UPDATED 12:05 p.m.

Taking on a major securities fraud case growing out of the controversy over the pain medicine Vioxx, the Supreme Court agreed on Tuesday to clarify when an investor must go to court to make a fraud claim.  The Justices granted review of Merck & Co., et al., v. Reynolds, et al. (08-905).  This was the only case granted.

Merck is the maker and distributor of Vioxx, a prescription medicine that often was used to relieve pain for arthritis patients.  The company has been the target of a wave of securities fraud lawsuits, claiming that it misrepresented the drug’s risks of heart attack or stroke.  The Food and Drug Administration had warned the company in September 2001 for having minimized those risks.

Ultimately, Merck withdrew the medicine from the market in September 2004, based on new study results suggesting a higher incident of het attack or stroke after 18 months of using the drug.

The issue the Supreme Court will consider, when the case comes up for argument and decision in the Term starting Oct. 5, is how to define the deadline for filing a securities fraud lawsuit under federal law.

There is broad agreement among lower courts that the law’s two-year filing period for such lawsuits begins to run once an investor becomes aware that fraud may have occurred.  But those courts are widely split on how to apply that standard.

At issue in the Merck case is the view adopted by the Third Circuit Court.  That view is that the investor has no duty to investigate suspicion of fraud, and the two-year filing period does not even begin to run until the investor comes upon evidence that the fraud was intentional.  That approach, Merck complained in its petition to the Justices, means that the investor does not have to inquire further about potential fraud unless evidence of intent falls into his or her lap.

The Justices had before them two cases on the filing period issue. The other was Trainer Wortham & Co.  v. Betz (07-1489).  The Court had asked the U.S. Solicitor General for the federal government’s views on that other case; SG Elena Kagan urged the Court not to hear the Trainer Wortham case, finding it was not a clear test of the issue, but suggested that the Court may want to hear the Merck petition instead. That is what the Court chose to do.

Among the other orders the Court issued on Tuesday, it declined to hear an appeal by DaimlerChrysler Corp., the automaker, asking the Justices to clarify when punitive damages may be awarded over a defectively designed product.  The company’s petition said that the Court has spent a good deal of time defining when a punitive damage was too high, but has not revisited the basic question of what kind of conduct justifies punitive damages of any size. The case was Daimler/Chrysler v. Flax (08-1010).

The automaker was seeking to overturn a $13.4 million punitive damages award for wrongful death of a child in an auto accident; the claim was that the company made a flawed design of seats in a passenger van.  Since the company has since filed for bankruptcy, the fate of that verdict is in doubt.

Posted in Merck & Co. v. Reynolds, Uncategorized