High Court Upholds 3rd Circuit’s Ruling, Finds Stockholder’s Suit Against Merck Was Timely

WASHINGTON, D.C. - (Mealey's) The U.S. Supreme Court on Tuesday, April 27, affirmed a Third Circuit U.S. Court of Appeals ruling that a shareholder derivative lawsuit over Merck & Co. Inc.'s marketing of Vioxx was timely and held that the statute of limitations on a claim under Section 10(b) of the Securities Exchange Act of 1934 begins to run when a plaintiff does in fact discover or when a reasonably diligent plaintiff would have discovered "the facts constituting the violation," whichever comes first (Merck & Co. Inc., et al. v. Richard Reynolds, et al., No. 08-905, U.S. Sup.; See December 2009, Page 4).

The court also explained that the "facts constituting the violation" include the fact of scienter, which is defined in Ernst & Ernst v. Hochfelder (425 U.S. 185, 194 [U.S. Sup. 1976]) as "a mental state embracing intent to deceive, manipulate or defraud." 

Investors led by Richard Reynolds sued Merck in November 2003, alleging that the company knowingly misrepresented the risk of heart attack associated with the painkiller Vioxx in violation of Section 10(b).  Under 28 U.S. Code Section 1658(b)(1), the plaintiffs' claim was timely if it was filed within two years after the discovery of the facts constituting the violation.  Merck asserted that the lawsuit was untimely because the plaintiffs should have discovered "facts constituting the violation" prior to November 2001, and the plaintiffs countered that they had not, and could not have, discovered those facts, particularly not facts related to scienter.

U.S. Judge Stanley Chesler of the District of New Jersey held that the lawsuit was untimely because the publication of the results of the Vioxx Gastrointestinal Outcomes Research (VIGOR) trial in March 2001 and a letter from the Food and Drug Administration in September 2001 warning the company that its marketing of Vioxx's cardiovascular benefits was "false, lacking in fair balance, or otherwise misleading," should have alerted the plaintiffs to the possibility that Merck had knowingly misrepresented material facts about the drug's safety.  Judge Chesler further found that the plaintiffs should have been on "inquiry notice" about the possibility of their claims by Oct. 9, 2001.

The Third Circuit reversed the ruling after finding that although the pre-November 2001 events constituted "storm warnings," the events did not suggest scienter.  As a result, the events could not have put the plaintiffs on "inquiry notice" and require them to investigate further.  Merck appealed to the Supreme Court.

In affirming the Third Circuit's ruling, the high court pointed out that in order to sufficiently state a claim under Section 10(b), the plaintiffs were required to provide facts of scienter and noted that Section 10(b) claims are subject to a heightened pleading requirement for scienter.

The high court further found that the FDA's September 2001 letter and early Vioxx products liability lawsuits, which alleged that Merck knew about the risks of Vioxx in the 1990s, showed "little or nothing" about whether the manufacturer misrepresented Vioxx's safety.

Justice Stephen G. Breyer wrote for the court.  The court was unanimous in its decision, with Justices John Paul Stevens and Antonin Scalia writing separate opinions concurring in part and concurring in the judgment.  Justice Clarence Thomas joined in Justice Scalia's ruling.

Justice Stevens wrote in his one-page opinion that he believed a portion of the high court's discussion of the discovery rule was unnecessary because "there is no difference between the time when the plaintiffs actually discovered the factual basis for their claim and the time when reasonably diligent plaintiffs should have discovered those facts."

Justice Scalia wrote that while he concurred with the finding that the plaintiffs' suit was timely, he concluded that Merck had failed to show that the plaintiffs actually discovered scienter more than two years before bringing suit.

For more information, call editor Michael Lefkowitz at 610-205-1161, or e-mail him at Michael.Lefkowitz@lexisnexis.com.