This question is not before us, as Matrixx has not advanced such an argument.

Footnote 3

 Respondents also allege that Matrixx falsely reported its financial results in the Form 10–Q by failing to reserve for or disclose potential liability, in violation of Generally Accepted Accounting Principles. The Court of Appeals did not rely on these allegations.

Footnote 4

 Under the Private Securities Litigation Reform Act of 1995 (PSLRA), when a plaintiff’s claim is based on alleged misrepresentations or omissions of a material fact, “the complaint shall specify each statement alleged to have been misleading, [and] the reason or reasons why the statement is misleading.” 15 U. S. C. §78u–4(b)(1).

Footnote 5

 The FDA defines an “[a]dverse drug experience” as “[a]ny adverse event associated with the use of a drug in humans, whether or not considered drug related.” 21 CFR §314.80(a) (2010). Federal law imposes certain obligations on pharmaceutical manufacturers to report adverse events to the FDA. During the class period, manufacturers of over-the-counter drugs such as Zicam Cold Remedy had no obligation to report adverse events to the FDA. In 2006, Congress enacted legislation to require manufacturers of over-the-counter drugs to report any “serious adverse event” to the FDA within 15 business days. See 21 U. S. C. §§379aa(b), (c).

Footnote 6

 “A study that is statistically significant has results that are unlikely to be the result of random error . . . .” Federal Judicial Center, Reference Manual on Scientific Evidence 354 (2d ed. 2000). To test for significance, a researcher develops a “null hypothesis”—e.g., the assertion that there is no relationship between Zicam use and anosmia. See id., at 122. The researcher then calculates the probability of obtaining the observed data (or more extreme data) if the null hypothesis is true (called the p-value). Ibid. Small p-values are evidence that the null hypothesis is incorrect. See ibid. Finally, the researcher compares the p-value to a preselected value called the significance level. Id., at 123. If the p-value is below the preselected value, the difference is deemed “significant.” Id., at 124.

Footnote 7

 Matrixx and its amici list as relevant factors the strength of the association between the drug and the adverse effects; a temporal relationship between exposure and the adverse event; consistency across studies; biological plausibility; consideration of alternative explanations; specificity (i.e., whether the specific chemical is associated with the specific disease); the dose-response relationship; and the clinical and pathological characteristics of the event. Brief for Petitioners 44–45, n. 22; Brief for Consumer Healthcare Products Assn. et al. as Amici Curiae 12–13. These factors are similar to the factors the FDA considers in taking action against pharmaceutical products. See infra, at 13–14.

Footnote 8

 See also n. 7, supra.

Footnote 9

 See also GAO, M. Crosse et al., Drug Safety: Improvement Needed in FDA’s Postmarket Decision-making and Oversight Process 7 (GAO–06–402, 2006) (“If FDA has information that a drug on the market may pose a significant health risk to consumers, it weighs the effect of the adverse events against the benefit of the drug to determine what actions, if any, are warranted. This decision-making process is complex and encompasses many factors, such as the medical importance and utility of the drug, the drug’s extent of usage, the severity of the disease being treated, the drug’s efficacy in treating this disease, and the availability of other drugs to treat the same disorder”), http://www.gao.gov/new.items/d06402.pdf; Federal Judicial Center, supra n. 6, at 33 (“[R]isk assessors may pay heed to any evidence that points to a need for caution, rather than assess the likelihood that a causal relationship in a specific case is more likely than not”).

Footnote 10

 We note that our conclusion accords with views of the SEC, as expressed in an amicus curiae brief filed in this case. See Brief for United States as Amicus Curiae 11–12; see also TSC Industries, Inc. v. Northway, Inc., 426 U. S. 438, 449, n. 10 (1976) (“[T]he SEC’s view of the proper balance between the need to insure adequate disclosure and the need to avoid the adverse consequences of setting too low a threshold for civil liability is entitled to consideration”).

Footnote 11

 It is unclear whether these plaintiffs were the same individuals whose symptoms were reported by the medical professionals.

Footnote 12

 Matrixx contends that Dr. Jafek and Linschoten’s study was not reliable because they did not sufficiently rule out the common cold as a cause for their patients’ anosmia. We note that the complaint alleges that, in one instance, a consumer who did not have a cold lost his sense of smell after using Zicam. More importantly, to survive a motion to dismiss, respondents need only allege “enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U. S. 544, 570 (2007). For all the reasons we state in the opinion, respondents’ allegations plausibly suggest that Dr. Jafek and Linschoten’s conclusions were based on reliable evidence of a causal link between Zicam and anosmia.

Footnote 13

 Matrixx contends that these studies are not reliable evidence of causation because the studies used zinc sulfate, whereas the active ingredient in Matrixx is zinc gluconate. Respondents’ complaint, however, alleges that the studies confirmed the toxicity of “zinc.” App. 68a. Matrixx further contends that studies relating to fish cannot reliably prove causation with respect to humans. The complaint references several studies, however, only one of which involved fish. In any event, the existence of the studies suggests a plausible biological link between zinc and anosmia, which, in combination with the other allegations, is sufficient to survive a motion to dismiss.

Footnote 14

 Under the PSLRA, if the alleged misstatement or omission is a “forward-looking statement,” the required level of scienter is “actual knowledge.” 15 U. S. C. §78u–5(c)(1)(B). Matrixx has not argued that the statements or omissions here are “forward-looking statement[s].”

Footnote 15

 One of Matrixx’s amici argues that “the most cogent inference regarding Matrixx’s state of mind is that it delayed releasing information regarding anosmia complaints in order to provide itself an opportunity to carefully review all evidence regarding any link between Zicam and anosmia.” Brief for Washington Legal Foundation as Amicus Curiae 26. We do not doubt that this may be the most cogent inference in some cases. Here, however, the misleading nature of Matrixx’s press release is sufficient to render the inference of scienter at least as compelling as the inference suggested by amicus.

Print this transcript Transcript: 

ORAL ARGUMENT OF JONATHAN HACKER ON BEHALF OF THE PETITIONERS

Chief Justice John G. Roberts: We will hear argument first this morning in Case 09-1156, Matrixx Initiatives v. James Siracusano.

Mr. Hacker.

Mr. Hacker: Mr. Chief Justice, and may it please the Court:

All drug companies receive on an almost daily basis anecdotal hearsay reports about alleged adverse health events following the use of their products.

Those incident reports do not themselves establish any reliable facts about the drug's performance or its safety, especially where, as here, there are only a handful of reports out of millions of products sold over a 4-year period, and--

Justice Ruth Bader Ginsburg: Mr. Hacker, do we know that from this record?

I mean, we know that the plaintiffs were able to identify -- there's some dispute whether it's 12 or 23, but do you represent that there were no other complaints made?

So that, let's say, there has been discovery; now we're just at the pleading stage.

The company would have said: That's it, we didn't have any more?

Mr. Hacker: --All I can speak for is what's alleged in the complaint, and the complaint, no matter how read, doesn't allege any more than 23 adverse event reports.

Justice Ruth Bader Ginsburg: But they might have been able through discovery to find that there were many more.

Mr. Hacker: That's true, but there's no allegation that what they -- what they know about or what they could find would have been a statistically significant difference between the rate of reported events and the background of--

Justice Ruth Bader Ginsburg: But why shouldn't that determination be deferred until there's discovery, and then we can know how many reports there really were?

Mr. Hacker: --Because it's incumbent on a plaintiff to come to court with a case, to plead the facts necessary to establish all of the elements of a claim.

