WASHINGTON—The U.S. Supreme Court has agreed to hear a case that may have significant implications for when securities class action lawsuits can be dismissed and when a manufacturer must disclose product safety concerns to investors.

Matrixx Initiatives et al. vs. James Siracusano et al. alleges that Matrixx and senior executives misled investors in the pharmaceutical maker about allegations that Zicam had caused anosmia—or a loss of smell—in some patients. The company argued that it was not obligated to disclose the anosmia complaints because they were not statistically significant.

The U.S. District Court for Arizona granted Matrixx's motion to dismiss the lawsuit in March 2006. In October 2009, the 9th U.S. Circuit Court of Appeals reversed that decision, denying the motion to dismiss. Last week, the U.S. Supreme Court agreed to hear Matrixx's appeal.

The appropriate threshold for courts to grant a defense motion to dismiss is a critical issue in many class actions. Many such cases settle and plaintiffs gain leverage in settlement talks if a case survives a motion to dismiss.

Between 1999 and 2003, Matrixx received some complaints about Zicam and anosmia, two doctors compiled data on 10 such patients, and several customers sued, according to court documents.

During that time, Matrixx officials expressed optimism about future growth and did not mention the allegations and lawsuits.

In early 2004, media outlets began to report the allegations, causing a decline in Matrixx's stock value.

Matrixx officials initially called the allegations “completely unfounded,” but later admitted that they did not know if Zicam caused anosmia and decided to conduct studies, court documents state.

The district court dismissed the suit, saying the number of allegations Matrixx executives were aware of was not statistically significant. The appeals court, however, concluded that was the wrong standard for a motion to dismiss and that questions of statistical significance should be decided at trial.

Requiring plaintiffs to present statistically significant evidence is very important for the life sciences industry and manufacturers because it helps get frivolous lawsuit dismissed early, said Erik J. Olson, a Palo Alto-based partner at Morrison & Foerster L.L.P., who is not involved in the case.

“There is always going to be anecdotal evidence that could reflect safety issues with respect to a device or drug,” Mr. Olson said. “If...there is evidence of death following people taking a new cancer drug, you have to distinguish: Is that evidence of death due to cancer or due to the cancer drug?”

The Supreme Court's decision also could be important because the 9th Circuit's ruling contravened decisions supporting a statistical significance standard in the 1st, 2nd and 3rd Circuit Courts of Appeal, Mr. Olson said.

Plaintiffs “could just flock to the 9th Circuit,” he said. “Almost every drug in the U.S. is distributed in some way all across the U.S.”

Mr. Olson said the Supreme Court typically has opted for somewhat subjective criteria over “bright-line” standards such as statistical significance, although he said Justice Samuel Alito authored the 3rd Circuit's ruling supporting the statistical significance threshold when he was an appeals court judge.

The district court in Matrixx also ruled that the plaintiffs failed to allege that defendants acted with the required state of mind, misleading investors either intentionally or with deliberate recklessness. The appeals court disagreed and found that implication was at least as compelling as the defendants' argument.

Kevin LaCroix, a Beachwood, Ohio-based partner with executive liability intermediary OakBridge Insurance Services L.L.C. who has blogged about the case, said the 9th Circuit's opinion raises the question of whether lawsuits can survive dismissal motions without specific allegations about what executives knew.

“All of that said...it is possible the court will narrow its focus just to” statistical significance, he said, via e-mail. “Even if the court just focuses on the statistical significance issue, it is important because many companies struggle with the question of when there are sufficient adverse event reports, such as customer complaints, that the company has to disclose them.”