Appeal from the United States District Court for the District of Arizona Mary H. Murguia, District Judge, Presiding. D.C. Nos. CV 04-0886 MHM & CV 04-1012 MHM.
The opinion of the court was delivered by: Tashima, Circuit Judge
Argued and Submitted June 9, 2009 -- San Francisco, California.
Before: Mary M. Schroeder, A. Wallace Tashima and Carlos T. Bea, Circuit Judges.
Matrixx Initiatives, Inc. ("Matrixx") is a pharmaceutical company that sells cold products through its wholly-owned subsidiary, Zicam, LLC. One of its main products is Zicam Cold Remedy, which comes in several different forms.*fn1
Plaintiffs-Appellants are lead plaintiff, NECA-IBEW Pension Fund, and named plaintiff, James Siracusano, in a class action brought against Matrixx and three Matrixx executives (collectively "Appellees") under the Private Securities Litigation Reform Act of 1995 ("PSLRA"). Appellants alleged that Appellees violated the Securities Exchange Act of 1934 by failing to disclose material information regarding Zicam Cold Remedy - specifically, that Zicam causes a condition called anosmia, which is a loss of the sense of smell, in its users. The district court granted in part and denied in part Appellees' motion to strike portions of the complaint and granted Appel-lees' motion to dismiss the complaint and the action. We have jurisdiction pursuant to 28 U.S.C. § 1291. We reverse and remand for further proceedings.
On April 27, 2004, Appellants filed a class action against Matrixx and three individual defendants - Carl Johnson, Matrixx's Chief Executive Officer, President and a director; William Hemelt, Matrixx's Chief Financial Officer and Executive Vice President; and Timothy Clarot, Matrixx's Vice President and Director of Research and Development - on behalf of investors who purchased Matrixx securities during the class period, October 22, 2003, to February 6, 2004. Zicam Cold Remedy accounted for approximately 70 percent of Zicam's sales during the class period. Zicam Cold Remedy's active ingredient is zinc gluconate and can be applied as a nasal spray or a gel. Appellants alleged that Appellees were aware that numerous users of Zicam had developed anosmia, but that they failed to disclose the risk and instead issued false and misleading statements regarding Zicam.
I. Allegations of Adverse Information Regarding Zicam
In December 1999, Dr. Alan Hirsch, the Neurological Director of the Smell & Taste Treatment and Research Foundation, Ltd., "called Matrixx's customer service line to inquire into the amount of zinc contained in Zicam nasal gel." CAC ¶ 25. Hirsch spoke with a Mr. Landau and explained that at least one of Hirsch's patients had developed anosmia after using Zicam. Hirsch stated that other studies had indicated potential problems with "intranasal application of zinc," and offered to conduct a clinical study on the issue. Mr. Landau declined his offer.
In September 2002, Clarot, Vice President of Research and Development, called Miriam Linschoten, Ph.D., of the University of Colorado Health Sciences Center. Clarot contacted Linschoten because a patient Linschoten had treated for loss of smell following use of Zicam also had complained to Matrixx. Linschoten expressed concern that Zicam, an over-the-counter product, contained no warning that it could cause a loss of smell. Clarot told Linschoten that Matrixx had received similar complaints from other customers as early as 1999. Linschoten asked whether Matrixx had performed any studies, told Clarot about existing studies linking zinc sulfate to the loss of smell, and offered to send Clarot information regarding those studies. Clarot replied that Matrixx had not done any studies but that "it had hired a consultant to review the product." CAC ¶ 26.
On September 20, 2002, Linschoten sent an email to Clarot including abstracts on the link between zinc sulfate and the loss of smell. Clarot called Linschoten to ask if she would participate in animal studies to be conducted by Matrixx, but Linschoten declined because she focused on human, not animal, research.
Linschoten, Dr. Bruce Jafek of the University of Colorado School of Medicine, and another colleague planned to submit their findings regarding ten patients who had developed anosmia following Zicam use in a presentation to the American Rhinologic Society on September 20, 2003. On September 12, 2003, "Matrixx sent a letter to Jafek stating that he did not have permission to use Matrixx's name or the names of its products" in the presentation. CAC ¶ 29. Jafek asked for permission to use the Zicam name, but Matrixx refused. The presentation to the American Rhinologic Society accordingly was made without naming Zicam. "Jafek's findings regarding Zicam were ultimately disclosed to the public on February 6, 2004 on Good Morning America." Id.
"As of April of 2004, Dr. Jafek had evaluated over 100 cases of anosmia following Zicam use." CAC ¶ 30. Linschoten had treated approximately 65 such patients, all of whom complained of "an 'immediate, severe burning' immediately following use of Zicam nasal gel, followed by a loss of smell." None of the patients had fully recovered. Id. Jafek and Hirsch "have observed that the Zicam nasal spray does reach the upper area of the nasal cavity where smell reception occurs."