And a securities fraud claim, of course, requires both materiality and scienter, and neither of those is established unless the company has knowledge of facts establishing a reliable basis for inferring that the drug itself is the cause of the reported event.

Absent information like that, there is neither materiality nor scienter under the securities laws, because neither the company nor an investor -- until there's reliable evidence of a causal link between the two products, neither a company -- excuse me, a link between the product and the event -- neither the company nor investor would have any reason to think that an adverse event report is -- actually indicates a problem with the product, as opposed to a coincidence.

Justice Samuel Alito: Can there be some situations in which statistically significant evidence would not be necessary?

For example, suppose some very distinguished physicians concluded based on clinical trials that there was a connection between a drug and a very serious side effect.

Could that establish materiality?

Mr. Hacker: I think a distinguished physician would not conclude that there's a connection unless the clinical trials reveal a statistically significant difference between what they've seen and what they would expect to see were there no association.

So there's that point, Your Honor.

But the second point I would make is, we acknowledge there are a very narrow, limited number of circumstances under which a claim can be pled absent statistically significant evidence, but that's -- that's because doctors and researchers will conclude that there may be causation under narrow circumstances.

For example, I think the most common set of criteria are the Bradford-Hill criteria.

But nothing like that is pled here, Your Honor.

Justice Antonin Scalia: Mr. Hacker, the complaint did not rely exclusively upon these adverse incidents but also referred to a study, a report by researchers at the American Rhinologic Society--

Mr. Hacker: Yes.

Justice Antonin Scalia: --which -- which asserted that there was a connection.

So the -- is the question before us simply whether in isolation the adverse incidents would be enough, or is not the question whether those adverse incidents placed next to this study would be enough?

Mr. Hacker: Well, two points, Your Honor.

First, the plaintiffs have throughout this litigation framed their case as one based on the failure to disclose adverse event reports.

It's the number of adverse event reports that they say is the problem, and they're not saying that there was a study out there and that we failed to disclose the study.

But they say it's the fact of the adverse event reports.

Justice Antonin Scalia: Why didn't they say that?

Mr. Hacker: Well, I think if you look at the -- to be clear, the study is not attached to the complaint, so there wasn't a basis in the complaint for saying the company was aware of a reliable study and here are the details of the study and they failed to disclose it.

Justice Antonin Scalia: Well, I thought the -- you're saying the complaint did not refer to the study?

Mr. Hacker: It did refer to it.

That's true.

And if you look at the study, there's really nothing there.

It's based on, primarily on a case study of one -- and again, this isn't in the complaint.

It is attached to the red brief, Your Honor.

There's one case study of one man who is 55 year old -- 55 years old, which is the population most likely to experience anosmia.

You're more likely to get it when you're -- he's suffering from signs of lupus.

Which causes anosmia, and he is taking Flonase, which also causes anosmia.

And so the idea that you can infer from that one incident out of millions over years of product sales that -- that Zicam causes anosmia under the--

Chief Justice John G. Roberts: You're talking about -- you're talking about who is right or wrong about the connection between Matrixx and anosmia.

But that's not the question.

I'm an investor in Matrixx; 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 percent, it seems to me that's material.

Mr. Hacker: --That's precisely the point, Your Honor.

If a psychic came out or a lunatic on the street corner is barking, you know, through a megaphone that there's a problem with the product, that's not the kind of information to rely -- a real investor would rely on.

Justice Sonia Sotomayor: But wait a minute.

These weren't psychics.

These were 3 clinical doctors in this area, one of them you knew poised to go to a society meeting to make this allegation.

Doesn't it make a difference who the reports are coming from and what the substance of those reports may do to your product?

Mr. Hacker: It may make a difference, Your Honor, and I didn't mean to suggest that, you know, these are psychics.

The point simply is, following up on the Chief Justice's question, that it does matter what the basis of the allegation, and is the evidence, the facts available to the company, reliable?

Does it create a reliable inference that a reasonable investor would be concerned about?

Justice Anthony Kennedy: Well, suppose you stipulate in response to the Chief Justice's question that it is irrational, that it is probably baseless, but that the market will react adversely.

Is there a duty then to address the claim?

Mr. Hacker: Under the case law, it's not clear that that's true.

In this case, looking at this case specifically, Your Honor, when the market reacted, what the market was reacting to was a Good Morning America report.

It's very important to be clear about what that report said.

On Good Morning America, a leading morning news program, the allegation was made by Dr. Jafek that Zicam causes anosmia.

That's a very different allegation that what the company was -- than what it was the company was aware of, which was simply the adverse event reports.

Justice Anthony Kennedy: But if there's a baseless report and we stipulate that, although it's baseless, it's going to affect the market, could that be the basis for an allegation, assuming the requisite scienter, that there's liability?

Mr. Hacker: Two answers I would say, Your Honor.

First of all, we have to be very careful about creating a rule through our interpretation of materiality that would require companies in advance to disclose the fact that a baseless, false allegation about the company is going to come out because it requires the company to ring the bell--

Justice Anthony Kennedy: But it's not the allegation.

It's the fact that the market may be affected.

Mr. Hacker: --Well, I understand, but the problem is it's the underlying -- what the rule would say is, because the company is aware the market may be affected, the company in advance has to say: 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.

Justice Ruth Bader Ginsburg: Mr. Hacker -- Mr. Hacker, you just said, if I understood you correctly, that when the -- when the news came out on Good Morning America, accurate or not, there was an obligation to do something about it, but among the -- the charges, it's not simply that there was these reports, but it's the way the company responded to them: Two press releases that said allegations of any link of these drugs to anosmia are completely unfounded.

That statement was made even after the -- what was it, Dr. Jafek?

Mr. Hacker: Right.

Justice Ruth Bader Ginsburg: --had this presentation, and he was going to put Zicam's name on it and the company said, you don't have any permission to do that.

So the company prevented Good Morning America from happening earlier, and it made these affirmative statements that there's no linkage.

Mr. Hacker: Well, what they said was, and this was true, that it was completely unfounded and misleading.

The very scientific panel that plaintiffs themselves rely on, which convened and issued its report 2 weeks later, confirms that.

There was no -- it's absolutely unfounded at the time to--

Justice Ruth Bader Ginsburg: I thought that the scientific report that came out later said, we can't say one way or the other, as opposed to the company saying that any suggestion of linkage is completely unfounded.

Mr. Hacker: --And that's correct, there isn't.

When -- when the scientific panel said you can't make that claim, it's unfounded, there's no basis in the available science.

Justice Ruth Bader Ginsburg: They didn't say "unfounded".

They said the evidence is not -- we can't say yes and we can't say no.

That's different from completely unfounded.

Mr. Hacker: Well, I'm -- with respect, Your Honor, I'm not entirely sure it is.

When you're talking about science, you make a claim that's either supported in the science or it's without support, and the point the scientific panel was making is there was no support in the available science, and what Jafek was relying on was unreliable.

As I just described, the one--

Justice Elena Kagan: Well, Mr. Hacker, you were saying that the question of whether there is support is reducible to the question of whether there are statistically significant findings.

Now, as I understand it, the FDA takes action all the time as to drugs -- they force the withdrawal of a drug from the market, they force relabeling of a drug -- on the basis of findings that are not statistically significant.

Now, clearly in those cases the market has a right to know the very things that are going to make the FDA take action against a product and that are going to severely affect the product's value to the company.

Not statistical significance there.

