Corporate Governance

Merck v. Reynolds: The Supreme Court, Rule 10b-5, and the Statute of Limitations

By J. Robert Brown

We will resume our examination of the Financial Stability Act tomorrow.  Today we will provide some thoughts on Merck v. Reynolds. The Supreme Court heard oral argument in the case yesterday.  Merck v. Reynolds involves the dull sounding but extremely important issue of the commencement of the statute of limitations under Rule 10b-5.  (The transcript of the oral argument is here).  The case turned on when the statute began to run once plaintiffs were on inquiry notice of the possibility of fraud.

Most of the legal analysis submitted by the parties and by amici turned on the significance and meaning of inquiry notice. 

I authored an amicus brief along with James Cox at Duke, Lisa Casey at Notre Dame, and Lyman Johnson at Washington & Lee (and supported by 24 other faculty who agreed with the position taken in the brief and lent their name to it) where we took the position that inquiry notice wasn't relevant, that the statute of limitations only began to run when plaintiffs had "actual" knowledge of the fraud.  

It was an aggressive position to take since ten circuits had held that commencement of the statute of limitations depended upon inquiry notice.  Nonetheless, in our view, the actual knowledge standard was supported by the language of the limitations period (Section 1658), the legislative history to the Section, and the Supreme Court's interpretation in Lampf, the decision that adopted a federal limitations period before Congress intervened.  Moreover, academics, including Lyman Johnson, had written articles back in the 1990s indicating that the limitations period began upon actual rather than inquiry notice.  We also took the position that actual knowledge included any information known to the market, at least in cases governed by fraud on the market. 

Petitioners in their Reply Brief largely ignored our arguments.  Our brief was cited for one position designed to show that we supported Petitioners.  As their brief described:  

• While some of respondents' amici suggest that such a requirement will still impose excessive burdens on "retired school teacher(s) in Boca Raton," CtW Br. 24, others correctly recognize "the reality of class action securities litigation": viz., that the lead plaintiffs are usually large institutional investors that possess ample resources to conduct investigations themselves.  Faculty Br. 32. 

The strategy to otherwise ignore the arguments may have been a bad one.  The oral argument suggests considerable interest on the part of the Justices with the actual knowledge standard.  We'll pick that up in the next post. 

The primary materials in the case can be found at the DU Corporate Governance web site. 

Full post as published by The Race to the Bottom on December 01, 2009 (boomark / email).