Corporate Governance

Merck v. Reynolds and the Statute of Limitations Under Rule 10b-5

By J Robert Brown Jr.

The Supreme Court today issued a unanimous opinion reversing a lower court opinion on the statute of limitations under Rule 10b-5.  The opinion is here. 

The statute begins to run upon "discovery of the facts constituting the violation."  28 U. S. C. §1658(b)(1).  The Court held "facts showing scienter are among those that 'constitut[e] the violation.''  The Court also rejected the argument that the statute began to run upon "inquiry notice," that is before plaintiffs actually knew or, upon reasonable investigation, would have known of the existence of the violation.  As the Court held: 

• We conclude that the limitations period in §1658(b)(1) begins to run once the plaintiff did discover or a reasona-bly diligent plaintiff would have 'discover[ed] the factsconstituting the violation'—whichever comes first. In determining the time at which 'discovery' of those 'facts'occurred, terms such as 'inquiry notice' and 'storm warn-ings' may be useful to the extent that they identify a time when the facts would have prompted a reasonably diligent plaintiff to begin investigating. But the limitations period does not begin to run until the plaintiff thereafter discov-ers or a reasonably diligent plaintiff would have discov-ered 'the facts constituting the violation,' including sci-enter—irrespective of whether the actual plaintiff undertook a reasonably diligent investigation.

Interestingly, this is a case where law and business faculty filed an amicus that argued the statute should only begin upon actual discovery of the fraud.  While the majority did not accept this view, Justice Stevens wanted it left open. 

• In this case there is no difference between the time when the plaintiffs actually discovered the factual basisfor their claim and the time when reasonably diligent plaintiffs should have discovered those facts. For that reason, much of the discussion in Part II of the Court's opinion, see ante, at 8–12, is not necessary to support theCourt's judgment. Until a case arises in which the differ-ence between an actual discovery rule and a constructivediscovery rule would affect the outcome, I would reservedecision on the merits of JUSTICE SCALIA's argument, post, at 1–7 (opinion concurring in part and concurring injudgment). With this reservation, I join the Court's excel-lent opinion.

Moreover, Justice Scalia, in his concurring opinion, agreed with the view and cited the brief.  See Concurring Opinion at 6 ("But as amici note, that is not so. See Brief for Faculty at Law and Business Schools as Amici Curiae 23–29 (here-inafter Faculty Brief). Some circuit cases cited by the Court and amici can conceivably be read as interpreting the language Lampf adopted from §78i(e) as imposing some form of constructive discovery.").  

The case had numerous amici filing briefs (by my count at least 13).  The opinion cited only the brief by law/business faculty and the Solicitor General.  Not bad for the law faculty. 

Full post as published by The Race to the Bottom on April 27, 2010 (boomark / email).