Mr. Hacker: --That's true, but the problem with that sort of standard -- well, first of all, to emphasize, to look at the facts of this case, the FDA didn't take any action until 5 years later, but -- which shows--

Justice Elena Kagan: Well, it could and eventually it did.

Mr. Hacker: --But that's--

Justice Elena Kagan: And you are suggesting a test for what -- what counts as material, which is statistically significant, a test that the FDA itself doesn't use when it thinks about what it should what it should regulate.

Mr. Hacker: --The problem is ex ante.

You have to -- you can't look at this through hindsight.

You have to look at it ex ante.

When a company has a handful of reports, it's absolutely true, nobody would dispute, that some day in the future, with the accumulation of more data, the FDA may take action based on its own prophylactic public health regulatory discretion.

But at the time, ex ante, no company when it gets an adverse event report can possibly know whether that's enough information for the FDA to act.

So the prospect that the FDA may some day act on the basis of additionally accumulated information would require disclosure of all reports all the time, and that we submit cannot be the standard.

Justice Antonin Scalia: Mr. Hacker, suppose Good Morning America made the same claim, categorically saying that this drug caused this condition, but did so simply on the basis of these adverse incidents, and they didn't have Dr. Jafek's, or whatever his name is, reports, but nonetheless Good Morning America comes out on the basis of those incidents saying Zicam causes whatever the condition is.

Would that have to be reported?

And if not, why not?

Mr. Hacker: I think what you would have to be hypothesizing is evidence that the company, say a week in advance, knew that Good Morning America was going to come out and say that.

Because once Good Morning America says it, it's said it and the effect is what it is.

But even in the hypothetical, you'd have to sort of unpack what you said.

If Good Morning America came out and said just what Matrixx knew at the time, there are a handful of adverse event reports, it's over millions of product uses over a 4-year period, and no indication that that's at all in any way different from the incident rate in the general population, especially among cold users, who of course are most likely to experience anosmia, we don't know what would have happened.

But then you add the element that Good Morning America then declares that Zicam causes anosmia -- again, the hypothetical would have to be in advance Matrixx is aware that the false claim is going to be made.

Justice Antonin Scalia: Fine.

Mr. Hacker: Right, and I would say, first of all, we have to be very careful, as I said before, about a rule that requires a company to disclose false facts.

I would say, second, that a reasonable investor doesn't want false information; a reasonable investor wants accurate information.

And a reasonable investor would actually--

Justice Antonin Scalia: These are unreasonable investors who are relying on some talking head on Good Morning America who says that this is true, even though it isn't true.

Mr. Hacker: --That's the third point I would make, Your Honor, is it's a different case, a fundamentally different case, if you're talking about a media--

Justice Antonin Scalia: You've neither answered yes or no.

There's no basis for its being said on Good Morning America, but unreasonable investors by the thousands rely upon it.

Mr. Hacker: --And I think the answer is no.

I think the reason it's no, a qualified no, is because--

Justice Antonin Scalia: No--

Mr. Hacker: --the law doesn't respond to irrational, unpredictable, or unreasonable investors.

It responds to a reasonable investor who wants accurate -- a reasonable investor is going to hold the stock.

Chief Justice John G. Roberts: A reasonable investor is going to worry about the fact that thousands of unreasonable investors are going to dump their Matrixx stock.

Mr. Hacker: I absolutely understand that.

Chief Justice John G. Roberts: I mean, there's nothing unreasonable about that.

If it looks -- if you're looking at Good Morning America, you say, my gosh, everybody else is going to sell this; I'm going to sell, too.

And if it turns out you knew about it you should have told me about it before.

Mr. Hacker: The point I would make is, first of all, a company ex ante can't know when that's going to happen.

So all the hypotheticals are suggesting some way of knowing the company--

Chief Justice John G. Roberts: It may not know, but it certainly can know.

If you know this is a very false report, but we know that, I don't know, the surgeon general, somebody, is going to come out and announce it and that will cause an effect--

Mr. Hacker: --That's why it's a meaningfully different case.

If the plaintiffs had plead in their complaint that there's a memo inside the company, for example, so this false fact is going to come out, and we know it's going to cause a stock drop, that would be a case involving the materiality of a media splash, a big media event.

It can't be that there's a false claim out there somewhere and the company becomes aware of the false claim and then purely hypothetically it's possible that somebody will make the false claim.

It becomes also possible that the media will pick up and not be persuaded to ignore the false claim.

That's the kind of case we're talking about here.

Justice Elena Kagan: In most cases we don't know whether the claim is false or not.

So let me give you a hypothetical.

There's a pharmaceutical company and it comes out with its first and only product, it's 100 percent of the sales, and it's a new contact lens solution.

And it sells this product to many, many, many hundreds of thousands of people.

And most of them use this product with no adverse effect whatsoever, but there are ten cases where somebody uses this product and they go blind.

Three of those ten cases, the person had to borrow a contact lens from a friend, only used it in one eye, they go blind only in that one eye.

This is not statistically significant.

There is no way that anybody would tell that you these ten cases are statistically significant.

Would you stop using that product and would a reasonable investor want to know about those ten cases?

Mr. Hacker: I would want to know more about the number of uses and all that, but, no, there wouldn't be a basis.

A reasonable investor would want to know all the facts and details that would establish a reason to draw a--

Justice Elena Kagan: There are a lot of contact lens solutions in the world.

So if I heard that, ten people went blind, three used it in one eye, three went blind in that eye, I'd stop using the product; and if I were holding stock in that company, I would sell the stock.

Mr. Hacker: --The problem is, there has to be some reliable basis.

You may be describing facts that would satisfy the Bradford Hill criteria, for example, where you can draw a reliable inference that the product is the cause.

That's the key here.

There has to be a reliable basis for inferring causation.

Justice Stephen G. Breyer: This is the same kind of question, but suppose I don't really know how drug companies operate.

I suspect, but I don't know, that where you have a serious drug, people are hurt all the time and they blame the drug.

So probably drug companies operate in an environment where they get all kinds of complaints and some are valid, some are not; who knows?

People are frightened.

Mr. Hacker: Very much so.

Justice Stephen G. Breyer: Okay.

Now, I don't know that.

But you say at the beginning your client says: Look, we get complaints all the time; you know, just put up with it if you buy our stock.

Now, I don't know to what extent that's true.

I don't know how that fits in.

I don't know whether their complaint is unusual or not unusual or general.

Who is supposed to decide that?

The judge at the complaint stage?

Or the judge after you get some evidence on it?

Or the jury?

And the same is true of scienter, after all, because the scienter -- and you have to plead that with particularity.

Okay.

What's your answer?

What's -- I mean, Justice Kagan had an interesting view of this, and it could be that she's putting forward and others might have a different view.

Who is to decide this?

Mr. Hacker: Well, ultimately it's a question -- it would go all the way to the jury if the plaintiffs were able to plead facts in the complaint that entitled them to--

Justice Stephen G. Breyer: Well, we don't know.

You see, what they're saying is we have one respectable doctor, studier, at, you know, in Colorado.

He, by the way has an abstract, which isn't in the complaint, which says that they do allege that it's zinc that's the problem, a free zinc ion.

And they say we also have 25 people who were hurt and some burning sensations in people that didn't rise to that level.

You know, I don't know.

I don't know if that's within the range of expectation of drug companies as part of the normal course of business which investors should know about, and I suspect a district judge doesn't know, either.

So how does it work where we in fact just don't know whether this does or not arise above the background noise of a drug company?

