Corporate & Securities Law

By Jim Hamilton

Unanimous Supreme Court Allows Vioxx Suit to Proceed

A unanimous Supreme Court held that the limitations period for securities fraud cases begins to run on the earlier of 1) the date on which the plaintiff actually discovered the facts constituting the violation or 2) the date on which a reasonably diligent plaintiff would have made that discovery. In securities fraud cases, held the Court, facts showing scienter are among those that constitute the violation (Merck & Co., Inc. v. Reynolds).

In this case, an investor class sued Merck & Co., alleging that the drug maker knowingly misrepresented the risks associated with Vioxx, an arthritis medication. A study showed adverse cardiovascular results for Vioxx when compared to naproxen, another pain reliever. Merck suggested that this might be due to the absence of a benefit conferred by naproxen rather than a harm caused by Vioxx. The investors alleged that Merck committed fraud by promoting the so-called "naproxen hypothesis," even though it knew the hypothesis was false.

Writing for the Court, Justice Breyer noted that securities fraud plaintiffs must show that it is more likely than not that the defendant acted with the relevant knowledge or intent to state a claim. In these cases, stated Justice Breyer, it would "frustrate the very purpose of the discovery rule" in the Sarbanes-Oxley Act limitations provision if the limitations period began to run regardless of whether a plaintiff had discovered any facts suggesting scienter. "So long as a defendant concealed for two years that he made a misstatement with an intent to deceive," wrote the Court, "the limitations period would expire before the plaintiff had actually `discover[ed]' the fraud."

In applying this standard, the Court concluded that an FDA warning letter to Merck which stated that the company had ?minimized? a study's ?potentially serious cardiovascular findings,? and the pleadings filed in products-liability actions alleging that Merck had ?omitted, suppressed, or concealed material facts" concerning Vioxx, were insufficient to initiate the limitations period. The FDA letter and the complaints did not contain any specific information concerning the alleged deceptive promotion of the naproxen hypothesis, concluded the Court.

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Full post as published by Jim Hamilton's World of Securities Regulation on April 27, 2010 (boomark / email).