Unanimously affirming the Ninth Circuit, the Supreme Court ruled that a claim under the Securities Exchange Act (SEA) was plausible, and therefore, the complaint should not have been dismissed by the district court.
While the case focuses on the standard for a claim of materiality under the SEA, it has broader significance for its treatment of pleading standards. The opinion written by Justice Sotomayor emphasizes that the allegations in the complaint are assumed to be true for a motion to dismiss and that discovery is appropriate to determine whether plaintiffs can prove the facts they allege. Matrixx Initiatives Inc. v. Siracusano, http://www.supremecourt.gov/opinions/10pdf/09-1156.pdf (Mar. 22, 2011).
This securities fraud class action against a pharmaceutical company alleges a failure to disclose reports that the use of the company’s cold remedy was associated with a loss of smell. The company asserted that the class failed to state a claim, because the class did not (and could not) allege that the reports were statistically significant. The federal government sided with the plaintiffs, noting that the Food and Drug Administration acts upon reports of adverse effects of medications, even if those reports have not been proven to be statistically significant. The Court agreed with the Ninth Circuit that the allegations were plausible.
The Seventh Circuit, in an unrelated case with a dissent by Judge Posner regarding pleading standards, noted that lower courts are presently struggling with how high to set the bar to determine plausibility after the Court’s decisions in Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009), and Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). Swanson v. Citibank, 614 F.3d 400 (7th Cir. 2010).
In Matrixx, the Supreme Court cited Iqbal early in its opinion for the proposition that courts must assume the facts of the complaint to be true, for the purpose of deciding a motion to dismiss. After analyzing the facts alleged in the complaint, the Court stated:
We believe that these allegations suffice to “raise a reasonable expectation that discovery will reveal evidence” satisfying the materiality requirement, Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556 (2007), and to “allo[w] the court to draw the reasonable inference that the defendant is liable for the misconduct alleged,” Iqbal, 556 U. S., at ___ (slip op., at 14).
The Court concluded that the claim was plausible and therefore the Ninth Circuit correctly reversed the dismissal of the complaint.