Mr. Hacker: --We think the answer is statistical significance, just like the Second Circuit said in Carter-Wallace--

Justice Stephen G. Breyer: Oh, no, it can't be.

I'm sorry, I don't mean to take a position yet.

But, look, Albert Einstein had the theory of relativity without any empirical evidence, okay?

So we could get the greatest doctor in the world and he has dozens of theories, and the theories are very sound and all that fits in here is an allegation he now has learned that it's the free zinc ion that counts.

And that could be devastating to a drug even though there isn't one person yet who has been hurt.

So I can't see how we can say this statistical evidence always works or always doesn't work.

Mr. Hacker: --But, Your Honor, out of millions of uses, if there was that problem, it wouldn't be hard to plead a case that says there is a significant problem--

Justice Stephen G. Breyer: They did.

They said -- they said the free zinc ion was -- that word on this was told to your client by a person who knows a lot about it, is apparently reputable, and was told to a person who also knows a lot about it.

I think they're saying you ought to have been very nervous at that point.

That isn't just the usual background noise, okay?

So I'm back to my question, which is -- you can answer the other one too if you like.

But my question is: Who is supposed to decide, how?

Mr. Hacker: --Well, I think a plaintiff -- I mean, I may just be repeating myself, but a plaintiff has to plead the facts that would entitle them to relief at the end of the day.

So, I'm not saying a judge--

Justice Stephen G. Breyer: I know, and we are back to my question--

Mr. Hacker: --And--

Justice Stephen G. Breyer: --The question is, the facts that are pleaded is -- I think it's assumed that this is above the normal background noise; they certainly argue that at length -- that there was this free zinc ion conversation, that there are 25 people who were hurt, and there is a lot of burning sensation going on, even though it doesn't rise to the level of people being hurt, and that's supported by some of the zinc sulfate studies in the fish--

Mr. Hacker: --I think you need to--

Justice Stephen G. Breyer: --okay?

Now, they're saying that's above the background noise and you say, no, it isn't.

Now, who decides and how do we decide?

Don't we have to go to a trial?

Mr. Hacker: --The answer is no, Your Honor, because there is no basis on those pleaded facts for inferring that there's actually a problem with the zinc ion--

Justice Stephen G. Breyer: I know.

I know, but over--

Mr. Hacker: --but look at the allegations--

Justice Stephen G. Breyer: --We're not saying -- you're saying if you are a scientist -- now we're back to Justice Scalia's questions and the--

Mr. Hacker: --But it matters what a scientist would think because it's only then that anybody ex ante, again, remember--

Justice Stephen G. Breyer: --Well, then what--

Mr. Hacker: --has a basis for inferring that there is a causal link which would be the problem, and the zinc -- to be very clear, to be very clear about the zinc studies, the claim made on the telephone wasn't even a claim of causation.

It said, are you aware of the zinc sulfate studies, which of course is a fundamentally different compound than--

Justice Stephen G. Breyer: --No, because the sulfate -- you see in the abstract, which they didn't put in the complaint, that the problem that they saw arising out of the zinc sulfate studies was the free zinc ion.

Mr. Hacker: --No, the zinc sulfate studies were -- totally irrelevant.

What they cited for the free zinc ions were studies of catfish and turtles.

And nobody thinks, nobody thinks, that you can infer anything from a study of catfish and turtles about their smell sensation and human beings.

Justice Stephen G. Breyer: The trouble is, you know, the truth is I don't know, and so I'm back to my question.

Mr. Hacker: Well, in terms of scienter, under the securities law there has to be a plausible basis--

Justice Sonia Sotomayor: Counsel, you got cert granted on a limited question, and the limited question was whether in a complaint that alleges only adverse reports can you prove materiality and scienter without proving statistical importance.

That's the question presented.

Justice Kagan started with the point that the FDA doesn't require that.

It requires just reasonable evidence of a connection, not statistical.

Many of the amici here have done a wonderful job of explaining why statistical importance can't be a measure because it depends on the nature of the study at issue.

So given all of that -- and even in your brief, in a footnote, you answered the question by saying, no, we can't establish that rule as an absolute, because there are additional factors that could prove materiality and scienter.

So you've already answered the question presented.

Are we down to what Justice Scalia asked you, which is: We got a no to the question: Are the facts in this case enough?

I don't know why we would have granted cert on that, but you presented a different question presented.

Given the question presented, is the answer no?

And if not, why not?

Mr. Hacker: --Let me -- let me start with the premise of the question presented.

It's presented on the facts as the case has been litigated today, trying to rely on adverse event reports, which is understandable.

The plaintiffs don't want to have to prove all of the other -- you wouldn't think they would want to prove all the other facts.

Justice Sonia Sotomayor: Can I just interrupt a second?

Mr. Hacker: Sure.

Justice Sonia Sotomayor: This wasn't an FDA-approved drug.

Mr. Hacker: Right.

Justice Sonia Sotomayor: So there weren't any adverse reports in the legal sense of that word.

Mr. Hacker: In the FDA sense, that's true.

Justice Sonia Sotomayor: In the FDA sense.

So we're using a misnomer here to start with.

Mr. Hacker: Well--

Justice Sonia Sotomayor: Continue.

Mr. Hacker: --I would just say that adverse event reports are not limited to what qualifies for the FDA, certainly not by the way the case is--

Justice Antonin Scalia: --Of course, if I may interject--

Mr. Hacker: --litigated.

Justice Antonin Scalia: --the FDA acts in the public interest, doesn't it?

Mr. Hacker: Yes.

Justice Antonin Scalia: And it doesn't make money by withdrawing a drug from the market?

Mr. Hacker: Yes.

Justice Antonin Scalia: As opposed to somebody who sues, who makes money on the lawsuit?

Mr. Hacker: That's true.

But there's a broader point about the FDA, which I think is underlying your question and Justice Kagan's question, which is I don't even think it's true that the FDA really requires reasonable evidence.

They have broad discretion and should have broad discretion.

Nobody is contesting that.

But the question is, again ex ante, before you know what the FDA might do, before there's sufficient evidence to justify the FDA to act.

Remember, the FDA didn't act for 5 years.

The FDA didn't act on the basis of what Matrixx was aware of at the time, and so, that can't be the standard, the idea that the FDA may some day act.

Statistical significance -- the question of statistical significance is presented in this case to the extent the courts below were arguing about and the plaintiffs were arguing about whether or not the small number of raw adverse event reports tell you anything meaningful.

The real standard -- the -- the case got developed in the briefing here when the plaintiffs came back and said, well, there's more to it and there can be more to it, and that, of course, is true, but the standard has to be reliability.

Justice Ruth Bader Ginsburg: You have said raw adverse event reports.

Am I not right that all of these reports came from medical doctors, and in response to the very first one, the company representative said, yeah, we've been getting reports since 1999?

Mr. Hacker: Well, there's a reference -- I mean, there's a -- 1999 was the first call from Dr. Hirsch, who reported one patient.

There is a discussion with Dr. Linschoten about one other patient.

And there were some reports -- nobody is disputing that there were some reports out there.

Justice Ruth Bader Ginsburg: My question is, does it make a difference if these reports come from medical experts in this particular field?

Mr. Hacker: No, because a doctor doesn't have unique expertise in diagnosing causation.

A doctor -- if you have a sore knee, a doctor is qualified to tell you -- to diagnose the fact that your sore knee is the product of bone cancer.

A doctor is not qualified to tell you why you got bone cancer, and that's the problem that we have here.

I would like to reserve the balance of my time.

Chief Justice John G. Roberts: --Thank you, Mr. Hacker.

