Appeals court reinstates Zicam lawsuit

A federal appeals court on Wednesday reinstated a shareholder lawsuit against Scottsdale-based Matrixx Initiatives over what company officials knew about potential dangers from its popular Zicam cold remedy.

In a unanimous ruling, a three-judge panel of the 9th U.S. Circuit Court of Appeals said that U.S. District Court Judge Mary Murguia was wrong to throw the lawsuit, filed in 2004, out of court. In that case and a companion one, shareholders charged that the company hid information from them about questions that had been raised about the safety of Zicam.

Murguia had concluded the shareholders did not provide any real evidence that Matrixx officers acted in a way to deliberately deny information to shareholders.

But appellate Judge A. Wallace Tashima said that inferences that Matrixx intentionally or deliberately withheld information about the link between Zicam and anosmia - the inability to perceive smells - "is at least as compelling as any plausible nonculpable explanation."

And Tashima said questions of whether Matrixx withheld "material" evidence should be decided by a jury. He said Murguia should not have tossed the case based on her own assessment.

All that, he wrote, means the shareholders are entitled to their day in court.

The ruling is the latest setback for Matrixx, which just four months ago withdrew two forms of Zicam - its nasal gel and nasal swabs - from the market following warnings from the U.S. Food and Drug Administration about the link of the product to anosmia. And the company announced in January it was paying out $12 million to settle 340 lawsuits brought by those who had purchased the over-the-counter medication.

Despite that, company officials have continued to insist there is "no reliable scientific evidence" that the product is linked to anosmia, saying that any loss of smell is caused by a cold virus, which Zicam is designed to treat.

Calls to a company spokesman seeking comment about the appellate court ruling were not immediately returned.

The lawsuit involves people who bought shares of Matrixx in a 3 1/2-month period in late 2003 and early 2004.

At the time Zicam Cold Remedy amounted to about 70 percent of the company's total sales. The active ingredient in the product is zinc gluconate.

According to the claim, company officials were aware at the time that numerous users of the product had developed anosmia but that they failed to disclose the risk and issued false and misleading statements about Zicam.

Much of the case surrounds research done at the University of Colorado of 10 patients who had developed anosmia following Zicam use. The researchers were planning to present their findings at a presentation on Sept. 20, 2003, to the American Rhinologic Society.

Matrixx, however, informed one of the researchers he did not have permission to use the Zicam name, and the report was presented absent the brand identification.

It was not until Feb. 6, 2004, that the findings - and the specific mention of Zicam - were disclosed to the general public on the TV show "Good Morning America."

The lawsuit says, though, that Matrixx officials continued to issue what the shareholders say were positive statements about the company and about Zicam in particular. And it specifically notes that Matrixx failed to disclose in one of its reports to the Securities and Exchange Commission that a lawsuit already had been filed by a Zicam user and that, based on what the company knew of the University of Colorado research, more lawsuits were likely.

Tashima said that, generally speaking, an omitted fact is considered "material" if a reasonable shareholder would consider it important in making a decision.

Here, the judge said, all of the facts alleged - including one complaint going back to 1999 - was information that a shareholder would consider material, despite Murguia's conclusion to the contrary.

More to the point, Tashima said the actions of company officials in what they released - and what information they withheld - were enough for a reasonable case to be made to a jury that they acted either intentionally or with deliberate recklessness. Tashima said Matrixx is free to present its own evidence that the information was withheld innocently.

Defendants in the lawsuit, aside from the company itself, are Carl Johnson, who at the time was president and chief executive officer for Matrixx, William Hemelt, executive vice president and chief financial officer, and Timothy Clarot, Matrixx vice president and director of research and development. Johnson retired a year ago and was replaced by Hemelt.

Matrixx shares, which were trading at close to $20 before Zicam was recalled in June, immediately plummeted to the $6 range and were below $5 on Wednesday.