MERCK: THE STATUTE OF LIMITATIONS IN SECURITIES FRAUD DAMAGE SUITS
In a result joined by all of the justices, the Supreme Court affirmed the decision of the Third Circuit, concluding that plaintiffs’ had timely filed a securities fraud suit against Merck & Co. Merck & Co. v. Reynolds, Case No. 08-905 S.Ct. (April 27, 2010).
The case centers on alleged fraud in connection with the sale of pain killing drug Vioxx. The question in the case turned on when the two year limitation period of 28 U.S.C. § 1658(b) for securities fraud suits begins to run. The high court concluded that such a cause of action accrues when the plaintiff in fact discovers, or with reasonable diligence would have discovered, the facts constituting a violation, whichever comes first.
The case centers on a claim that Merck knowingly misrepresented the risks of heart attacks accompanying the use of Vioxx. An investor group brought suit against the firm claiming fraud in violation of Section 10(b). Under Section 1658(b), the complaint had to be filed within two years “after the discovery of the facts constituting the violation” or 5 years after such a violation. The background of plaintiffs’ fraud complaint, filed on November 6, 2003, traces to 1999 when the FDA initially approved the use of the drug. By March 2000, the company announced the results of a study which showed that the drug had minimal gastrointestinal side effects, but an increased incident of heart attack compared to similar drugs. The company offered a plausible theory regarding the increased incident of heart attack.
Public debate about the company’s theory for the increased incident of heart attack continued. In February 2001, the FDA requested that the Vioxx label be changed to reflect the positive gastrointestinal findings. Two months later, products liability suits were filed against the company because of the side effects. Later the same year, an article in the AMA Journal reported that the increased incident of heart attack constitutes a red flag. Bloomberg News, however, quoted a Merck scientist noting that additional data was reassuring. Nevertheless, in October 2001, the FDA warned Merck that its adverting about the drug was false and misleading, although the agency conceded that the company’s theory about the difficulties of the drug was plausible. More product liability suits followed while a New York Times story reported that there was no evidence of increased heart difficulties from the drug.
Subsequently, in October 2003, the Wall Street Journal published the results of a company funded study which reported an increase incident of heart attacks from the drug. About one year later, the company withdrew the drug from the market. The next month the Wall Street Journal reported on internal Merck e-mails and other information which demonstrated that the company fought for years to suppress adverse news about the drug.
The court’s decision is predicated largely on a close reading of the statutory language and long established precedent regarding the application of the statute of limitations. At the outset the court concluded that the word “discovery” in Section 1685(b)(1) referred not just to the actual discovery of certain facts by the plaintiff, but also to those which could have been discovered with reasonable diligence. The court based this conclusion on an analysis of decisions regarding the application of the statute of limitations in fraud cases. It buttressed the determination by noting that after its decision in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350 (1991), applying a limitations period borrowed from express securities causes of action to Section 10(b) claims, every court of appeals which considered the issue concluded that the concept of “discovery of facts” included a hypothetical reasonably diligent plaintiff. Against this backdrop, the court concluded Congress must have included the concept in the statute at issue here.
The court then addressed the arguments raised by Merck. First, the company claimed that the statute did not require the plaintiffs to discovery scienter-related facts. Since the question under the statute, however, is when plaintiff discovered a violation and scienter is a key part of a claim, the court rejected Merck’s argument. At the same time, the court did not determine whether facts supporting all the elements of a claim had to be discovered. A citation to the Amicus Curiae brief of the U.S. with a parenthetical noting that facts regarding the common law elements of a Section 10(b) claim regarding reliance, loss and loss causation at least suggests that the answer to this question is no.
The court also rejected Merck’s contention that the discovery of false statements is sufficient. Those facts do not necessarily establish scienter, which is a key element. Likewise, Merck’s claim that “inquiry notice” was sufficient to trigger the running of the statute is wrong the court held. That concept means that there are enough facts to investigate. At that point however, there may not be enough facts to establish a violation. Accordingly, Merck’s claim would mean that the statute would begin to run before the plaintiff had discovered a violation, which is contrary to the plain language of the section. Rather, the court held that the “limitations period does not begin to run until the plaintiff thereafter discovers or a reasonably diligent plaintiff would have discovered ‘the facts constituting the violation,’ including scienter—irrespective of whether the actual plaintiff undertook a reasonably diligent investigation.” On this record, the court held the court of appeals had correctly concluded that the action was not time barred.