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by Michele Rose, Christian Ward, and Lisa Perez
In Merck & Co. v. Reynolds, 130 S. Ct. 1784, 2010 U.S. LEXIS 3671, (2010), the Supreme Court unanimously rejected the inquiry notice standard numerous circuits applied in determining when the limitations period for a Section 10(b) claim begins. The Supreme Court has now made clear that the statute begins to run only when a plaintiff actually discovers, or when a reasonably diligent plaintiff would have discovered, "facts constituting the violation," including scienter. Applying this standard to the facts of Merck & Co., the Court found that the plaintiffs did not discover, nor could a reasonably diligent plaintiff have discovered, facts suggesting that Merck had acted with scienter more than two years before filing suit.With this decision, the Court has significantly altered the availability of the statute of limitations defense for defendants on a motion to dismiss, and potentially opened the door for more cases pursuing stale claims. The Court correctly recognized that the five year statute of repose (found in § 1658(b)(2)) will continue to serve as the outer bounds for timely claims. However, the rejection of the inquiry notice standard and the requirement of facts establishing scienter makes it more difficult to trigger the limitations period in the first instance.The Merck decision leaves many unanswered and interesting questions about the practical application of the statute of limitations in securities fraud cases. As expanded upon below, for example, must a plaintiff be able to successfully plead a strong inference of scienter (i.e., survive a motion to dismiss) in order to have "discovered" the violation? Will potential class members be deemed to have constructive knowledge of their claims if a single shareholder files a complaint alleging a violation? If not, can other shareholders file suit after a class action has been dismissed for failure to plead scienter where more than five years have passed since the alleged misstatement, on the grounds that the statute of repose was tolled while the class action was pending and absentee potential class members are not barred by res judicata? In suits filed more than two years after the alleged corrective disclosure, will questions over a class member's actual knowledge of the violation prevent certification of the class? It is not likely that these questions will be answered anytime soon given that the vast majority of Section 10(b) class actions are filed shortly after the alleged corrective disclosure and thus well within the statute of limitations. But given the resourcefulness and diligence of the plaintiff's bar, attorneys representing Section 10(b) defendants should be prepared for these and other statute of limitations issues to arise.
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Michele Rose and Christian Word are partners in Latham & Watkins' Washington, D.C., office. They both specialize in the areas of securities litigation, including the defense of securities class actions, derivative, M&A, corporate control, SEC enforcement actions and internal investigations. Lisa Perez is an associate in Latham & Watkins' Washington, D.C., office.