D&O Liability - Federal Court in New Jersey Dismisses Vioxx Securities Litigation With Prejudice on Statute of Limitations Grounds
On April 12, 2007, Judge Stanley Chesler of the United States District Court for the District of New Jersey dismissed with prejudice the securities litigation portion of In re Merck & Co., Inc. Securities, Derivative & “ERISA” Litigation.
Judge Chesler held that the claims were time-barred, using an “inquiry notice” standard to determine when the claims had accrued.
The first securities complaint was filed against Merck and its directors and officers in the United States District Court for the Eastern District of Louisiana on November 6, 2003. In the next year and a half, numerous additional
suits were filed. The Judicial Panel on Multidistrict Litigation consolidated the suits in the United States District Court for the District of New Jersey on February 23, 2005. The Corrected Consolidated and Fourth Amended
Class Action Complaint (the “Complaint”) alleged that Merck’s failure to disclose the cardiovascular risks associated with Vioxx inflated the price of Merck stock and that investors suffered a loss when the truth
was revealed in October 2003. The Complaint included six counts, three asserting claims under the Securities Exchange Act of 1934 and three asserting claims under the Securities Act of 1933.
Because the Complaint was filed after enactment of the Sarbanes-Oxley Act, Judge Chesler applied the limitations period set forth in that statute to Counts One through Three of the Complaint, which alleged violations of Sections
10(b), 20(a) and 20A of the Exchange Act and Rule 10b-5. Specifically, the Sarbanes-Oxley Act provides that the limitations period for private securities fraud claims is the earlier of two years after the discovery of the facts
constituting the violation or five years after the violation. The limitations period for violations of the Securities Act of 1933, which is set forth in Section 13 of that statute, is “one year after the discovery of
the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence.”
Judge Chesler applied the “inquiry notice” standard to determine when the claims had accrued for purposes of applying the two statutes of limitations. That standard involves an objective test that takes into account
when the plaintiff discovered, or in the exercise of reasonable diligence should have discovered, the general fraudulent scheme. If the defendant establishes that the plaintiff was on inquiry notice, the burden shifts to the
plaintiff to show that it was unable to discover its injuries despite the exercise of reasonable due diligence.
Because the first securities class action was filed on November 6, 2003, plaintiffs’ claims under the Exchange Act would be barred by the statute of limitations if plaintiffs had had inquiry notice of them before November
6, 2001. Based upon the news articles, analyst reports and other public documents available to the plaintiffs, the Court concluded that plaintiffs were on inquiry notice of their claims no later than October 9, 2001.
The Court pointed out that, on that date, the New York Times ran an article in which Merck’s Executive Vice President for Science and Technology admitted that Vioxx may increase the risk of heart attack.
In addition, the Court noted that numerous articles published in 2001 in mainstream publications including USA Today and JAMA discussed the possibility that Vioxx increased the risk of heart attack. Products
liability and consumer fraud cases involving Vioxx were filed in May and September 2001. On September 21, 2001, the FDA published a warning letter to Merck regarding the risks of Vioxx that received widespread media and analyst
coverage. In the two and half weeks following the publication of the FDA warning letter, eleven articles chronicling the problems with Vioxx were published. In the Court’s words, the foregoing “torrent
of publicity . . . is more akin to thunder, lightning and pouring rain than subtle warnings of a coming storm.” (Opinion at 27.)
The Court rejected plaintiffs’ contentions that positive information disseminated by Vioxx counterbalanced the negative information because, the Court concluded, a reasonable investor would not have relied upon Merck’s
reassurances in light of the public information to the contrary. The Court noted that plaintiffs had not argued that they conducted a diligent investigation and that there was nothing in the Complaint that demonstrated that
plaintiffs were unable to uncover the pertinent information during the limitations period. As a result, the Court dismissed the Exchange Act claims with prejudice.
The Court held that plaintiffs’ claims under the 1933 Securities Act with respect to stock purchased pursuant to Merck’s April 26, 2002 Registration Statement and April 30, 2002 Prospectus also were time-barred.
In view of the Court’s finding that plaintiffs were on inquiry notice of the alleged wrongdoing by no later than October 9, 2001, the Court concluded that plaintiffs were on inquiry notice of the misrepresentations made in
the Registration Statement and Prospectus immediately upon issuance of these documents. The Securities Act’s one-year statute of limitations thus expired on April 30, 2003, months before the first securities action was
filed.