Mr. Frederick.

ORAL ARGUMENT OF DAVID C. FREDERICK ON BEHALF OF THE RESPONDENTS

Mr. Frederick: Thank you, Mr. Chief Justice, and may it please the Court:

In TSC and Basic, this Court reaffirmed the longstanding rule that materiality is judged based on the total mix of information available to investors.

Matrixx initially sought a major change to this Court's contextual approach to materiality by offering a bright line standard of statistical significance.

In its reply brief, Matrixx offer -- offers a rule that would apply only in the hypothetical scenario where investors rely solely on numbers of adverse event reports in pleading securities fraud.

This Court should reject both arguments in this case.

The broad theory has numerous legal and policy flaws.

First, the longstanding totality of the circumstances test best comports with the varied reasons why investors make investment decisions.

Justice Samuel Alito: Suppose the allegations of materiality are based solely on adverse event reports?

Suppose that it's alleged that ten million people during -- during -- during 1 year have taken a particular drug and five people shortly after taking the drug have developed certain -- have had an adverse -- have had -- experienced an adverse event.

Is that sufficient to go to a jury?

Mr. Frederick: Well, probably not sufficient to go a jury absent a drop in the stock price, absent evidence that there was a scientifically plausible link, absent evidence that the product was highly important to the company's long-term financial prospects.

All of these things go into the contextual mix that investors would regard as important in making an investment decision, and they all happen to be present here.

We--

Justice Antonin Scalia: If it was the only product, they sold that might be enough, five adverse reports out of ten million?

If -- if that's the only product they make, you say, totality of the circumstances, that may be enough?

Mr. Frederick: --Under the Basic test, Your Honor, that very well might if the probability and the magnitude of the harm -- if those five incidents were deaths from a product that was easily substitutable, that might be a relevant decision and information that investors might want to take into account.

Chief Justice John G. Roberts: In response to Justice Alito, I heard you say something about a scientifically plausible link?

Mr. Frederick: Correct.

Chief Justice John G. Roberts: That seems to me to be a rather significant concession.

In other words, you're saying it's not simply the fact that some psychic would say something, that that is not sufficient, even if that has an impact on the market price, that there has to be some scientifically plausible link to the report?

Mr. Frederick: I think this goes back to Justice Kennedy's question as well, Mr. Chief Justice, because there could very well be materiality.

The information might be important for investors, but it could very well be that the people making the disclosures don't have the requisite scienter because there is an absence of any plausible relationship.

The stock price might drop on news that would not be regarded as news that the most highly scientifically rational people would take into account.

Justice Anthony Kennedy: Well, I thought this might come up.

At some point do we look at scienter and then go back from that to whether or not it's material, i.e., the argument would be the company knew that this would affect the price, and that's why they didn't disclose it and therefore that shows it's material?

Or do we do this with two isolated boxes: one, materiality, two, scienter, and we don't mix the analyses.

Mr. Frederick: They're both analytically distinct and related, Justice Kennedy, and I don't have a simple answer for you because many of the recorded cases raise issues of both materiality and scienter.

What the Court has said in Basic is that the test is the total mix of information and whether that -- under that total mix the investor would find that information important.

In Tellabs the Court said that whether or not the inferences of scienter could be deemed as plausible as other inferences based on the mental state of the people making the information.

So the Court has announced separate tests.

In a case like this there is a natural overlap, and in fact the other side has litigated this case on the basis that no one would have thought within the company, based on the adverse event reports, that there was a basis for thinking there was information.

We plead the other way by saying that when you have three medical specialists in three distinct periods where the last wants to bring findings to the leading ear, nose and throat medical society suggesting that, based on studies that go back as far back as the 1930s, there is a scientifically plausible link based on the zinc ions, that's something that the company should have taken seriously and disclosed to investors.

Justice Elena Kagan: But Mr. Frederick, suppose you are the CEO of a pharmaceutical company with a new drug, you've just put it back on the market, and you get a report back, this drug has caused a death, right?

This is your first adverse effect report.

Do you have to disclose it?

Mr. Frederick: Well, I guess the first thing I would say is if the drug has not been FDA approved, that would be material information that investors might want to know.

If the drug had been FDA approved and that report was then submitted to the FDA, I think that there's a closer call depending on the, you know, effect of the report that might be on the stock price, because that's the only company product and the other factors that we've mentioned in our brief.

I think the question of one event is obviously much more difficult than where there are multiple events submitted by doctors with a scientifically plausible basis on a product that's 70 percent of the company's revenues.

Justice Samuel Alito: Now we're told that there are hundreds of thousands of these; for a -- for a typical drug there may be thousands of these adverse event reports in -- in a year, and you're -- basically you're saying all of those have to be disclosed?

Mr. Frederick: Justice Alito, they already are all disclosed.

Justice Samuel Alito: Well they -- already.

So then why does the company have to make additional disclosure?

Mr. Frederick: The--

Justice Samuel Alito: Analysts who follow the stock price can easily look at the FDA web site and see the adverse event reports that have been reported--

Mr. Frederick: --Right.

Justice Samuel Alito: --and draw whatever conclusions seem to be warranted based on that.

Mr. Frederick: That's why I think this presents the issue in a rather artificial way, because the reports here were not the classic FDA-regulated adverse event reports.

This was a homeopathic drug that was put on the market without FDA approval, and there were no requirements of reports until 2006 which was after the -- at issue here.

Justice Stephen G. Breyer: How would you write -- look, I'm asking how do you write this, because what -- where I think where the other side has a point, is if -- with these -- this is a big class of these kinds of things, you know, vitamins, all kinds of things like that -- and if we say that they have to disclose too much, what will happen is people won't pay attention to it, you know.

And if -- if you have, you know, 4,000 pages of small print saying everything that was ever reported, what really happens in -- in such instances is the public pays no attention, and they think -- and it will hide things that are actually important.

So how would you write some words -- assuming that you're right, that their test is wrong -- but how would you write some words that will put a disclosure obligation such that it's not going to be overkill and it is going to get incidents that rise above the background noise, and those are the incidents that are -- that would be significant for a reasonable investor?

Mr. Frederick: I would start with the language in Basic which says the total mix of information is what has long standing been the test for materiality under this Court's cases.

I would say that where there is credible medical professionals describing the harms based on credible scientific theories to back up the link, a very serious health effect risk for products with many substitutes, and the effect is on a predominant product line, then the company ought to disclose that information.

I will not--

Justice Stephen G. Breyer: Okay, I'll go back and read what you've just said, and -- I will, because it will be in the transcript, and -- and the -- I -- this case, you are very good, your clients, and the lawyers at writing complaints.

Mr. Frederick: --Right.

Justice Stephen G. Breyer: All right?

So they've alleged in this complaint everything they can show, and I -- I suspect -- and during the class period.

And what it doesn't say is that very helpful chart that you put in the brief, in the pocket.

It doesn't say they ever showed that to the company.

All it says is there was a phone call and this individual from -- from Colorado said something, which it doesn't specify, about zinc and the -- and the number of deaths.

Mr. Frederick: Well, in 1999, though, Justice Breyer, Dr. Hirsch, and this is outlined at paragraph 25 of the complaint, also said that intranasal application of zinc could be problematic, and he specifically asked about how much zinc is put in Zicam precisely because of his awareness of prior studies going all the way back to the polio period in which zinc had created a problem of persistent anosmia.

