Big Doings in Big Cases: Merck Settle Securities Suits for $688 Million, Facebook IPO Derivative Suits Dismissed

In what may be the largest settlement ever in securities class action litigation involving a pharmaceutical company, Merck has agreed to a combined settlement of $688 million to settle two related securities class action cases. The company's February 14, 2013 press release announcing the settlements can be found here.

The lawsuits relate to alleged representations concerning the anti-cholesterol drug Vytorin. The drug was marketed through a joint venture between Merck and Schering-Plough. The shareholder claimants allege that the companies and certain of their directors and officers withheld information relating to poor clinical trial results while continuing to promote the drug's benefits.

According to the company's press release, the company will pay $215 million to resolve the claims against the Merck defendants and $473 million to resolve the claims against the Schering-Plough defendants. The company also announced that it would take a pre-tax and after-tax charge of $493 million, which the company indicated "reflects anticipated insurance recoveries." (Although it is not entirely clear, the company statement about the charge suggests that the company "anticipate" insurance recoveries of $195 million, possibly under the insurance programs of the two companies).The settlements are subject to court approval.

According to Victor Li's February 14, 2013 Am Law Litigation Daily article (here), the cases settled three weeks before they were set to go to trial. The article also quotes the lead plaintiffs' lawyers as saying that the settlement is the largest ever involving a securities class action lawsuit against a pharmaceutical company; is among the top ten settlements in a securities class action that didn't involve a restatement; and is among the 25 largest securities settlements of any kind.

Facebook IPO Derivative Suits Dismissed: In a February 13, 2013 opinion (here), Southern District of New York Robert Sweet granted without prejudice the defendants' motion to dismiss the Facebook IPO shareholders' derivative suits that had been multidistricted before him. The ruling not only represents a win for the defendants in the derivative suits, but it could also prove helpful in the parallel securities class action litigation. In addition, parts of the opinion may also be helpful in other state court IPO cases and may even prove helpful for defendants attempting to address the multi-jurisdiction litigation problem in the M&A litigation context.

As Alison Frankel discusses in a February 14, 2012 post on her On the Case blog (here), Judge Sweet's ruling contains strong language dismissing plaintiffs' claims based on Facebook's alleged failure to disclose internal projections, noting that "courts throughout the country" have "uniformly agreed" that the internal calculations are not material. He added that "an opposite ruling would have changed at least two decades of IPO practice."

Judge Sweet also (as Frankel puts it) "implicitly endorsed" the use of forum selection clauses in certificates of incorporation, though he denied Facebook's motion to dismiss on forum selection grounds. According to the defense lawyers Frankel quotes in her post, the judge's analysis of the issue, though clearly dicta, represents a "significant" development in a relatively undeveloped area of the law.

Judge Sweet also held that shareholders who purchased their shares in the IPO do not have standing to complain about pre-IPO conduct. Derivative plaintiffs must be able to show that they owned their shares at the time of the conduct they are complaining about. Because they did not own their shares at the time of the pre-IPO conduct that is the basis of their claims, they lack standing to assert claims based on that conduct.

Finally, Judge Sweet held that federal judges have discretion to consider threshold issues such as standing and forum selection clauses even before they determine whether they have jurisdiction over the derivative suits. It is this latter holding that Frankel suggests may be most helpful to defendants litigating multi-jurisdiction M&A litigation, because the defendants could remove the state court cases to federal court and before the case can be remanded the federal court might be able to rule on the threshold issues.

Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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