04/27/2010 04:48:00 PM EST
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
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
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
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
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
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
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.