But our submission here is that--

Justice Sonia Sotomayor: How was your -- that long litany of factors you mentioned a few moments ago about how a company will go about determining whether an adverse event report is material or not or should be disclosed or not, are you saying that companies don't have to respond to irrational securities holders?

Are you accepting your adversary's proposition that on some level -- you said credible evidence -- that they don't have to respond to things they judge are not credible?

Mr. Frederick: --It really depends, Justice Sotomayor, and I don't mean to be evasive, but if there is a product, say, that has some link to satanic influences, and there is some reason to think that a large body of followers in an irrational way might regard there to be satanic influences on the basis of a particular product, a cautious, reasonably prudent investor might want to know that on the basis of that information that most of us would regard as irrational, might affect the stock price.

Chief Justice John G. Roberts: So what protection is there at the summary judgment stage in response to allegations?

Because it doesn't have to be scientifically valid; it can be completely irrational.

All you have to do is allege that, you know, if you had told this the price would have gone down.

If you had disclosed this the price would have gone down, and the response from the company is, well, but this is just ridiculous.

This is some guy in his garage who writes this out on -- on a -- you know, a piece of paper in -- in handwriting; and the response is going to be, well let's let the jury sort it out.

Mr. Frederick: There are two answers, Mr. Chief Justice.

One is in Basic itself, the Court talked about the actions of a reasonable investor, and this Court and many courts have always looked at a reasonable person's standard in making all sorts of these fine judgments about the importance of particular information.

But the second answer is--

Chief Justice John G. Roberts: Well, you just told me that it would be enough if somebody says that there's a satanic, you know, impact on this, because a reasonable investor would say there are enough crazy people out there that this is going to affect the price.

Mr. Frederick: --What I said was if the product was one that might be, you know, attractive in some way to people who had that particular following.

I think you have to link up the product with the nature of the complaint and the effect of the importance of the information--

Chief Justice John G. Roberts: So it matters whether -- I don't know what kind of product has particular satanic susceptibility--

[Laughter]

--but I mean, are you saying it matters if it's something that -- that Satan's not going to be interested in?

I don't understand.

[Laughter]

Mr. Frederick: --You're--

Chief Justice John G. Roberts: I don't mean to be facetious, but your way of distinguishing the satanic product is that it depends on whether people who follow satanic cults are going to be interested or not.

I mean--

Mr. Frederick: --Well, Your Honor, there are people who follow those things, and they spend money and they buy stocks, but my second point is that scienter -- scienter is the other way around this problem.

Because even though information--

Justice Antonin Scalia: I don't know if scienter is -- it seems to me ridiculous to -- to hold companies to -- to irrational standards; and we did -- and we did say in -- in Basic that it's viewed -- whether it would be viewed by the reasonable investor.

And -- and you are saying well, the reasonable investor takes account of the irrationality.

I don't think that's what we meant in -- in Basic.

Mr. Frederick: --Well, Justice Scalia, you can certainly write as a prophylactic here that that isn't part of -- the test.

We certainly have here all of the indicia of credible medical professionals on a credible scientific theory on a product that was important to the company's finances, and a very serious side effect for a drug that had ready--

Chief Justice John G. Roberts: --So that -- I'm just trying to get your response to that.

You just talked again about credible scientists and all that, and you're putting those other things to one side.

So even if you have your satanic problem, that is not enough.

And you can sit there and allege it would cause a drop of 30 percent in the stock price, and you should have let this know.

Your answer is no, they don't have to let -- they don't have to disclose this because there is no scientific credible basis for the link that's alleged?

Mr. Frederick: --Now, I'm saying two things.

One is that there is a difference between scienter and materiality.

There is importance of information and an intent to deceive, and the questions are analytically distinct.

In your hypothetical, Mr. Chief Justice, I think you merged them, and I would like to keep them separate because as we -- as this case comes to the Court, the issue is what is the standard for materiality and whether or not statistical significance is the only way to--

Justice Samuel Alito: Can I give you -- because I'm having a little difficulty understanding the boundaries of the argument you're making.

Let me give 2 hypotheticals, and they both involve companies that have one product, and this is their one product.

The first one was what I mentioned before, and I wasn't -- I wasn't clear about your answer.

All that's alleged is that a very large number of people took the drug and that three people, after taking the drug, within a week developed a certain syndrome.

That's the first one.

Is that enough for materiality?

The second one is that a company receives a telephone call: Hello, I'm a general practitioner from wherever, and I treated a patient and the patient took your medication and shortly after that developed this syndrome, and I think there might be a connection.

Is that enough for materiality?

Mr. Frederick: --On the second one, I would say probably not.

And I would say on the first one, there's not enough information about the side effect and what the drug is intended to solve.

I mean, the probability magnitude test as articulated by this Court goes to the probability of the effect versus the magnitude that would be perceived by investors, and those are important factors they go into.

So your hypothetical is very difficult to answer as you have framed it.

Justice Samuel Alito: All right.

This drug, let's say it's a drug to relieve the common cold and the effect is loss of the sense of smell.

Five million people take it.

Three people, after taking it, lose their sense of smell.

Is that enough for materiality by itself?

Mr. Frederick: It -- by itself, that could be enough, and the reason we know that could be enough, Justice Alito, is that when, you know, some score additional were released and this information was disclosed, the stock price went down by 23.8 percent.

Justice Ruth Bader Ginsburg: Mr. Frederick your time is running out, and there is one thing you emphasize in your brief, and I haven't heard you say one word about it here.

And that is: You're saying this is not a case of a company that remains silent.

The company, in response to this, issued press releases in which it said any suggestion of a linkage is completely unfounded.

Now, that's something different from, there are X number of reports.

To what extent are you relying on the affirmative statements that the company made?

Mr. Frederick: We're relying on those to establish scienter, both at the beginning of the class period when they forced Dr. Jafek, through their legal threats, to take Zicam off his poster presentation, and then later when they said that the reports of anosmia were completely unfounded.

And "misleading" was the word that they used.

"And misleading".

And they repeated that after the Good Morning America program came on, only to say three weeks later, after empaneling a scientific expert panel, that the information was insufficient to make that determination.

Our submission is that that is enough.

Justice Antonin Scalia: Mr. Frederick, I'm -- I'm not clear on why you can draw a distinction between materiality and scienter for purposes of the issue before us here.

If, indeed, satanic effect is enough for materiality, you say, well, it may not be enough for scienter.

Why?

I mean, if the company knows that satanic effect is material, then the company has -- knowingly withholds it because it thinks satanic effect is irrational, why doesn't that company have scienter, if it's material?

The scienter is withholding something that is material that is known to be material, and once you say that -- you know, that Satan is material, if the company thinks Satan is involved here, it has to put it in its report, no?

Mr. Frederick: And it would depend on what kind of stock effect occurred.

Justice Antonin Scalia: So there's no difference between the materiality issue and the scienter issue.

Mr. Frederick: Well--

Justice Antonin Scalia: You can't push this problem off onto the scienter side of the equation.

Mr. Frederick: --It depends -- it depends on this Court's application of its known precedent, which my colleague here has not even referenced in his opening argument, Basic, which says you look at the total mix of the information.

And all of these things go into play.

Justice Stephen G. Breyer: Okay.

I get that.

Can I just ask you one question in response to -- just picking up on the last, what about the need for a, quote, "strong inference of scienter", end quote, and does this complaint show more than a borderline situation where it doesn't strongly infer that the person intended to mislead the defendant?

What about that argument?

