Court addresses different kind of cold case

Freedom New Mexico

The scientific standard for statistical significance and the legal standard for material misrepresentation in a federal securities case aren’t the kinds of topics that typically inspire lively dinner conversation. Nevertheless, a recent Supreme Court decision involving these issues deserves greater public attention and will affect consumers’ choices in their stock portfolios and medicine cabinets.

Last month, a unanimous Supreme Court held that Matrixx Initiatives, makers of over-the-counter cold remedies, could be sued for failing to disclose to investors negative information about their products, Zicam Cold Remedy nasal gel and swabs. Writing for the court, Justice Sonia Sotomayor observed “that information included reports from three medical professionals and researchers about more than 10 patients who had lost their sense of smell after using Zicam.”

Ten, of course, can be a large or small amount depending on the overall sample size. In this case, the company argued that 10 cases, from among millions of units sold, was not statistically significant and therefore did not merit public disclosure. Pharmaceutical companies were hopeful that this case would establish statistical significance as the new legal standard for determining when a company must publicize bad information. The court responded with an equivocal, “It depends.”

We sympathize with businesses’ complaints that vague guidelines make them more susceptible to frivolous lawsuits. But, we also agree with the court that statistical significance is the wrong criteria for evaluating lawsuits.

Above all else, companies crave predictability in regulations. Most businesses aren’t trying to suppress harmful information; they simply want a reliable set of guidelines for complying with the law. Yet, it is not easy to come up with a bright-line rule for disclosure. Set the standard too high, and companies are likely to withhold information that is pertinent to consumers. Set the standard too low, and companies will have the power to bury truly harmful stories in generic press releases.

Scientific studies alone are an imperfect basis for regulations. That’s why, for instance, the Food and Drug Administration looks beyond statistical significance and relies on multiple forms of evidence before making a determination about a product’s safety.

We become concerned any time government agencies treat scientific studies as the sole factor in their decision-making. Whether through mistakes or manipulation, scientific studies can be flawed. The controversy surrounding the Climate Research Unit at the University of East Anglia, criticized for manipulating its global warming data, is an excellent reminder of how science can go astray.

This was the wrong case to deviate from precedent. Zicam Cold Remedy nasal gel and gel swabs eventually were pulled from the market, after the FDA issued a warning in 2009 about the publicized side effects. We hope the court will consider another case that could set clearer guidelines. In the meantime, we are glad to see the court isn’t willing to replace critical judgment with a simple determination of statistical significance.