October Term, 2010
March 22, 2011
Today the Supreme Court issued two decisions, described below, of interest to the business community.
Securities Exchange Act—Materiality
Matrixx Initiatives, Inc. v. Siracusano, No. 09-1156 (previously discussed in the June 14, 2010 Docket Report).
Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 provide that a business may be held liable for failing to disclose a material fact when disclosure is necessary to make statements regarding the purchase or sale of securities not misleading. Today, the Court issued a unanimous decision in Matrixx Initiatives, Inc. v. Siracusano, No. 09-1156, reaffirming that a particular fact is material “‘when there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having altered the “total mix” of information made available.’” Slip op. 10 (quoting Basic v. Levinson, 485 U.S. 224, 231–32 (1988)).
Matrixx, the defendant below, is a pharmaceutical company that manufactures products to treat common-cold symptoms under the brand name Zicam. According to the class-action complaint, Matrixx violated § 10(b) and Rule 10b-5 when it failed to disclose “adverse event reports” related to use of Zicam—specifically, reports that a handful of users lost their sense of smell. Matrixx argued that these reports were not material, because they were so few in number as to not be statistically significant. The district court agreed and dismissed the complaint for failure to state a claim, but the Ninth Circuit reversed. The Supreme Court granted certiorari to resolve a split among the courts of appeals regarding whether an allegation of statistical significance was necessary to render the reports “material” facts.
In its decision affirming the Ninth Circuit, the Court rejected a bright-line rule requiring statistical significance for materiality, just as the Basic Court had refused to lay down such a bright-line rule regarding merger negotiations. Instead, the Court reaffirmed Basic’s “total mix” standard, observing that any bright-line rule would be either over- or under-inclusive. The Court observed that neither the FDA nor scientific bodies necessarily require statistically significant proof of causation before taking or recommending action. “Given that medical professionals and regulators act on the basis of evidence of causation that is not statistically significant, it stands to reason,” the Court found, “that in certain cases reasonable investors would as well.” Slip op. 15.
The Court carefully limited its ruling. First, it reiterated that as a general matter “§10(b) and Rule 10b–5(b) do not create an affirmative duty to disclose any and all material information,” but instead require disclosure only when failure to disclose would render other statements misleading. Slip op. 16. Second, with respect to pharmaceutical companies in particular, it noted that the “mere existence” of adverse event reports is not necessarily material and that “[s]omething more is needed” to render them material. Id. However, that “something more” is not limited to statistical significance; it can come from “the source, content, and context of the reports.” Id. Going forward, companies should be aware that a lack of statistical significance will not automatically render undisclosed information immaterial for the purposes of the highly fact-specific materiality inquiry under § 10(b) and Rule 10b-5.
Fair Labor Standards Act—Retaliation—Oral Complaints
Kasten v. Saint-Gobain Performance Plastics Corp., No. 09-834 (previously discussed in the March 22, 2010 Docket Report).
The Fair Labor Standards Act of 1938 (“FLSA”) contains an anti-retaliation provision that forbids an employer from subjecting an employee to an adverse employment action “because such employee has filed any complaint” under the FLSA. 29 U.S.C. § 215(a)(3). Today, in Kasten v. Saint-Gobain Performance Plastics Corp., No. 09-834, the Supreme Court resolved a conflict among the courts of appeals over whether the term “filed any complaint” encompasses oral, as well as written, complaints. The Court held that it does.
The plaintiff in Kasten had orally complained to both his supervisor and the human-resources manager that the placement of the company’s time clocks was unlawful under the FLSA. The plaintiff further warned the company that he “‘was thinking about starting a lawsuit about the placement of the time clocks’” and that the company “would ‘lose’ in court.” Slip op. 2–3. According to the plaintiff, he was disciplined and later discharged for these complaints in violation of the FLSA’s anti-retaliation provision. The district court granted summary judgment for the company, and the Seventh Circuit affirmed, reasoning that the provision covered only written complaints. The Supreme Court reversed that decision.
Writing for the majority, Justice Breyer first noted that “legislators, administrators, and judges have all sometimes used the word ‘file’ in conjunction with oral statements” and that “oral filings were a known phenomenon” when the FLSA was passed. Slip op. 5, 6. The Court then concluded that “inhibiting use of the Act’s complaint procedure by those who would find it difficult to reduce their complaints to writing, particularly illiterate, less educated, or overworked workers,” would “undermine the Act’s basic objectives.” Id. 9. Moreover, the Court observed, limiting the scope of the anti-retaliation provision to the filing of written complaints would “take needed flexibility away from those charged with the Act’s enforcement.” Id. 10. The Court acknowledged that “the statute requires fair notice” and noted that “a complaint must be sufficiently clear and detailed for a reasonable employer to understand it.” Id. 11, 12. However, the Court held that this standard can be satisfied by oral complaints. Also guiding the Court’s decision was the fact that the Department of Labor “has consistently held the view that the words ‘filed any complaint’ cover oral as well as written, complaints.” Id. 12.
Deeming the argument waived, the Court refused to consider whether “the antiretaliation provision applies only to complaints filed with the Government.” Slip op. 14.
In a dissenting opinion joined by Justice Thomas (except as to one footnote), Justice Scalia took the position that the anti-retaliation provision covers only official grievances filed with a court or an agency.
Justice Kagan did not participate in the case.
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