Brown
Penultimate Amazing
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A case now pending before the United States Supreme Court involves issues of science. The case is Matrixx Initiatives, Inc. v. Siracusano.
In the court of oral arguments, the Court gets into questions relating to psychics, science, irrational people, homeopathy, satanic influence, and perhaps the role of Satan himself.
First, a little bit about the facts of the case. Matrixx makes a reputed cold remedy called Zicam. Zicam is (supposedly) a homeopathic product, and Matrixx claimed that this product was clinically proven to reduce the severity and duration of the common cold. Even so, the product was not regulated by the FDA and had not been evaluated for safety and efficacy. Matrixx sold millions of Zicam products.
In 1999, Matrixx began to receive isolated reports about adverse reactions from people who took the product, notably loss of sense of smell. The total number of adverse reactions is unknown, but it is estimated to be about one to two dozen. Matrixx said it tried to follow up on the reports but could not. In any event, Matrixx deemed the reports to be of no basis, since loss of sense of smell was a well-known side-effect of the common cold itself, and the number of complaints was statistically insignificant.
It appears that Matrixx did NOT also assert that a homeopathic product cannot cause adverse pharmacological effects, due to the absence of active chemical elements.
It appears, however, that there is more to this so-called homeopathic product than one might think. Matrixx called its product homeopathic so that the company could avoid federal regulation. But there are indications that the product was not one in which total dilution was applied. Instead, Zicam used zinc gluconate, and zinc has long been touted as a cold remedy. And zinc ions, which have been linked to loss of sense of smell, may have been present in Zicam. At least, this is what the medical doctors concluded might be involved, when their patients reported losing their senses of smell after using a product that supposedly had an active ingredient of zinc gluconate. (For more information, see this thread and this thread.)
When it was reported that there were adverse effects to Zicam, the value of Matrixx stock dropped. In response, Matrixx issued a press release saying that statements linking its intranasal product and loss of smell are "completely unfounded and misleading." This apparently stopped the decline in stock price.
Unfortunately, troubles for Matrixx were just beginning. Stockholders sued, saying that the company misled them under the securities laws. It is the securities misrepresentation issue, not the scientific issue of whether the homeopathic product can actually do anything pharmacologically, that is at issue.
(After the securities suit, the FDA got after Matrixx, saying that even though Zicam was labeled as homeopathic, the FDA could exercise its discretionary enforcement against homeopathic products because there was evidence of a safety risk. Matrixx also got hit with a product liability lawsuit.)
At issue was whether there could be misrepresentation when the reported adverse effects were hearsay and statistically insignificant. Matrixx won at the lowest court level, but lost on appeal. The Ninth Circuit ruled that statistical significance is not determinative, but the question should be whether reasonable investors would have viewed the information about the link between the product and the purported effect as significant.
There has not been a trial in this case, or significant discovery of evidence. The issue was basically, if the reputed problems are statistically insignificant and a company does not report them because they are insignificant, can the company be liable for misrepresentation under securities laws? Given the way the case got to the Supreme Court, the statistical insignificance of the reports will be assumed to be true. With that assumption, can you legally have a misrepresentation, with materiality and scienter (basically, knowing that there is a falsehood that is going to be important)… for a concern that lacks statistical significance and might be purely imaginary??
The case was argued to the United States Supreme Court on 10 January 2011. Read the transcript here.
Jonathan Hacker argued on behalf of Matrixx. After Justice Ginsburg asked a question about procedure, Justice Alito asked:
A purported maker of a homeopathic product is arguing that it what matters is evidence, and there is a rejection of a sort of placebo effect that might be at work here (it’s not whether or not it’s true, what matters is that a lot of people BELIEVE it to be true). The surreal nature gets even stranger when the purported maker of a homeopathic product argues a solidly scientific principle:
David Frederick argued on behalf of the folks suing Matrixx. Not long after he started, the question of psychics was raised:
The business about satanic influence did not draw any immediate comment, and it appeared that the Court might let it slide. Until:
In the court of oral arguments, the Court gets into questions relating to psychics, science, irrational people, homeopathy, satanic influence, and perhaps the role of Satan himself.
First, a little bit about the facts of the case. Matrixx makes a reputed cold remedy called Zicam. Zicam is (supposedly) a homeopathic product, and Matrixx claimed that this product was clinically proven to reduce the severity and duration of the common cold. Even so, the product was not regulated by the FDA and had not been evaluated for safety and efficacy. Matrixx sold millions of Zicam products.
In 1999, Matrixx began to receive isolated reports about adverse reactions from people who took the product, notably loss of sense of smell. The total number of adverse reactions is unknown, but it is estimated to be about one to two dozen. Matrixx said it tried to follow up on the reports but could not. In any event, Matrixx deemed the reports to be of no basis, since loss of sense of smell was a well-known side-effect of the common cold itself, and the number of complaints was statistically insignificant.
