The U.S. Supreme Court relaxed the deadlines for shareholder fraud lawsuits, saying investors can proceed with accusations that Merck & Co. misled the public about the risks posed by its now-withdrawn Vioxx painkiller.
The nation’s highest court unanimously ruled that the two-year window for shareholder suits under federal law hadn’t closed by the time the first shareholders sued Merck in November 2003. The court, interpreting the federal securities laws, said the two-year period doesn’t begin until investors have indications of intentional company wrongdoing.
The ruling will mean more flexibility for shareholder lawyers, giving them longer to decide whether to file fraud lawsuits. The decision will extend the length of time companies are vulnerable to suits over alleged misconduct.
“The case will enable not only a greater number of shareholder lawsuits in the pharmaceutical industry, but could also help spur securities litigation more generally, especially in financial services,” said Chris Brummer, a securities law professor at Georgetown University Law Center in Washington.
Vioxx-related legal problems have already cost Merck billions of dollars. The company set up a $4.85 billion settlement fund in 2007 to resolve thousands of injury claims over the drug, and Merck said last month 13 states have sued the company seeking refunds of money they paid for Vioxx.
Merck, based in Whitehouse Station, New Jersey, said in a statement that it will seek to have the investor suit dismissed on other grounds.
“Merck is disappointed in today’s decision, but believes that the allegations in the complaint are unfounded and will continue to defend itself vigorously,” Bruce Kuhlik, the company’s general counsel, said in a statement.
Merck pulled Vioxx from the market in September 2004 because of links to heart attacks and strokes. On the day the drug was pulled, Merck fell 27 percent, wiping out $26.8 billion in market value. Merck agreed in 2007 to pay $4.85 billion to settle more than 26,000 patient lawsuits.
The first public hints of a problem with Vioxx came in 2000 when a study released by Merck showed its treatment caused five times more heart attacks than a rival painkiller, naproxen. Merck at the time said the results stemmed from naproxen’s protection of the cardiovascular system.
The first Vioxx product-liability suit was filed in May 2001, and in September of that year the Food and Drug Administration said in a warning letter that the company was underplaying potential heart risks associated with Vioxx.
The case put Merck in the unusual position of arguing that the events of 2000 and 2001 suggested wrongdoing by the company and should have prompted investors to investigate. Merck contended that the two-year window for lawsuits was closed by September 2003, two years after the FDA letter.
In his opinion for the court, Justice Stephen Breyer said the FDA letter “shows little or nothing” about whether Merck “advanced the naproxen hypothesis with fraudulent intent.”
“The court comprehensively rejected Merck’s argument that the statute of limitations had run on the claims of fraud before the investors had obtained knowledge of the company’s fraudulent intent,” said David Frederick, the lawyer who argued the case for the shareholders. Frederick is a partner at Kellogg Huber Hansen Todd Evans & Figel PLLC in Washington.
Frederick argued that investors didn’t have enough information to establish a violation of the securities laws until a 2004 Wall Street Journal article disclosed internal company e-mails. The Obama administration backed the investors in the case.
A federal appeals court had allowed the suit to go forward, overturning a trial judge’s decision throwing it out.
Breyer said that, because shareholders must prove intentional deception, they shouldn’t have to sue before they have a reasonable chance to get evidence of that element of the case.
Imposing a stricter requirement would mean that defendants could avoid suit by concealing evidence of misstatements for two years, he said. Breyer pointed to a provision in federal law that says investors have two years “after the discovery of facts constituting the violation.”
“Intent to deceive is assuredly a fact,” Breyer wrote.
Breyer rejected Merck’s contention that plaintiffs’ lawyers have a duty to begin investigating once they get hints of fraud. At the same time, he said the two-year period begins once a “reasonably diligent” shareholder would have evidence of intentional misconduct.
Scalia and Thomas
Two justices -- Antonin Scalia and Clarence Thomas -- said they would have gone further in relaxing the deadlines. Scalia said the provision the court was interpreting doesn’t require shareholders to be “reasonably diligent.”
The ruling will have limited practical impact, affecting primarily companies that have been the subject of government investigations, said Adam Pritchard, who teaches securities law at the University of Michigan in Ann Arbor.
“Most cases are going to be brought very soon after the big stock price drop that gives rise to the lawsuit,” Pritchard said. “The impact of this decision is going to be on frauds that come to light a substantial time after the company has gone into a decline.”
Breyer’s standard is similar to what most, though not all, lower courts have applied, said Barbara Black, a securities-law professor at the University of Cincinnati School of Law.
“It’s probably what the courts have been doing, but there clearly were some outliers, like the district court in this case,” she said.
The case is Merck v. Reynolds, 08-905.