Would-be plaintiffs may have more time to pursue federal securities law class actions against publicly held companies under a new decision from the U.S. Supreme Court.
By law, a federal securities fraud claim is barred unless brought within “2 years after the discovery of the facts constituting the violation” or “5 years after [the] violation,” whichever comes first. In November 2003, plaintiffs filed a securities fraud class action against the pharmaceutical maker Merck & Co. claiming it had misrepresented health risks associated with its drug Vioxx®. Merck obtained dismissal of the suit by arguing that the plaintiffs had known the “facts constituting the [alleged] violation” more than two years earlier in September 2001, when the FDA publicly released a warning letter charging that Merck’s marketing of Vioxx was false and misleading. The United States Court of Appeals for the Third Circuit reversed the dismissal, and the U.S. Supreme Court took up the case at Merck’s urging to resolve a disagreement among federal appeals courts over what triggers the two-year statute of limitations.
In a unanimous decision, the Court affirmed the Third Circuit’s reinstatement of the Vioxx suit. The Court held that, while “storm warnings” like the FDA warning letter may warrant inquiry, such “inquiry notice” is not sufficient to trigger the two-year statute of limitations. The Court noted that, although the FDA’s letter accused Merck of falsely marketing Vioxx, it contained “little or nothing” relevant to the question whether Merck had acted with fraudulent intent—one of the essential “facts constituting the violation.” Accordingly, the Court held that the two-year limitations period does not begin to run until the plaintiff discovers (or a reasonably diligent plaintiff would have discovered) facts constituting the violation including the elements of both falsity and the intent to defraud.
The Court’s decision means that, in a greater number of cases, plaintiff lawyers will have more time to commence securities fraud lawsuits following a company’s public statement that leads to a drop in stock price. As a practical matter public companies will see more federal securities fraud lawsuits brought between two and five years after the event in question.
Merck & Co. v. Reynolds U.S. Supreme Court Holds “Inquiry Notice” Insufficient To Trigger Statute Of Limitations For Securities Fraud Claims
May 4, 2010