Below, Akin Gump’s John Wittenzellner previews Merck & Co., Inc. v. Richard Reynolds, one of two cases to be heard by the Supreme Court on Monday, November 30.  Lyle Denniston also covered the cert. grant in the case for SCOTUSblog; his post is available here.  Check the Merck & Co., Inc. v. Reynolds (08-905) SCOTUSwiki page for additional updates.

28 U.S.C. § 1658(b) sets the statute of limitations for federal securities fraud claims as the shorter of: (1) two years after discovery of the facts constituting the violation; or (2) five years after such violation. In No. 08-905, Merck & Co., Inc. v. Reynolds, the Court will determine when an investor is placed on "inquiry notice" of a violation, such that the statute of limitations begins to run.

Background

This case stems from a class action suit in which the respondents, purchasers of stock in petitioner Merck & Co., alleged that Merck officers and directors misrepresented the safety profile and commercial viability of Vioxx, a non-steroidal anti-inflammatory drug used to treat osteoarthritis and acute pain. Vioxx was introduced to the market in May 1999 and eventually attained widespread use before being voluntarily withdrawn from the market by Merck in September 2004 due to mounting evidence that it caused harmful cardiovascular ("CV") events.

Shortly before the release of Vioxx, Merck initiated the Vioxx GI Outcomes Research ("VIGOR") study to examine how the drug's gastrointestinal safety profile compared to other non-steroidal anti-inflammatory drugs ("NSAIDs"), such as aspirin, ibuprofen, and naproxen. The VIGOR study, which was released in March 2000, showed that CV events were higher in the Vioxx patient group than in the group that was given naproxen. There were two possible explanations for this difference: (1) naproxen decreases the likelihood of CV events while Vioxx has no effect ("the naproxen hypothesis"); or (2) Vioxx increases the likelihood of CV events. Merck contended that the first explanation was the correct one.

What followed was a series of articles, involvement by the Food and Drug Administration (FDA), and further studies to determine the effects of Vioxx, two of which were of significant importance. First, in September 2001, the FDA made publicly available a Warning Letter in which it accused Merck & Co. of engaging in deceptive and misleading conduct with regard to the safety profile of Vioxx by endorsing the naproxen hypothesis. Second, in October 2003, the Wall Street Journal published a study by the Harvard-affiliated Brigham and Women's Hospital in Boston, that found an increased risk of heart attack in patients taking Vioxx as compared to patients taking Celebrex and placebo ("the Harvard study").

Merck filed a motion to dismiss the shareholder suit as time-barred, and the district court agreed. In the court's view, the FDA Warning Letter "would give an investor in Merck reason for concern and charge him or her with the responsibility of conducting a diligent investigation." Because the letter was published more than two years prior to the filing date, "storm warnings" of the alleged fraud existed more than two years prior to filing, and the suit was barred by the statute of limitations.

On appeal, the Third Circuit reversed and remanded the case for further proceedings. In contrast to the district court, it took a narrow view of the effect of the FDA Warning Letter, reasoning that the letter did not accuse Merck of not believing in the naproxen hypothesis. Rather, the Letter directed Merck to inform health care professionals and consumers that the naproxen hypothesis had never been observed in a clinical study. Furthermore, because the FDA is not responsible for regulating the securities markets, the FDA Warning Letter did not trigger a "storm warning." Instead, in the Third Circuit's view, the first point at which adequate "storm warnings" would have existed, such that an investor would suspect that Merck & Co. did not actually believe the naproxen hypothesis, was when the Harvard study was published.

Merck & Co. filed a petition for certiorari, which was granted on May 26, 2009. The petitioners' and respondents' briefs on the merits are due on August 10th and October 16th, respectively.

Petition for Certiorari

In its petition, Merck outlines three reasons for granting certiorari. First, the Third Circuit's opinion, although consistent with the Ninth Circuit's jurisprudence, is at odds with the other circuits. The Third and Ninth Circuits are the most lenient: they hold that the statute of limitations does not start to run until an investor receives evidence of scienter of the alleged fraud; until then, the investor has no duty to conduct an investigation. By contrast, other circuits apply more stringent tests, which vary to a certain extent but do not require scienter of the alleged fraud before starting the clock on the statute of limitations. Second, securities law is a national issue and thus should be applied uniformly across the circuits. Third, unlike Wortham & Co. v. Betz, a securities case from the Ninth Circuit also pending at the Supreme Court that was decided at the summary judgment stage, the case is an ideal vehicle to consider the question presented because it involves a dismissal under Rule 12(b)(6).