Mr. Frederick: Well, we believe, and they haven't argued that this complaint is not sufficient under the PSLRA, which set the heightened pleading standard for scienter that this Court articulated and construed in the Tellabs decision, so we believe that scienter is adequately pleaded here based on--

Justice Stephen G. Breyer: Well, page 49 of their brief -- they have two pages on it -- it does not give rise to a strong inference of scienter.

Mr. Frederick: --What I'm saying is that there is already a heightened pleading standard, Justice Breyer.

I was not -- I misunderstood your question to say, is there some other heightened pleading standard other than the one--

Justice Stephen G. Breyer: No, no, I mean -- I just want to know why, if their inference on materiality is enough to survive the background noise reply, is it enough to show a strong inference that they did do this intending to mislead, a strong inference of scienter?

Mr. Frederick: --The key aspects here are their treatment of Jafek when Jafek was going to go public with his scientifically linked claim of anosmia from the Zicam, and then subsequently when they issued press releases saying it would be completely unfounded and misleading to assert any causal link.

That is sufficient to establish a strong inference of scienter.

Chief Justice John G. Roberts: Thank you, Mr. Frederick.

Mr. Shah.

ORAL ARGUMENT OF PRATIK A. SHAH ON BEHALF OF THE UNITED STATES, AS AMICUS CURIAE, SUPPORTING THE RESPONDENTS

Mr. Shah: Mr. Chief Justice, and may it please the Court:

For 35 years, this Court's precedents have instructed that information is material for securities fraud purposes if a reasonable investor would have viewed it as having meaningfully altered the total mix of information.

Under the terms of their question presented, petitioners propose to depart from that contextual inquiry in favor of a categorical rule that deems information about an adverse drug effect immaterial absent statistical significance.

Justice Antonin Scalia: Mr. Shah, what do you think about Satan?

Mr. Shah: Let me try to unpack the satanic connection hypotheticals a little bit.

Now, to be sure, if someone just called a company and said, hey, I think you guys are affiliated with satanic practices, surely a company would not have to go and disclose that to all the investors.

But this is going to depend on what the actual reality is and what the company's statements have been.

Now, if the company has made a statement that, look, consumer confidence in our products is at an all-time high and we expect sales to double in the next quarter, and yet they are aware that there -- a consumer boycott is being planned by, let's say, 10 percent of their consumer base premised on the irrational notion that their company is tied to Satan, then certainly to correct their affirmative representation that consumer confidence is at an all-time high and that they expect their sales to double, a reasonable investor would want to know--

Justice Antonin Scalia: They haven't said that.

They haven't said that our sales are going to double.

They're just walking along at normal sales.

Mr. Shah: --Right.

Justice Antonin Scalia: And they find out that 10 percent of nutty-nuttys out there are not going to buy their stuff because of Satan.

What about that?

Mr. Shah: Your Honor, in that hypothetical, it depends on what affirmative statements the companies have made.

Under the securities law -- and this is an important point that I don't think has come through yet.

Under the securities laws, there is no baseline duty to disclose for a manufacturer or a company.

A company creates a duty to disclose once they have spoken.

So it's going to depend on what the company has said.

Now, in your scenario, if a company has made statements projecting their company's success into the next quarter, for example, and they have a concrete basis to know that, as your hypothetical submits, 10 percent of their computer -- consumer base is going to leave the company's products, that is almost certainly going to be material to an investor, and so yes, they would have to disclose that we have reason to believe, however ridiculous it is and untrue it is, that 10 percent of our consumer base has decided to boycott our products.

That's certainly reasonable.

Chief Justice John G. Roberts: You would have -- you just said they would have a duty to disclose?

Mr. Shah: Yes, your honor.

Chief Justice John G. Roberts: I thought you earlier just said there's no affirmative duty to disclose; it only is based on what they say?

Mr. Shah: It's based on what they said.

So, for example, if the company had simply remained silent and not said anything about its future sales, its prospects, then under the securities laws there is no duty to disclose.

Basic and other cases have long made clear that there has to be something to trigger a duty to disclose.

That is, under Rule 10b-5 it's only statements that are rendered misleading by the omission of a material fact that can trigger liability.

If there is no projection about the company's future success, then it wouldn't have to disclose in that situation.

Justice Samuel Alito: What if the company makes the kind of relatively common statements that were made here, poised for growth in the upcoming season, very strong momentum going into the season, extremely well positioned for successful season?

Mr. Shah: Sure, Your Honor--

Justice Samuel Alito: That -- that triggers the duty to disclose the satanic rumors?

Mr. Shah: --In certain cases where there are very generalized statements, for example, we think our product will do well, that may close -- come close to the line of puffery that is a nonactionable statement that no reasonable investor would rely on.

Petitioners have never pressed that argument before this Court.

There is no dispute about whether the statements that Matrixx made in this case are actionable, even though I agree with you that some of them probably come close to that puffery line.

Here, though, we don't just have those statements about the company being well positioned for future growth.

There are additional statements, and these were made to stock analysts that they expected a 50 percent increase in annual revenues, and, of course, there are the much more affirmative statements that the drug's safety had been well-established and that the reports of anosmia were completely unfounded and misleading.

Those statements certainly crossed the line.

And as I said before, there hasn't been an argument in this case as to whether those less specific and arguably puffery type statements--

Justice Antonin Scalia: 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, assuming the company has said we're doing well, right?

Mr. Shah: --Well, Your Honor, yes, I think it would depend, again, on the statements the company makes.

If -- if--

Justice Antonin Scalia: Well, I mean, if Satan comes in, surely lousy science comes in as well, no?

Mr. Shah: --Okay.

So -- so, for example, if -- if a company had been faced with potential adverse effect and it had assembled its blue ribbon panel of scientists, conclusively determined that there is no causal connection between this purported adverse effect and their drug, the question is, would they have to disclose in that circumstance?

I think if the company had simply made statements relating to the drug safety, we think our drug is safe, there is no reason to believe that it causes any adverse effects, then the answer is no, because the reported adverse effect would not call into question the accuracy of the company's statements relating to the safety of the drug.

If, however, the company had made specific statements relating to consumer demand for its products and it knew, notwithstanding the fact that there was no causal connection, it knew or had good reason to believe that a significant portion of its consumer base would avoid the product, then, yes, a reasonable investor would want to know that information, and under Basic the company would have a duty to disclose that, even though unfounded, these reports may lead a significant percentage of our consumer base to leave the product.

I think that falls squarely within the definition of materiality, which is would a reasonable investor want to have known that information?

Justice Elena Kagan: Mr. Shah, what deference do you think that the SEC's understanding of materiality it's entitled to and why?

Mr. Shah: Well, Your Honor, this Court in both TSC and Basic accorded what it called due deference to the SEC's views on the application of the materiality standard.

I think it's certainly true -- and -- and those, by the way, were both -- the -- the Court was deferring to the views of the SEC as expressed in amicus briefs to the Court just like in this case.

I think the SEC is due a significant deference based on, one, its long-standing historical practice in applying the materiality standard, which is part of its own rule, Rule 10b-5, and its special expertise in knowing what a reasonable investor would want to know based upon its experience in this area.

So, I do think that to the extent there is any ambiguity remaining in this case, the Court should defer to the SEC's views.

And back to Justice Breyer's questions about what should the Court write simply beyond reiterating the Basic standard, I think what the Court did in Basic was it not only articulated the general standard, but it laid out some factors.

And in laying out those factors, that's where the Court deferred to the SEC's brief.

And it laid out factors that a reasonable investor might find relevant in that case it was the merger context.

