In a rare boost for securities fraud class actions, the U.S. Supreme Court on Tuesday closed off a “statute of limitations” defense for Merck & Co. in its battle against Vioxx-related shareholder suits.
The Court unanimously ruled in Merck v. Reynolds (pdf) that the litigation is timely and must go forward, in spite of Merck’s insistence that the suit was filed too late under the two-year statute of limitations contained in the Sarbanes-Oxley Act of 2002.
Justice Stephen Breyer, writing for the Court, took an expansive view of the two-year statute, finding that the clock should start ticking only after plaintiffs discovered the facts of the fraud violation — including whether the company intended to defraud investors.
Defining the statute of limitations any other way, Breyer said, would encourage fraudulent companies to hide their wrongdoing for long periods of time. “So long as a defendant concealed for two years that he made a misstatement with an intent to deceive, the limitations period would expire before the plaintiff had actually discovered the fraud,” Breyer wrote.
The Court rejected Merck’s proposal that the triggering point for the statute of limitations should be when plaintiffs were on “inquiry notice” — the moment when a plaintiff should have had enough information to inquire further into possible fraud.
“Merck is disappointed in today’s decision, but believes that the allegations in the complaint are unfounded and will continue to defend itself vigorously,” said Bruce Kuhlik, Merck’s executive vice president and general counsel in a statement. “The company has already made a motion to dismiss the operative complaint on numerous other grounds, and will renew that motion in the district court.”
Plaintiffs and shareholder groups applauded the decision for sweeping away a morass of conflicting lower-court decisions on the all-important statute of limitations rules.
“The Court’s opinion makes the rules of the road so much clearer than before,” said David Frederick of Kellogg, Huber, Hansen, Todd, Evans & Figel, who argued and won the case for Merck shareholders, who lost billions in the debacle.
The decision is especially significant, Frederick said, because it includes scienter — the company’s intent to defraud — among the facts that the plaintiff needs to be able to learn before the statute of limitations begins running. “That is usually the hardest part of the securities fraud to find out about,” Frederick said.
Morrison & Foerster San Francisco partner Jordan Eth, who advises defendants in securities class actions, said the ruling means that “companies and defendants will have to keep in mind that lawsuits could take place further down the road than before.”
Before Sarbanes-Oxley, Eth said, suits were often filed within months of a disputed company statement or stock drop. But now, in light of the Court decision, “companies could be sued four years and 364 days after a statement is made.” The law states that no matter what knowledge plaintiffs have or do not have, they cannot file suit more than five years after the triggering act of fraud.
Merck began marketing its painkiller Vioxx in 1999, and the following year announced the results of a study indicating that those who took Vioxx had heart attacks at a higher rate than people who took another drug, naproxen, for pain. The company argued that the discrepancy was caused by a positive feature of naproxen, not a problem with Vioxx. The study got wide publicity, but sales continued, totaling more than $8 billion from 2001 to 2004. Other studies linking Vioxx to elevated risk of heart trouble were also publicized.
Shareholders filed suit in November 2003.
Merck pulled the drug off the market in September 2004, leading to a sharp drop in the company’s stock price. What was not known publicly until later was that Merck officials had for years tried to keep negative information about the drug from the public. An article in The Wall Street Journal in November 2004 detailed internal company e-mails.
In its defense, Merck argued that there was enough evidence of possible fraud in the public domain two years earlier that diligent investors should have filed their lawsuit long before 2003 to satisfy the two-year statute of limitations.
Judge Stanley Chesler of the U.S. District Court for the District of New Jersey agreed with Merck and dismissed the class action in 2007, but the 3rd U.S. Circuit Court of Appeals reinstated the case, ruling that the shareholders could not have been aware of the wrongdoing earlier.