The shareholders counter with five arguments against certiorari. First, because this case hinges upon whether there were sufficient "storm warnings" to trigger the duty to investigate, it does not implicate the circuit split over when the statute of limitations begins to run. Second, the Third Circuit's opinion is consistent with the Supreme Court's 1991 opinion in Lampf v. Gilbertson, holding that the statute of limitations begins after discovery of the facts constituting the securities fraud violation, because it began its statute of limitation analysis from the point at which the shareholders had a proper understanding of the specifically alleged fraud, rather than just fraud in general. Third, the Third Circuit's decision hinged upon specific facts, not the appropriate legal standard for inquiry notice. Fourth, the case is based upon a rare fact pattern that is unlikely to recur"”a securities fraud claim based on a misrepresentation of opinion. Fifth, there is no need to hold this case pending the Court's disposition of Betz.

Merits Briefing

In its brief, Merck outlines four reasons to reverse the Third Circuit's holding.  First, the statute of limitations is triggered by either actual or constructive (i.e., "storm warnings") knowledge of the "facts constituting the violation."  However, a plaintiff does not need facts related to every element of a violation to be put on "inquiry notice" "“ an assertion for which Merck cites TRW v. Andrews, a Fair Credit Reporting Act case in which the Supreme Court acknowledged that a plaintiff could be on "inquiry notice" when she is denied credit, even if she lacks information that a credit agency made improper disclosures.

Second, Merck argues, the Third Circuit's rule essentially eliminates the concept of "inquiry notice" altogether, because requiring a plaintiff to have facts bearing specifically on every element of a violation "“ a scenario that Ninth Circuit Judge Kozinski has described as not having "storm warnings until the hurricane makes landfull" "“ would effectively eliminate the concept of constructive knowledge.

Third, Merck attacks the premise of the Third Circuit's rule and the government's proposed rule: there is no actual or constructive knowledge until the plaintiff has sufficient information to file a complaint that would survive a motion to dismiss.  Because a violation, is different than a cause of action, Merck explains, the two do not have to correspond temporally and the statute of limitations can begin to run even before a plaintiff has a cause of action.  Furthermore, the Third Circuit's rule and the government's proposed rule would intermingle the now separate limitations and pleadings defenses, creating a scenario in which a defendant would have to adopt inconsistent positions to assert both defenses.

Fourth, Merck argues that the FDA Letter, studies, and articles that were publicly available prior to November 6, 2001 were sufficient to place the shareholders on inquiry notice under either standard.

The shareholders' brief responds to Merck's brief with four main arguments.  First, the "facts constituting" a violation must include all of the elements based on the plain meaning of the word "constitute."  The shareholders cite various cases in which the courts have repeatedly interpreted the phrase "facts constituting" to include all of the elements to support their argument.

Second, the shareholders discuss the actual and constructive knowledge of the "facts constituting" a violation.  They focus in particular on constructive discovery and how it relates to their construction of "facts constituting" "“ specifically, that a plaintiff cannot have constructive knowledge of a fact that is solely controlled by the defendant.  Essentially, if a fact cannot be discovered through due diligence, then the statute of limitations cannot be tied to a "due diligence" investigation.

Third, the structure of the statute, 28 U.S.C. § 1658(b), supports the shareholders' arguments because it differentiates between offenses that include facts that the plaintiff could not discover.  When the plaintiff knew or should have known, for example, the two-year limit applies to curtail the plaintiff's ability to bring a stale claim.  However, when the plaintiff could not discover facts that relate to all of the elements of the claim, the five-year limit applies.  As such, the two-year limitation does not begin to run until the plaintiff has facts for all of the elements of the claim.

Fourth, despite Merck's assertions, mere suspicion of wrongdoing does not trigger the statutory limitations period.  The shareholders compare Congress's failure to include a constructive-discovery provision in 28 U.S.C. § 1658(b)(1) with its inclusion of such a provision in § 13 of the 1933 Act.

The United States filed an amicus brief in support of the shareholders.  The Government first contends that the statute of limitations does not start to run until an investor who is on inquiry notice discovers or should have discovered the "facts constituting the [securities] violation" via a diligent investigation "“ that is, when the investor has discovered or should have discovered facts demonstrating the violation, including scienter.  Second, "storm warnings" will exist only when the available information suggests that the misrepresentation was made with scienter to constitute "storm warnings."  Considerations of fairness dictate that investors should not be required to conduct an investigation if they have no reason to believe that a misrepresentation was made without culpable intent.

Finally, the United States argues that the Supreme Court should affirm the Third Circuit's decision because the suit was timely filed.  The FDA Letter was insufficient to place respondents on "inquiry notice" because it did not suggest culpable intent on Merck's part.  But even if the FDA Letter were sufficient, the respondents could not have completed a diligent investigation prior to November 6, 2001, two years prior to the filing of suit.

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