I am no fan of Zicam.
But, Matrixx, the makers of Zicam quietly lost a Supreme Court case last week.
The specifics of the case are not that nasty, but the direction it leads is nothing but trouble.
Here’s the details:
- Matrixx made Zicam and a lot of money. Investors like this.
- Matrixx received anecdotal reports that Zicam use led to loss of the sense of smell. It didn’t tell investors because the evidence wasn’t strong.
- Good Morning America did tell the public. Matrixx share prices dropped and investors lost money.
- Investors sued for security fraud. Matrixx lost, appealed, and has now lost at the highest level. The decision was unanimous.
The case hinges on the requirement that a company release information to investors that is “material” to the value of their investment.
The borderline for what is “material” is squishy. That squishiness has benefitted lawyers in the creation of securities fraud cases. This decision will make this problem worse:
Justice Sonia Sotomayor, writing for the court on Tuesday, roundly rejected Matrixx’s proposal that information can be material only if it meets standards of statistical significance.
“Given that medical professionals and regulators act on the basis of evidence of causation that is not statistically significant,” she wrote, “it stands to reason that in certain cases reasonable investors would as well.”
On the other hand, she said, “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” the requirement of materiality. Instead, she said, companies and courts must consider “the source, content and context of the reports.”
Here, Justice Sotomayor wrote, the plaintiffs had accused Matrixx of having received information from “three medical professionals and researchers about more than 10 patients who had lost their sense of smell after using Zicam.” That was enough to allow the case to go forward in its earliest stages, she wrote.
If the accusations are proved true, she said, “Matrixx received information that plausibly indicated a reliable causal link between Zicam and anosmia.”
Reasonable investors would want to know about the reports, she said, particularly given the importance of the product to the company and the risk-benefit calculation consumers might make after hearing of the possibility that using a cold remedy could result in lasting injuries.
In rejecting the proposed categorical rule in favor of a contextual inquiry, the court provided only limited guidance to companies and lower courts.
So, let’s think about this.
- Matrixx did invest time to investigate the complaints — duh — that’s how they know they were statistically insignificant.
- The Supreme Court has ruled that their objective method of evaluating complaints must be replaced by a subjective one — like what’s the likelihood that an availability entrepreneur out in the legacy media is going to feed their content monster with this.
Now, I have no doubt that investors would really like to know that there are reports of problems with the product they’ve bought a piece of, and I think Zicam is a scam anyway, so I’m inclined to believe there’s some culpability. I’m biased though.
Even so … this is like a theatre owner being told by a patron that there might be a fire in the theatre. That patron may not have a big mouth, but someone else might, and the owner is responsible if they use it. So, the Supreme Court has concluded that the owners must shout “Fire!” in the crowded theatre first to follow the law.
But … we spend a lot of time talking in statistics classes about how everything is a statistical test (whether you view it that way and do the work, or not). And, one of the worst things you can do with a statistical test is to change the level of significance after you run the test. This is precisely what the Supreme Court is suggesting: Matrixx has a significance level for their tests that they used, and the Supreme Court is telling them at a later date that they should have used a higher number. They didn’t specify the number.
Sheesh.