In here on page 28 of our brief, we lay out several factors that we think bear on the materiality question in this particular context; that is, involving adverse drug information.

Chief Justice John G. Roberts: Is there any way that consideration of those factors would support a -- a summary judgment in favor of the pharmaceutical manufacturer, other than the fact of having an extremely poor lawyer drafting a complaint?

Anytime you have a variety of factors like that--

Mr. Shah: Sure.

Chief Justice John G. Roberts: --I think it's very difficult for the judge to say anything other than that's for the jury.

Mr. Shah: If you mean at the motion to dismiss phase, Chief Justice?

Chief Justice John G. Roberts: Yeah.

Mr. Shah: I think there would be some cases.

And in fact, we know there are dozens of 12(b)(6) motions granted in securities fraud cases, and let me lay out a few scenarios for you.

One would be in the -- in the -- in the scenario where the company has not made any actionable statements.

It has either -- statements predicated to duty to disclose.

It either has been made--

Chief Justice John G. Roberts: No, no, I'm talking about the -- I'm talking about materiality.

In other words, based solely on -- in other words, you're saying if they say anything related, it's going to be enough--

Mr. Shah: --Sure.

Chief Justice John G. Roberts: --whether it's a scientific basis or not.

Mr. Shah: Sure.

Two responses to that.

One, the PSLRA does have a safe harbor for companies once they make forward-looking statements, that if they add in meaningful cautionary language -- and this is in the PSLRA itself, section 5(c)(1)(A), that if they add in meaningful cautionary statements, then they cannot be subject to liability.

And I think there are a couple other scenarios that would -- would trigger, for example, if the product at issue is such a small percentage of the company's income or expected growth that no reasonable investor would care if it tanked, then that might be a circumstance where a motion to dismiss would be appropriate.

Thank you, Your Honor.

Chief Justice John G. Roberts: Thank you, counsel.

Mr. Hacker, you have three minutes remaining.

REBUTTAL ARGUMENT BY JONATHAN HACKER ON BEHALF OF THE PETITIONERS

Mr. Hacker: Thank you, Mr. Chief Justice.

I would like to return to Justice Kennedy's question about the role of scienter here, which I think absolutely is critical as this Court emphasized recently in the Merck v. Reynolds case.

Mr. Frederick correctly, I think, conceded that there has to be a scientifically plausible basis.

And what you're talking about here is the company's knowledge of a scientifically plausible basis.

And he has to make that concession in this case because of what is alleged to be the material omission.

The material omission is not knowledge of dubious scientific -- medical claims, it's not that we get one phone call from a doctor.

The real material omission is that the adverse event reports told Matrixx that Zicam causes anosmia.

That's ultimately the fact that -- that Matrixx supposedly did not disclose.

So there has to be a basis for believing that -- there has to be allegation in the complaint that sufficient to establish Matrixx actually knew that Zicam causes anosmia and yet willfully refused to tell investors that fact, and there's nothing in the complaint like that.

There's not -- you're not talking about a case where there was a failure to disclose the doctor's completely dubious untested claim.

It's not a case -- it's not the Satan case where you're talking about a media splash, a known fact that there is going to be a major media splash and the company knows for a fact that that splash is going to have the adverse effect on the stock.

There is not even a claim here--

Justice Sonia Sotomayor: Has that -- the solicitor general's argument.

He wasn't actually even talking about causation.

He was talking about a statement you made about the company poised to double its growth.

And I think he was saying that on the basis of what you had heard up until that time, you had to have known that that statement was misleading, as was the statement that this drug, that there was absolutely no proof or connection of causation, which was your scientific panel said you couldn't make that extreme statement.

Mr. Hacker: --Well, two points, Your Honor.

First, if the claim was about, you know, the consumer sales, you would need an allegation in the case that consumer product sales were actually affected.

There's no allegation like that, and the truth is they weren't.

And so you're not talking about falsifying any prior claim.

There's not even an allegation that that happened, Your Honor.

Second, with respect to the -- the statement, as I was discussing with Justice Ginsburg in the beginning part of the argument, the statement was what the scientific panel was addressing primarily was Jafek's claim that Zicam causes anosmia, and the company said accurately that that is completely unfounded and misleading because there is no scientific support for it.

You can't go out and claim that Zicam causes anosmia unless you have a scientific basis for that and the scientific panel was saying that isn't true.

So the question is whether you can draw an inference of scienter from the fact that -- from what's alleged here, and there is simply no basis for an allegation, supportable allegation that the company knew it causes anosmia and nevertheless refused to tell investors that.

Thank you.

Chief Justice John G. Roberts: Thank you, counsel.

The case is submitted.

At this moment, the court will observe a moment of silence in honor of the victims of the shooting in Tucson and join the rest of the nation in doing so and I invite the members of the bar and the spectators to join, thank you very much.

Print this transcript Transcript: 

Justice Sonia Sotomayor: Respondents, plaintiffs in this securities fraud class action alleged that petitioner Matrixx Initiatives, Inc. made statements that were misleading in light of reports that Matrixx had received from medical professionals about patients who had lost their sense of smell after using Matrixx's leading product, a zinc-based remedy called “Zicam Cold Remedy”.

According to the complaint, the professionals drew Matrixx attention to studies that had demonstrated a link between inter-nasal application of zinc and loss of smell.

Respondents claimed that Matrixx made a series of public statements regarding revenues and product safety during the class period that were misleading in light of this information.

Matrixx argues that respondents have not adequately alleged that Matrixx made a material misrepresentation or omission.

In Basic, Inc. versus Levinson, we held that the materiality requirement is satisfied when there is, “A substantial likelihood that the disclosure of the omitted fact would've been viewed by the reasonable investor as having significantly altered the total mix of information made available”.

Matrixx proposes a bright-line rule that reports of adverse events associated with a pharmaceutical company's products cannot be material, absent a sufficient number of such reports to establish a statistically significant risk that the product is causing the events.

We reject this rule.

Medical experts and the Food and Drug Administration rely on evidence other than statistically insignificant data establish an inference of causation.

Given that medical professionals and regulators act on the basis of evidence of causation that is not statistically significant, it stands to reason that in certain cases reasonable investors would as well.

Assessing the materiality of adverse event reports is a fact specific inquiry that requires consideration of the source, content, and content of the reports.

The mere existence of reports of adverse events will not be material information.

Something more is needed, but that something more is not limited to statistical significance and can come from “the source, content, and context of the reports.

We conclude that respondents have adequately pled materiality in this case.Assuming the complaint's allegations to be true, Matrixx received information that plausibly indicated a reliable causal link between its product and loss of smell.

In light of all the complaint's allegations, it is substantially likely that a reasonable investor would have viewed this information as having significantly altered the total mix of information made available.

Matrixx also argues that respondents have not adequately alleged that Matrixx acted with the required state of mind.

Under the Private Securities Litigation Reform Act, a plaintiff must state with particularity facts or giving rise to those strong inference that the defendant acted with the required state of mind.

We have explained that a complaint satisfies the standard only if a reasonable person would deem the inference of scienter, cogent and at least is compelling as any opposing inference one could draw from the facts alleged.

The complaint's allegations give rise to a cogent inference that Matrixx elected not to disclose the reports, not because it believed they were meaningless but because it understood their likely harmful effect on the market.

This inference is at least as compelling as any opposing inference.

We conclude that respondents have adequately pled that Matrixx acted with the required state of mind.

For these reasons, the judgment of the Court of Appeals for the Ninth Circuit is affirmed.

The decision of the Court is unanimous.