Litigation

U.S. Supreme Court favors plaintiffs on securities fraud statute of limitations

By Heidee Stoller

On Tuesday the U.S. Supreme Court addressed when a securites fraud claim accrues and the statute of limitations begins to run.  The plaintiff investors in Merck & Co. v Reynolds alleged that Merck & Co. knowingly misrepresented the heart attack risks associated with Vioxx.  Justice Breyer, writing for the majority, held that, due to delayed discovery of the claim, the two-year statute of limitations did not bar the investors from bringing a securities fraud action under Section 10(b) of the Securities Exchange Act. 

Claims by private plaintiffs under Section 10(b) must be brought no later than the earlier of "two years after the discovery of the facts constituting the violation," or five years after the violation.  28 U.S.C. § 1658(b). The Court held that the two-year period begins to run when a plaintiff actually discovers ?the facts constituting the violation,? or when a reasonably diligent plaintiff would have discovered such facts?whichever comes first.  The court held that the limitations period does not begin to run at ?inquiry notice,? or the point at which a reasonably diligent plaintiff would investigate the facts, because the point at which a plaintiff would begin investigating is not necessarily the point at which a plaintiff would discover ?the facts constituting the violation.?

The Court rejected Merck?s argument that facts showing scienter??a mental state embracing the intent to deceive, manipulate, or defraud??are not among ?the facts constituting the violation? for purposes of delayed accrual under § 1658(b).  Noting that ?the state of a man?s mind is as much a fact as the state of his digestion,? the Court held that the ??fact? of scienter ?constitut[es]? an important and necessary element of a § 10(b) ?violation.??  The court held that it would frustrate the purpose of the discovery rule if the limitations period began to run before the plaintiff discovered any facts related to scienter. The court also held that facts tending to show a materially false or misleading statement were ordinarily insufficient to establish scienter; instead it is often necessary for plaintiffs to discover facts specifically related to a defendant?s state of mind.

Justice Scalia, joined by Justice Thomas, concurred in part and concurred in the judgment.  Justice Scalia argued for an even more plaintiff-friendly result, stating that the statute of limitations should begin to run when a plaintiff actually discovers facts constituting the violation, rather than when a reasonably diligent plaintiff should have known such facts. 

Full post as published by Northwest Business Litigation Blog on April 29, 2010 (boomark / email).