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By: Michael McCloskey and David Aveni (Foley & Lardner LLP)
On April 28, 2010, the United States Supreme Court decided Merck & Co. v. Reynolds, one of only a few securities litigation cases to be entertained by the Supreme Court in recent years. The decision addresses the timing of securities fraud lawsuits, including class actions filed against corporations, and could lead to more securities fraud lawsuits being filed.
Under Section 10(b) of the Securities Exchange Act of 1934, a securities fraud claim must be brought within the earlier of (1) two years after the discovery of the facts constituting the violation, or (2) five years after such violation. The Merck Court addressed the standard under the first part of this rule and held that the two year limitations period in securities fraud lawsuits does not being until the plaintiff discovers, or a reasonable plaintiff would discover, facts constituting a violation of securities law. Scienter, or, in other words, an intent to deceive, is a fact that is an important and necessary element of a Section 10(b) violation.
The Merck plaintiffs were a group of investors who alleged that Merck & Co. knowingly misrepresented the increased risk of heart attack that resulted from use of its pain-killing drug, Vioxx. Merck argued that the claims were time-barred citing several events that had put the plaintiffs on notice of the critical facts underlying their claim more than two years before their lawsuit was filed. First, Merck had announced the results of a study revealing that participants who used Vioxx were four times more likely to suffer a heart attack than users of another pain-killing drug, naproxen. Second, several products-liability lawsuits were filed against Merck alleging Merck’s own study demonstrated Vioxx users were considerably more likely to suffer a heart attack. Third, the FDA published a letter warning Merck that its Vioxx marketing was “false, lacking in fair balance, or otherwise misleading” because it failed to adequately disclose the increased risk of heart attack from Vioxx.
The Supreme Court held that the plaintiffs’ securities fraud claim was not time-barred. First, the Court held that the statute of limitations does not begin to run until the plaintiff learns of facts demonstrating the defendant acted with scienter. Since the plaintiff cannot maintain a securities fraud claim without pleading and proving scienter, the Court held that evidence of such a state of mind is necessary for the statute of limitations to commence. In reaching this holding, the Court noted that evidence showing a statement’s falsity does not necessarily demonstrate the statement was made with the requisite intent to deceive. A company might make a prediction that ultimately proves to be wrong, but that does not necessarily mean the company intentionally lied when making the prediction. Under Merck, it is not until the plaintiff discovers facts that reveal the statement or omission is made with a fraudulent intent that the statute of limitations begins to run. Turning to the case at hand, the Court held that the facts known to the plaintiffs more than two years before they filed their claim did not demonstrate such a fraudulent intent existed.
Second, the Supreme Court rejected the view that so-called “inquiry notice” is sufficient to commence the running of the statute of limitations. Inquiry notice refers to the point at which the facts sufficiently suggest misconduct occurred, so that a reasonable plaintiff would begin investigating. The Court held that such “inquiry notice” is inconsistent with the express language of the statute of limitations, which says the plaintiff’s claim accrues only after the facts are discovered, not after an investigation should begin. The Court tempered this holding, however, by noting that “discovery” in this context does not mean the plaintiff actually discovered the facts constituting the claim. Instead, the plaintiff’s claim accrues once such facts would have been discovered by a hypothetical “reasonably diligent plaintiff.”
While securities fraud lawsuits do not typically hinge on statute of limitations issues, the Merck decisions may induce the plaintiffs’ bar to file claims previously considered too stale. Only time will tell. However, because the statute of limitations still bars any claim brought more than five years after the violation occurred, it remains a potent defense to securities fraud claims.
Provided By:
Foley & Lardner LLP
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