a. What was the holding?
b. What does this mean?
Zicam Cold Remedy was a nasal spray (or gel) that accounted for 70% of Matrixx's sales revenue. Its active ingredient was zinc gluconate. Matrixx began receiving reports that some Zicam users had developed anosmia (that is, they had lost their sense of smell). Then it learned for the first time that some studies had linked the use of zinc sulfate to the loss of smell.
A year later, Matrixx found out that two doctors were planning to make a presentation at a conference about patients who had developed anosmia after Zicam use. Matrixx sent them a letter warning them that they did not have permission to use the name of Matrixx or its products. The doctors deleted references to Zicam.
Nine people filed suit against Matrixx alleging that Zicam had damaged their sense of smell. Matrixx issued statements that Zicam was poised for growth and that revenues would increase by more than 80 percent. In its 10-Q filing with the SEC, Matrixx warned of the potential "'material adverse effect'"that could result from product liability claims, "whether or not proven to be valid." It did not disclose, however, that plaintiffs had already sued Matrixx.
After the Food and Drug Administration (FDA) announced that it was investigating Zicam, Matrixx's stock price fell. Matrixx issued a press release stating:
"Matrixx believes statements alleging that Zicam products caused anosmia (loss of smell) are completely unfounded and misleading. In no clinical trial of zinc gluconate gel products has there been a single report of lost or diminished olfactory function (sense of smell). 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."
The day after this press release, Matrixx stock price bounced back. Shortly thereafter, however, the TV show Good Morning America reported that more than a dozen patients had suffered from anosmia after using Zicam and that some had filed lawsuits against Matrixx. The company's stock price plummeted.
A group of shareholders filed suit alleging that Matrixx had violated §10(b) and Rule 10b-5. The trial court granted Matrixx's motion to dismiss on the grounds that, without a statistical correlation between the use of Zicam and anosmia, the reported incidents were not material. The Court of Appeals reversed. The Supreme Court granted certiorari.