Merck & Co., Inc., et al. v. Reynolds et al.
559 U.S. (2010)
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Rule of Law:
The two-year statute of limitations for a private securities fraud action begins to run when a plaintiff actually discovers, or when a reasonably diligent plaintiff would have discovered, the facts constituting the violation, including the facts that show scienter (intent to deceive).
Facts:
- In the mid-1990s, Merck & Co. developed the painkilling drug Vioxx, which the FDA approved in 1999.
- In March 2000, Merck released its VIGOR study, which showed Vioxx users suffered four times as many heart attacks as users of another painkiller, naproxen.
- Merck publicly explained this discrepancy by advancing the 'naproxen hypothesis,' suggesting naproxen had a protective cardiovascular benefit that Vioxx simply lacked, rather than Vioxx being harmful.
- Throughout early 2001, public debate continued, and some product liability lawsuits were filed against Merck concerning Vioxx's heart risks.
- In September 2001, the FDA issued a public warning letter to Merck, stating its marketing of Vioxx was 'false, lacking in fair balance, or otherwise misleading' regarding cardiovascular risks.
- The FDA's letter, however, also acknowledged that Merck's 'naproxen hypothesis' remained a 'possible explanation' for the VIGOR study's results.
Procedural Posture:
- Investors filed a securities fraud complaint against Merck & Co. in the U.S. District Court for the District of New Jersey on November 6, 2003.
- Merck filed a motion to dismiss, arguing the complaint was filed outside the two-year statute of limitations.
- The District Court, as the court of first instance, granted Merck's motion to dismiss, finding that public information before November 6, 2001 had placed the plaintiffs on 'inquiry notice'.
- The investors, as appellants, appealed the dismissal to the U.S. Court of Appeals for the Third Circuit.
- The Court of Appeals, an intermediate appellate court, reversed the District Court's decision, holding the available information did not sufficiently suggest scienter to trigger the limitations period.
- Merck, as petitioner, successfully petitioned the U.S. Supreme Court for a writ of certiorari.
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Issue:
Does the two-year statute of limitations for a private securities fraud action under 28 U.S.C. § 1658(b)(1) begin to run when a plaintiff is put on 'inquiry notice' of potential wrongdoing, or only after the plaintiff discovers or reasonably should have discovered facts constituting the violation, including scienter?
Opinions:
Majority - Justice Breyer
No, the statute of limitations does not begin to run merely when a plaintiff is put on 'inquiry notice.' The limitations period under § 1658(b)(1) begins only after a plaintiff discovers, or a reasonably diligent plaintiff would have discovered, the facts constituting the violation, which includes facts showing scienter. The court reasoned that 'discovery' in the context of fraud statutes of limitation has long been interpreted to include what a reasonably diligent plaintiff would have discovered through investigation. Furthermore, the 'facts constituting the violation' must include scienter, as fraudulent intent is a core element of a §10(b) securities fraud claim. To start the clock before a plaintiff could have found facts related to scienter would frustrate the purpose of the discovery rule. While 'storm warnings' may trigger a duty to investigate (i.e., put a plaintiff on inquiry notice), the limitations period does not begin to run until that diligent investigation would have uncovered the facts of the violation itself. Applying this standard, the pre-November 2001 information did not provide sufficient facts to suggest Merck knew its naproxen hypothesis was false, so the plaintiffs' complaint was timely.
Concurring - Justice Stevens
Yes, the suit is timely and the Court's application of the law to these facts is correct. Justice Stevens concurred in the judgment and most of the majority's opinion. However, he wrote separately to state that the Court's extensive discussion interpreting the meaning of 'discovery' (actual vs. constructive) was unnecessary to decide this case, as the outcome would be the same under either interpretation. He would reserve a definitive ruling on that broader question for a future case where the distinction is outcome-determinative.
Concurring - Justice Scalia
Yes, the suit is timely, but for a different reason than the majority provides. Justice Scalia argued that the term 'discovery' in § 1658(b)(1) refers only to actual discovery, not constructive discovery. His reasoning is based on statutory comparison: another section of the securities laws, 15 U.S.C. § 77m, explicitly includes language about when a discovery 'should have been made by the exercise of reasonable diligence.' Because Congress included that explicit constructive discovery language elsewhere but omitted it from § 1658(b)(1), 'discovery' in this statute must mean only actual discovery. Since Merck had not shown that the plaintiffs actually discovered facts related to scienter more than two years before filing suit, their claim was timely.
Analysis:
This decision resolves a circuit split and clarifies the trigger for the securities fraud statute of limitations, rejecting a purely 'inquiry notice' standard that many lower courts had applied. By holding that the limitations period does not begin until a diligent plaintiff would have discovered facts suggesting scienter, the Court makes it more difficult for defendants to obtain early dismissals of securities fraud cases on timeliness grounds. The ruling provides plaintiffs with more time to develop facts showing fraudulent intent before the two-year clock begins to run, though the absolute five-year statute of repose still provides an ultimate cutoff for claims.
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