(CN) - The 9th Circuit reinstated a shareholder class action accusing Arizona-based Matrixx Initiatives and three executives of hiding the risks that users of their Zicam nasal gels and sprays would lose their sense of smell.
Matrixx officials knew that several Zicam users had developed anosmia, or the loss of smell, but failed to disclose the risk and instead issued false and misleading statements about the product, shareholders claimed.
When the news finally broke that the zinc glucomate in Zicam may cause anosmia, Matrixx's stock allegedly fell from $13.55 per share to $11.97 per share.
Matrixx initially recouped the losses with "vigorous, but baseless, denials," shareholders claimed, but its efforts were reversed by a "Good Morning America" report on the link between Zicam and smell disorders.
"According to Matrixx's own SEC filings," shareholders claimed, "from late 2003 through October 2004 Matrixx has been sued by approximately 284 individuals in 19 different lawsuits alleging that Zicam caused damage to their sense of smell."
The district court dismissed the shareholder class action on the grounds that the user complaints were not "statistically significant." Additionally, the judge said the plaintiffs failed to claim that Matrixx executives knew about the Zicam problems but chose not to reveal them.
The three-judge panel in San Francisco reversed, finding enough evidence to suggest executives were aware of the potential anosmia problem. Judge Tashima added that there was a "strong" inference that top-level executives knew the company was being sued for product liability.
The 9th Circuit also rejected the lower court's reliance on the so-called "statistical significance standard," saying it was "inconsistent with the Supreme Court's rejection of bright-line rules and its emphasis on having materiality determined by the trier of fact."
Read the Top 8
Sign up for the Top 8, a roundup of the day's top stories delivered directly to your inbox Monday through Friday.