II. Allegations of Misleading Statements
On October 22, 2003, Matrixx issued a press release announcing that its net sales for the third quarter of 2003 had increased by 163% over the third quarter of 2002. Johnson was quoted in the press release as follows:
The Zicam brand is poised for growth in the upcoming cough and cold season with improved retail exposure by virtue of three [new] unique oral delivery forms of our Zicam Cold Remedy product, the resumption of our television advertising campaigns in recent weeks and the momentum from last year's successful season. Additionally, our retail partners have come to rely on the Zicam brand not only as an efficacious product for their customers, but also for the profitability that Zicam branded products produce for their respective bottom-lines.
Matrixx 10/22/2003 press release. Appellants alleged that these statements were materially false and misleading because they failed to disclose Appellees' awareness of the material health risk that Zicam posed to consumers.
On October 23, 2003, Appellees held an earnings conference call, at which Johnson expressed his "enthusiasm for the most recently completed quarter" and his "optimis[m] about the future." 10/23/03 Tr. at 1. Johnson explained that we have very strong momentum going into the upcoming cough and cold season. In addition, what lies behind these results is a unique product in the Zicam product line, a product that offers a unique benefit, the ability for consumers to actually reduce the duration and severity of the common cold, not just mask the symptoms, and tremendous support that we are receiving from our retail customers.
Id. at 2. Johnson further expressed the expectation for the year that "our revenues will be up in excess of 50% and that earnings per share for the full year will be in the 25-30ó range." Id. at 5. Hemelt stated that the growth "was driven by increased sales of all 10 of our Zicam products," explaining that approximately one-third of the increase in sales was due to "three new Zicam oral cold remedy products," and that the remainder of the increase "was due to increased sales of our other seven Zicam products." Id. at 4. Johnson and Hemelt then answered questions.
At one point, they were asked to "make any comment on the litigation MTXX or its officers are involved in, or whether or not there is any SEC [Securities and Exchange Commission] investigation." Id. at 17. They replied that "[t]he officers of this company are not involved in any litigation," and that they were not aware of any SEC investigation.*fn3 Id. at 17-18. Johnson concluded by reiterating "the optimism we have for the future." Id. at 32. There was no mention of the anosmia issue.
On November 12, 2003, Matrixx filed its Form 10-Q report for the third quarter of 2003 with the SEC. The section of the Form 10-Q that Appellants alleged was false and misleading was this paragraph from the section on Risk Factors:
We may incur significant costs resulting from product liability claims
We are subject to significant liability should use or consumption of our products cause injury, illness or death. Although we carry product liability insurance, there can be no assurance that our insurance will be adequate to protect us against product liability claims or that insurance coverage will continue to be available on reasonable terms. A product liability claim, even one without merit or for which we have substantial coverage, could result in significant legal defense costs, thereby increasing our expenses and lowering our earnings. Such a claim, whether or not proven to be valid, could have a material adverse effect on our product branding and goodwill, resulting in reduced market acceptance of our products. This in turn could materially adversely affect our results of operations and financial condition.
CAC ¶ 35. Appellants alleged that these statements were materially false and misleading because Appellees "failed to disclose that a lawsuit alleging that Zicam caused anosmia had already been filed and, given the findings of the researchers at the University of Colorado it was highly likely that additional suits would be filed in the future." Id.
Matrixx issued a press release on January 7, 2004, in which it "upwardly revised its guidance for fiscal year 2003. The Company expects total 2003 revenues to grow by greater than 80 percent compared to 2002 and fully diluted earnings per share to be in the range of $0.33 to $0.38." CAC ¶ 37. Matrixx reported that "[t]he increase in the guidance for 2003 reflects a much greater incidence of colds than previously anticipated." Id.
On January 30, 2004, an article in the Dow Jones Newswires reported that the FDA was "looking into complaints that an over-the-counter common-cold medicine manufactured by a unit of Matrixx Initiatives Inc. (MTXX) may be causing some users to lose their sense of smell." The article stated that "[t]he FDA's interest follows at least three lawsuits filed by individuals against Matrixx and Zicam LLC, a wholly-owned subsidiary, by users of Zicam Cold Remedy."
Appellants alleged that Matrixx's stock declined after this report, "falling from $13.55 per share on January 30, 2004 to $11.97 per share on February 2, 2004." CAC ¶ 41.
On February 2, 2004, Matrixx issued a press release, "respond[ing] to the Dow Jones 'In The Money report: FDA Looks Into Complaints About Zicam,' by Carol S. Remond, alleging that the FDA is investigating consumer complaints regarding intranasal zinc gluconate-induced ...