Supreme Court to Decide Whether an FDA Warning Letter Starts the Statute of Limitations in a Securities Fraud CaseNovember 4, 2009
By Carrie S. Martin –
On November 30, 2009, the United States Supreme Court will hear oral argument in Merck & Co. v. Reynolds, No. 08-905, a securities class action. The case concerns the standard of inquiry required to start the clock running on the statute of limitations in a private securities “fraud” case. Plaintiffs have alleged that Merck defrauded investors by not disclosing safety concerns about Merck’s product Vioxx, the nonsteroidal anti-inflammatory drug (“NSAID”) that was pulled from the market in 2004. Merck argues that plaintiffs had sufficient notice of the alleged fraud, and that the statute of limitations prohibits the lawsuit from proceeding. Merck points to a 2001 FDA Warning Letter in which FDA accused Merck of deceptive and misleading conduct by misrepresenting Vioxx’s safety profile, media coverage about study results pointing to safety concerns, and other suits filed against Merck as constituting inquiry notice. Plaintiffs argue that the statute of limitations was not triggered by the Warning Letter because the fraud cause of action requires a suspicion of scienter, i.e., Merck’s intent to deceive or defraud , and the Warning Letter etc. did not cover that subject. Under section 804(a) of the Sarbanes-Oxley Act of 2002, a private action claiming fraud under section 10(b) of the Securities Exchange Act of 1934 must be brought “not later than the earlier of – (1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation.”
In Merck, the district court granted Merck’s motion to dismiss, concluding that the two-year statute of limitations provision barred the suit. In re Merck, 483 F. Supp. 2d 407, 418 (D.N.J. 2006). The district court pointed to “storm warnings” that Vioxx increased the risk of myocardial infarction, including the FDA’s 2001 Warning Letter. Id. at 419. These storm warnings stemmed from a study called the Vioxx Gastrointestinal Outcomes Research (“VIGOR”) study, which showed an increase of myocardial infarction in patients treated with Vioxx as compared to naproxen. Id. at 411-12.
The Third Circuit reversed, based on the heightened pleading requirement of the Private Securities Litigation Reform Act of 1995 (“PSLRA”) requiring that a plaintiff plead facts with particularity that the defendant acted with scienter. 543 F.2d 150, 164 n.12 (3rd Cir. 2008). Although the Third Circuit admitted that several published articles and the 2001 FDA Warning Letter discussed the negative VIGOR findings, the court concluded that the plaintiffs had no reason to suspect that Merck misrepresented the drug’s safety profile. Merck publicly hypothesized that the results were due to the cardioprotective effects of naproxen rather than any harmful effect of Vioxx. Id. at 171-72. The plaintiffs, therefore were not on inquiry notice that Merck intentionally misrepresented the study results. Only when an independent study found an increased risk of heart attack in patients taking Vioxx as compared to placebo, were Merck’s reassurances of Vioxx’s safety questioned and inquiry notice triggered. Id. at 172.
In August 2009, PhRMA submitted an amicus brief supporting Merck’s arguments. PhRMA argued that the “limitations period should commence when a reasonable investor of ordinary intelligence would suspect that he has been defrauded” without which information “suggesting scienter.” Brief of PhRMA as Amicus Curiae in Support of Petitioners at 12 (Aug. 17, 2009). The United States, in its amicus brief filed in October 2009, argued that notice “arises only if circumstances suggest a misrepresentation or omission made with scienter.” Brief of the United States as Amicus Curiae Supporting Respondents at 26 (Oct. 26, 2009).
The Supreme Court will now have the opportunity to decide whether the Third Circuit’s interpretation of “inquiry notice”, as supported by the United States’ amicus brief, is correct. If the Supreme Court affirms, it will likely restrict the statute of limitations as a bar to private securities fraud cases.