When reports surfaced that some consumers of the now-discontinued cold remedy Zicam had lost their sense of smell, the manufacturer, Matrixx Initiatives, Inc., saw shares of its stock lose value.

The drug company issued statements in defense of the product, first dismissing the incidence of the loss of sense of smell as statistically insignificant, then saying there was no scientific basis for linking Zicam to the apparent side effect.

On Tuesday, in a 9-to-0 decision, the US Supreme Court cleared the way for an investor class-action lawsuit to move forward against Matrixx, saying the company had an obligation to reveal details of the observed side effects to investors even though the company’s information did not rise to the level of statistically significant data.

At issue in the case was whether the information the company withheld from investors was important enough to justify an investor lawsuit under federal securities law.

The company said its disclosure obligation arose only when it possessed statistically significant information about the side effects of its product.

On Tuesday, the Supreme Court said there is no bright line rule requiring statistically significant information.

Instead, the court embraced a “total mix” standard of whether a reasonable investor would have viewed the non disclosed information as significantly altering the total mix of information available to the investing public.

“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,” wrote Justice Sonia Sotomayor in the 22-page decision.

The case stems from an investor lawsuit claiming Matrixx Initiatives fraudulently withheld information about the adverse side effects in an effort to prevent its stock price from plunging.

Federal securities laws require companies to disclose key information to investors, including detrimental information that might lead to a lower stock price.

Amid reports that its product was causing customers to lose their sense of smell, the company made a series of public statements suggesting the suspect product (Zicam) was “poised for growth in the upcoming cough and cold season,” and that the company had “very strong momentum.”

The company also told investors it expected an 80 percent increase in revenues.

A few months later, after a news report that the Food and Drug Administration was investigating complaints of customers losing their sense of smell, the company’s stock fell from $13.55 to $11.97 per share.

'No statistically significant difference'

The company responded by issuing a new statement that the overall incidence of adverse events was extremely low and that there had been “no statistically significant difference between the adverse event rates” for the product’s users and subjects who had been given placebos.

The same day the company’s stock rebounded to $13.40 per share.

A few weeks later, ABC’s news program “Good Morning America” ran a segment on Zicam, reporting that one researcher had identified a dozen patients who lost their sense of smell while using the product.

The stock plunged to $9.94 per share later that day.

The company again responded with a statement. It said it had convened a two-day meeting with physicians and scientists who concluded there was “insufficient scientific evidence” to link the product to the loss of the ability to smell.

Investors sued.

A federal judge dismissed the lawsuit on grounds that the investors were unable to show that the company had withheld data showing a statistically significant correlation between the product and the loss of the sense of smell. A panel of the Ninth US Circuit Court of Appeals reinstated the suit, ruling that the investors had cited enough facts to state a claim under securities laws.

Risks vs. benefits

In affirming the Ninth Circuit’s ruling, Justice Sotomayor said that the investors’ 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.”

Sotomayor added: “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).” This would have suggested to investors a significant risk to the commercial viability of the company’s leading product, she said.

“It is substantially likely that a reasonable investor would have viewed this information as having significantly altered the total mix of information made available,” she wrote.

The company withdrew Zicam cold remedies from the market in 2009 after the FDA issued consumer warnings.

The case is Matrixx Initiatives v. Siracusano (09-1156).