Merck & Co. shareholders can go forward with a class-action suit alleging the company misrepresented the safety of its arthritis drug Vioxx and that share prices fell when the true risk was disclosed.
U.S. District Judge Stanley Chesler in Newark granted certification on Wednesday for a class of plaintiffs claiming the company’s statements violated the 1934 Securities Exchange Act.
Chesler rejected Merck’s argument that factual variations in the plaintiffs’ claims defeat the typicality and adequacy requirements for class certification.
The suit, In Re Merck & Co. Securities, Derivative & ERISA Litigation, 05-1151 and 05-2367, was filed in November 2003. Chesler dismissed it as untimely in 2007 but the U.S. Court of Appeals for the Third Circuit reinstated it in 2008, and the U.S. Supreme Court affirmed in 2010.
Chesler certified a class of persons and entities who acquired Merck common stock or call options or sold Merck put options between May 21, 1999, when Vioxx went on-the-market, and Sept. 29, 2004, when it was pulled from shelves amid indications that users faced increased risk of heart attack and stroke.
The judge appointed Steven LeVan, Jerome Haber and Richard Reynolds as class representatives.
In opposing certification, Merck claimed the typicality requirement of Rule 23(a) of the Federal Rules of Civil Procedure was undone by some class representatives’ individual circumstances. The company noted Reynolds did not have any input into his decision to purchase Merck stock, but had delegated authority on such decisions to an investment adviser. Merck also noted that Reynolds continued to buy Merck stock after the company disclosed the health risks of prolonged use of Vioxx.
But Chesler said the circumstances cited by Merck “amount to no more than minor factual differences” which “do not destroy the fundamental similarity between lead plaintiffs’ and the absent class members’ claims of injury as a result of Merck’s misrepresentations and omissions about Vioxx.” Even if Reynolds made his purchases based only on an analysis of Merck’s stock price, as defendants maintain, he is not precluded from asserting the same fraud-on-the-market doctrine that other plaintiffs rely on, says Chesler. And Haber’s purchase of Merck stock through an investment adviser likewise fails to distinguish his circumstances from those of the class under the fraud on-the-market doctrine, Chesler said.
The “fraud on-the-market” doctrine uses stock price as a proxy for demonstrating actual and direct reliance on a fraudulent statement or omission, since it is “based on the hypothesis that, in an open and developed securities market, the price of a company’s stock is determined by the available material information regarding the company and his business,” Chesler said, citing Basic, Inc. v. Levinson, 485 U.S. 224 (1988).
Merck also claimed that the same factual variations in the class representatives’ circumstances render their interests antagonistic to the interests of the class as a whole, defeating the adequacy requirement. But Chesler said the differences cited “do not remotely approach the level of fundamental conflict required to demonstrate inadequacy.”
Merck further argued that the class failed to meet the predominance standard under R. 23(b), because no showing was made that class members relied on the company’s misrepresentations and omissions concerning Vioxx. Chesler cited the Supreme Court’s establishment in Basic of a rebuttable presumption of classwide reliance based on the fraud on-the-market theory.
The plaintiffs are entitled to invoke the fraud on-the-market theory of reliance because Merck stock is traded on the “indisputably efficient” New York Stock Exchange and because of the public nature of the misrepresentations and nondisclosures at issue, Chesler said. The plaintiffs need not conduct an analysis to demonstrate the NYSE’s efficiency because it has been consistently recognized as such by the Third Circuit and other federal appellate courts, he said.
Chesler said issues to be resolved in the case include whether defendants made false statements and/or omissions with regard to the safety of Vioxx; whether such statements and/or omissions related to material facts; whether such statements and/or omissions were made with the requisite scienter; whether class members relied on such statements and/or omissions in connection with their respective transactions in Merck securities during the class period; whether such misrepresentations and/or omissions resulted in “loss causation”; and the economic loss suffered by the class as a whole.
Mark Levine of Stull, Stull & Brody in New York, co-lead counsel for the plaintiffs, said that “getting class certification is always a very significant event.” Brickfield & Donahue of River Edge and the New York firms of Milberg and Bernstein, Litowitz, Berger & Grossman also represent the class. Attorneys representing Merck, from the firms of Cravath, Swaine & Moore in New York and Hughes, Hubbard & Reed in Washington, D.C., did not return calls about the ruling. A Merck spokesman did not immediately respond to a request for comment. •