It appears that Matrixx did NOT also assert that a homeopathic product cannot cause adverse pharmacological effects, due to the absence of active chemical elements.
It appears, however, that there is more to this so-called homeopathic product than one might think. Matrixx called its product homeopathic so that the company could avoid federal regulation. But there are indications that the product was not one in which total dilution was applied. Instead, Zicam used zinc gluconate, and zinc has long been touted as a cold remedy. And zinc ions, which have been linked to loss of sense of smell, may have been present in Zicam. At least, this is what the medical doctors concluded might be involved, when their patients reported losing their senses of smell after using a product that supposedly had an active ingredient of zinc gluconate. (For more information, see this thread and this thread.)
When it was reported that there were adverse effects to Zicam, the value of Matrixx stock dropped. In response, Matrixx issued a press release saying that statements linking its intranasal product and loss of smell are "completely unfounded and misleading." This apparently stopped the decline in stock price.
Unfortunately, troubles for Matrixx were just beginning. Stockholders sued, saying that the company misled them under the securities laws. It is the securities misrepresentation issue, not the scientific issue of whether the homeopathic product can actually do anything pharmacologically, that is at issue.
(After the securities suit, the FDA got after Matrixx, saying that even though Zicam was labeled as homeopathic, the FDA could exercise its discretionary enforcement against homeopathic products because there was evidence of a safety risk. Matrixx also got hit with a product liability lawsuit.)
At issue was whether there could be misrepresentation when the reported adverse effects were hearsay and statistically insignificant. Matrixx won at the lowest court level, but lost on appeal. The Ninth Circuit ruled that statistical significance is not determinative, but the question should be whether reasonable investors would have viewed the information about the link between the product and the purported effect as significant.
There has not been a trial in this case, or significant discovery of evidence. The issue was basically, if the reputed problems are statistically insignificant and a company does not report them because they are insignificant, can the company be liable for misrepresentation under securities laws? Given the way the case got to the Supreme Court, the statistical insignificance of the reports will be assumed to be true. With that assumption, can you legally have a misrepresentation, with materiality and scienter (basically, knowing that there is a falsehood that is going to be important)… for a concern that lacks statistical significance and might be purely imaginary??
The case was argued to the United States Supreme Court on 10 January 2011. Read the transcript here.
Jonathan Hacker argued on behalf of Matrixx. After Justice Ginsburg asked a question about procedure, Justice Alito asked:
Justice Scalia, perhaps unsatisfied with that answer, pointed out that there was studies connecting Zicam and loss of smell. Hacker said the studies showed no such connection. Chief Justice Roberts felt that it didn’t matter whether there really was a connection or not:
Now the Chief is just being hypothetical here, but the rule being toyed with is that maybe the law would require that some credence be given to psychics… as long as some people take them seriously, whether it is rational to do so or not.
A pause may be due here, so that we may appreciate the surreal nature of the arguments.
A purported maker of a homeopathic product is arguing that it what matters is evidence, and there is a rejection of a sort of placebo effect that might be at work here (it’s not whether or not it’s true, what matters is that a lot of people BELIEVE it to be true). The surreal nature gets even stranger when the purported maker of a homeopathic product argues a solidly scientific principle:
Justice Scalia toyed with the notion of whether you need to make disclosures for the benefit of investors who are complete ignoramuses:
Justice Kagan reminded everyone that the rationale of this case will apply not only to makers of homeopathic drugs, but to makers of (shall we say) more legitimate drugs as well. But Justice Breyer shortly thereafter weighed in on his understanding of scientific history, and whether having any evidence was really all that important:
Justice Breyer’s point, to which he eventually got, was to ask who had the right to decide whether an adverse effect was statistically significant or not.
David Frederick argued on behalf of the folks suing Matrixx. Not long after he started, the question of psychics was raised:
Mr. Frederick basically responded that the science questions relate to scienter (basically, whether there was intent to deceive), rather than to materiality. After all, there are a lot of people who are moved by things that are irrational or that are unsupported by evidence. For example: Mr. Frederick referred to occult forces, a decision that he might later regret:
Basically, Frederick argued that he had a slam-dunk win on the issue of whether the falsehood was material. Virtually ANYTHING is material, if dodos believe it. And he argued he ought to win on the guilty knowledge element as well because of the doctors and studies, which Matrixx dismissed.
The business about satanic influence did not draw any immediate comment, and it appeared that the Court might let it slide. Until:
Justice Scalia might be sounding like he makes a lot of sense here, but he later returns to the question of Satan:
Pratik Shah argued the position of the United States. Get a load of Justice Scalia’s first question to him:
Shah answered seriously, but he treated the satanic business like any other scandalous rumor that a company might face. Justice Alito brought up satanic influence, and so did Justice Scalia, with perhaps the quote of the day:
