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Pair of Supreme Court rulings deal blows to business

Decisions make it easier to sue drug makers over alleged stock fraud and allow workers to sue their employers if they suffer retaliation after making an oral complaint.

March 23, 2011|By David G. Savage, Los Angeles Times
  • In one case ruled on by the Supreme Court, the maker of Zicam failed in 2003 to tell investors of health effects reported by users.
In one case ruled on by the Supreme Court, the maker of Zicam failed in 2003… (Scott Olson, Getty Images )

Reporting from Washington — The Supreme Court dealt two more defeats to businesses, handing down rulings that made it easier to sue drug makers over alleged stock fraud and allowing workers to sue their employers if they suffer retaliation after making an oral complaint.

The decisions continue a trend of late in which the high court has confounded its critics by siding with workers and plaintiffs in business cases. The U.S. Chamber of Commerce has been on the winning side in only one case decided this year, while suffering five losses.

In recent years, liberal groups have labeled the high court pro-corporate, citing in particular last year's ruling that gave corporations and unions the right to spend freely on campaign ads. But this year, the justices have been sending a different message.

Tuesday's 6-2 workplace decision was the third in favor of a fired worker who had sued his employer. And the unanimous ruling in the investor fraud case was the second in a month that leaves a major industry vulnerable to more lawsuits.

But legal experts said it was too soon to suggest a true change in direction for the Supreme Court.

Though lawyers consider the business decisions this year to be significant, they pointed out that the rulings show that the court is not automatically pro-corporate and conservative.

Even the U.S. chamber hasn't been surprised. Robin S. Conrad, who heads the chamber's litigation center, had discounted claims of a pro-business bias as "simplistic" and inaccurate.

In addition, this year's most important and far-reaching business cases are yet to be decided. They include the Wal-Mart Stores Inc. case to be heard next week, which tests whether a huge employer can face a nationwide class-action sex bias suit brought on behalf of more than 1 million female employees.

In arguments in the two cases decided Tuesday, major business and industry groups had urged the court to shield companies from lawsuits.

In the investor case involving Matrixx Initiatives Inc., the pharmaceutical industry had said it feared a wave of stock fraud suits if drug makers could be sued whenever they fail to warn investors of reports of "adverse events" involving one of their products.

Their only option would be to "flood the market" with reports of drug problems, the industry said, even if they are believed to be unfounded.

Nonetheless, the Supreme Court allowed such a suit to go forward, ruling that "reasonable investors" would want to know about these reports, even if they are few in number and may not be "statistically significant."

To sue over alleged stock fraud, disgruntled investors must have evidence that shows they were misled or fooled about a "material" fact regarding the company's prospects.

Matrixx made and marketed Zicam Cold Remedy, a nasal spray and gels with zinc gluconate that accounted for 70% of its sales. By 2003, however, doctors had reported at least a dozen cases of patients who said they lost their sense of smell after using Zicam or similar products with zinc.

Despite knowing of these reports, Matrixx put out statements in the fall of 2003 saying Zicam was "poised for growth" and the company had "very strong momentum" for the year ahead. A few months later, news reports highlighted the stories of patients who lost their sense of smell, and Matrixx's stock price plunged.

A group of investors sued, contending they had been cheated by the company's decision to tout its growth prospects while covering up the "adverse event" reports about its leading drug.

In the last decade, both Congress and the Supreme Court had made it harder to bring stock fraud suits against companies, and a federal judge dismissed the suit against Matrixx.

But the U.S. 9th Circuit Court of Appeals revived the suit and said a reasonable investor probably would consider it significant and "material" if patients had complained of a loss of smell after using Zicam.

The Supreme Court agreed in a 9-0 decision and said the plaintiffs had cited enough evidence to go forward with the suit trying to show that Matrixx had deliberately deceived them.

Justice Sonia Sotomayor said drug makers need not disclose "all reports of adverse events," but they should warn investors when they receive multiple reports of the same problem.

The decision in the workplace case follows last month's ruling that allowed automakers to be sued for failing to install the most effective safety equipment in vehicles, even if federal regulators decided against requiring the extra measure of safety.

In Tuesday's case, the dispute began when Kevin Kasten complained about the time clocks at a plastics plant in Portage, Wis. He was later fired, and in a lawsuit he accused his employer, Saint-Gobain Performance Plastics Corp., of retaliating against him for complaining about a violation of federal work rules.

But a federal judge and the U.S. court of appeals in Chicago threw out his suit, saying an oral complaint did not count as having "filed a complaint" under the terms of the law. The Supreme Court disagreed in 6-2 decision.

"To fall within the scope of the anti-retaliation provision, a complaint must be sufficiently clear and detailed for an employer to understand it," Justice Stephen G. Breyer said. "This standard can be met, however, by oral complaints, as well as by written ones."

Justices Antonin Scalia and Clarence Thomas dissented, saying the anti-retaliation law was meant to apply only to formal, written complaints. Justice Elena Kagan did not participate in the decision.

The U.S. Labor Department applauded the ruling, saying it "ensures workers with limited English skills will not be prevented from exercising their rights under the Fair Labor Standards Act."

david.savage@latimes.com

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