In a result joined by all of the
justices, the Supreme Court affirmed the decision of the Third Circuit,
concluding that plaintiffs' had timely filed a securities fraud suit against
Merck & Co. Merck & Co. v. Reynolds, Case No. 08-905 S.Ct.
(April 27, 2010).
The case centers on alleged fraud in
connection with the sale of pain killing drug Vioxx. The question in the case
turned on when the two year limitation period of 28 U.S.C. § 1658(b) for
securities fraud suits begins to run. The high court concluded that such a
cause of action accrues when the plaintiff in fact discovers, or with
reasonable diligence would have discovered, the facts constituting a violation,
whichever comes first.
The case centers on a claim that
Merck knowingly misrepresented the risks of heart attacks accompanying the use
of Vioxx. An investor group brought suit against the firm claiming fraud in
violation of Section 10(b). Under Section 1658(b), the complaint had to be
filed within two years "after the discovery of the facts constituting the
violation" or 5 years after such a violation. The background of plaintiffs'
fraud complaint, filed on November 6, 2003, traces to 1999 when the FDA
initially approved the use of the drug. By March 2000, the company announced
the results of a study which showed that the drug had minimal gastrointestinal
side effects, but an increased incident of heart attack compared to similar
drugs. The company offered a plausible theory regarding the increased incident
of heart attack.
Public debate about the company's
theory for the increased incident of heart attack continued. In February 2001,
the FDA requested that the Vioxx label be changed to reflect the positive
gastrointestinal findings. Two months later, products liability suits were
filed against the company because of the side effects. Later the same year, an
article in the AMA Journal reported that the increased incident of heart attack
constitutes a red flag. Bloomberg News, however, quoted a Merck scientist
noting that additional data was reassuring. Nevertheless, in October 2001, the
FDA warned Merck that its adverting about the drug was false and misleading,
although the agency conceded that the company's theory about the difficulties
of the drug was plausible. More product liability suits followed while a New
York Times story reported that there was no evidence of increased heart
difficulties from the drug.
Subsequently, in October 2003, the Wall
Street Journal published the results of a company funded study which
reported an increase incident of heart attacks from the drug. About one year
later, the company withdrew the drug from the market. The next month the Wall
Street Journal reported on internal Merck e-mails and other information
which demonstrated that the company fought for years to suppress adverse news
about the drug.
Read the Merck: The Statute of Limitations in Securities Fraud Damage
Suits in entirety. For more cutting edge
commentary on developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.