The Supreme Court’s “Vioxx” Decision Threatens To Extend Limitations Periods and Subject Securities Law Defendants To Stale Claims


Under the antifraud provisions of the Securities Exchange Act of 1934, private suits must be brought within two years after the “discovery of the facts constituting the violation,” but no later than five years “after such violation.” The Supreme Court yesterday ruled unanimously that a private cause of action accrues under Section 10(b) of the Exchange Act only when a plaintiff is put on inquiry notice of specific facts, including the defendant’s mental state, or “scienter,” that are necessary to establish all the elements of a cause of action (Merck & Co., Inc. v. Reynolds). The decision threatens to broadly extend the period within which plaintiffs can bring securities fraud suits. A plaintiff who claims that he could not have uncovered that a false or misleading statement was made recklessly or with the intent to deceive may be able to bring suit as much as five years after the challenged disclosure. That could both permit plaintiffs to revive old claims, or play a “wait-and-see” game before bringing suit. The Merck decision accordingly risks exposing securities issuers and others involved in the law’s disclosure regime to the prospect of defending stale claims of securities fraud.

The Merck case involved a lawsuit brought by a group of investors alleging that Merck & Co. knowingly misrepresented the risks of heart attacks associated with use of Merck’s pain-killing drug Vioxx. The action was brought in November 2003, more than two years after three significant public disclosures: (1) Merck’s release of the results of a study indicating that participants who took Vioxx were four times more likely to have a heart attack than participants who did not take Vioxx; (2) a products liability lawsuit brought against Merck based on these findings; and (3) an FDA warning letter that Merck’s Vioxx advertising was “false, lacking in fair balance, or otherwise misleading.” All of these facts were publicly known in 2001.

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