Merck & Co. v. Reynolds

(April 29, 2010, Supreme Court Watch)

The Supreme Court held earlier this week in Merck & Co. v. Reynolds that the two-year statute of limitations for a private securities-fraud action begins to run when a plaintiff discovers, or a reasonably diligent plaintiff should have discovered, "the facts constituting the violation"—whichever comes first. The "facts constituting the violation," the Court explained, include facts concerning a defendant's scienter or fraudulent intent.

At issue in the case was a claim by a group of investors that Merck knowingly misrepresented the risk of heart attacks accompanying use of its Vioxx painkiller and that the investors suffered losses when Merck's stock price declined after increasing public attention focused on these risks. In March 2000, Merck had announced the results of a study that found patients taking Vioxx suffered heart attacks at a higher rate than those taking a different painkiller. Merck acknowledged the adverse cardiovascular data but suggested that the results could be explained by a benefit conferred by the other drug, rather than by harm caused by Vioxx. Further studies, however, raised additional concerns regarding cardiovascular risk, and Merck withdrew Vioxx from the market in September 2004.

On November 6, 2003—after Merck's release of the 2000 study results but prior to its withdrawal of Vioxx from the market—the investors filed a securities-fraud action under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, which Merck moved to dismiss on statute-of-limitations grounds. A private securities-fraud claim must be commenced not later than "2 years after the discovery of the facts constituting the violation," 28 U.S.C. §1658(b)(1), but, under any circumstances, within five years of the violation. Id. §1658(b)(2). The five-year period was not at issue, and the investors argued that their complaint was timely under the two-year requirement because they did not discover, and could not have discovered, facts constituting the securities-fraud violation—particularly facts relating to Merck's scienter—more than two years before filing suit.

The Supreme Court agreed. The Court unanimously held that, in the context of a Section 10(b) violation, facts relating to a defendant's scienter are "facts constituting the violation" and the statute of limitations therefore does not begin to run until a plaintiff discovers those facts. To hold otherwise, the Court reasoned, would allow a defendant to avoid securities-fraud liability by concealing, for two years, facts suggesting fraudulent intent. Applying this rule to the Merck complaint, the Court held that the suit was timely because the investors did not discover facts relating to Merck's scienter—that is, facts showing that Merck advanced an alternative explanation for the March 2000 study with fraudulent intent—more than two years before the investors filed suit.

Merck additionally argued that the limitations period expired because the investors were on "inquiry notice" of the alleged fraud more than two years before filing their complaint, meaning that the investors had information sufficiently suggestive of wrongdoing so as to require further inquiry. The Court, however, rejected the concept of "inquiry notice" as inconsistent with the statute's use of the term "discovery."

Writing for six justices, Justice Breyer reasoned that the word "discovery" in Section 1658(b)(1) refers not only to a plaintiff's actual discovery of certain facts, but also to constructive discovery of the facts a "reasonably diligent plaintiff" would have discovered. This conclusion rested on the so-called "discovery rule"—a doctrine applied in a variety of limitations contexts to delay accrual of a cause of action until a plaintiff discovers, or with due diligence should discover, the facts underlying a claim. The Court emphasized that the rule was particularly important in the context of fraud, because a defendant's deceptive conduct may prevent a plaintiff from even knowing he or she has been defrauded.

The Merck decision will likely reduce the number of private securities-fraud suits dismissed on limitations grounds. Some lower courts had held that "inquiry notice" was sufficient to trigger the beginning of the limitations period, but Merck makes clear that discovery (or constructive discovery), and not inquiry notice, is the touchstone for limitations analysis.

Supreme Court Watch Archive

©2008 Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, NY 10153, (212) 310-8000, www.weil.com ©2008. All rights reserved. Quotation with attribution is permitted. This publication provides general information and should not be used or taken as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. The views expressed in this publication reflect those of the authors and not necessarily the views of Weil, Gotshal & Manges LLP. If you would like to add a colleague to our mailing list or if you need to change or remove your name from our mailing list, please log on to subscriptions, .