A unanimous
Supreme Court held that the
limitations period for
securities fraud cases begins to
run on the earlier of 1) the
date on which the plaintiff
actually discovered the facts
constituting the violation or 2)
the date on which a reasonably
diligent plaintiff would have
made that discovery. In
securities fraud cases, held the
court, facts showing scienter
are among those that constitute
the violation.
In this case, an
investor class sued Merck & Co.,
alleging that the drug maker
knowingly misrepresented the
risks associated with Vioxx, an
arthritis medication. A study
showed adverse cardiovascular
results for Vioxx when compared
to naproxen, another pain
reliever. Merck suggested that
this might be due to the absence
of a benefit conferred by
naproxen rather than a harm
caused by Vioxx. The investors
alleged that Merck committed
fraud by promoting the so-called
"naproxen
hypothesis" even though
it knew the hypothesis was
false.
Writing for the
court, Justice Breyer noted that
securities fraud plaintiffs must
show that it is more likely than
not that the defendant acted
with the relevant knowledge or
intent to state a claim. In
these cases, stated Justice
Breyer, it would
"frustrate
the very purpose of the
discovery rule" in the
Sarbanes-Oxley Act limitations
provision if the limitations
period began to run regardless
of whether a plaintiff had
discovered any facts suggesting
scienter.
"So long as a defendant
concealed for two years that he
made a misstatement with an
intent to deceive," wrote
the court,
"the limitations period would
expire before the plaintiff had
actually "discover[ed]" the
fraud."
In applying this
standard, the court concluded
that an FDA warning letter to
Merck which stated that the
company had
"minimized" a study's
"potentially
serious cardiovascular
findings," and the
pleadings filed in
products-liability actions
alleging that Merck had
"omitted,
suppressed, or concealed
material facts"
concerning Vioxx, were
insufficient to initiate the
limitations period. The FDA
letter and the complaints did
not contain any specific
information concerning the
alleged deceptive promotion of
the naproxen hypothesis,
concluded the court.
□ Merck & Co.,
Inc. v. Reynolds (U.S. Sup
Ct) will be published in a
forthcoming
Report.