Securities Law - Statute of Limitations Decision - Merck & Co., v. Reynolds, 08-905

SECTION 10(b)-5 STATUTE OF LIMITATIONS

The U.S. Supreme Court on April 27, 2010 has furnished clarity to the question of when does the statute of limitations begin to run § 10(b)-5 Securities lawsuits. Plaintiffs filed a securities fraud action under § 10(b)-5 on November 6, 2003. The District Court dismissed the complaint on the ground that the filing was not timely because the plaintiff should have been alerted to the possibility of Merck’s misrepresentation prior to November 3, 2001 because of a study (the VIGOR study) showing adverse cardiovascular results when the Merck Drug Vioxx was used. The applicable statues of limitations provides in part “private right of action involving a claim for fraud, deceit, manipulation or contrivance in contravention of a regulatory requirement concerning the securities laws … may be brought not later than the earlier of (1) two years after the discovery of facts constituting the violation; or, (2) 5 years after such violation. 29 U.S.C. § 1658(b)(1).

The Complaint alleged that Merck defrauded investors by promoting the drug Vioxx when it knew of the serious safety issues of Vioxx. In 1998, internal Merck clinical trials showed that serious cardiovascular events occurred six times more frequently in patents given Vioxx. Merck claimed that the plaintiff should have known more than two years before filing the Complaint and the District Court agreed.

The Third Circuit reversed and said that although there were storm warnings about the use of Vioxx, they did not put plaintiff on inquiry. Merck sought review in the United States Supreme Court because of disagreements in the Circuits.

Justice Breyer wrote the opinion of the Supreme Court which unanimously affirmed the decision of the Third Circuit. Judge Breyer in his opinion states that the parties and the Solicitor General agree that § 1658(b)(1)’s word “discovery” refers not only to plaintiff’s actual discovery of certain facts, but also to the facts that a reasonably diligent plaintiff would have discovered. The opinion discusses the use of the word “discovery” by various authors and by the Supreme Court itself. In Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350 (1991), the court said that private sections under 10(b)-5 actions “must be commenced within one year after the discovery of the facts constituting the violation and within three years after such violation.” The opinion went on to state that the word “discovery” as used in the statute encompasses not only those facts the plaintiff actually knew, but also those facts a reasonably diligent plaintiff would have known.

The Court then considered and dismissed various arguments suggesting that plaintiffs had knowledge more than two years prior to the filing of its Complaint. The Court concluded that the limitation period in § 1658(b)(1) begins to run once the plaintiff did discover or a reasonably diligent plaintiff would have discovered the facts constituting the violation, whichever comes first.

In determining the time at which ”discovery” of those “facts” occurred, such terms as “inquiry notice,” and “storm warnings” may be useful to the extent they identify time when the facts would have prompted a reasonably diligent plaintiff to begin investigating. But the actual limitation 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 plaintiffs undertook a reasonably diligent investigation.

Judge Stevens wrote a concurring opinion and Justice Scalia wrote a concurring opinion joined by Justice Thomas.

A big defeat for Merck but important clarity when analyzing the § 10(b)-5 Statute Of Limitations.