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Vioxx's Long Shadow: Supreme Court Skeptical Of Merck's Argument On Timing Of Securities Suits

This article was originally published in The Pink Sheet Daily

Executive Summary

Case could determine how much evidence is necessary for investors to bring a securities fraud suit to start the clock running on the statute of limitations.

Supreme Court justices appear skeptical of Merck's claim that investors should have known the company may have misrepresented the safety profile of Vioxx long before they filed a securities class action against the company.

In Merck v. Reynolds, the question before the court, which heard oral arguments Nov. 30, is how much evidence plaintiffs need to be put on "inquiry notice" of securities fraud to start the clock running on the statute of limitations for filing a suit. Merck contends that plaintiffs are on notice when they have enough information to trigger further investigation - i.e., when there is enough information to cause a reasonable investor to suspect that the defendant has engaged in securities fraud.

A district court found there was sufficient information in the public domain for plaintiffs to have known of Merck's alleged fraud in 2001 and ruled that their claims were barred by the two-year statute of limitations since the first suit was filed in November 2003. The U.S. Court of Appeals for the Third Circuit reversed, finding plaintiffs did not wait too long to sue (Also see "Appeals Court Reinstates Vioxx Securities Class Action Against Merck" - Pink Sheet, 15 Sep, 2008.). Merck withdrew Vioxx from the market in September 2004 based on a different study indicating increased cardiovascular risks.

Merck's attorney Kannon Shanmugam of Williams & Connolly said there was considerable information in the public domain suggesting the possibility that Merck engaged in securities fraud when it misrepresented the safety profile of its nonsteroidal anti-inflammatory Vioxx (rofecoxib) in reporting the results of its VIGOR (Vioxx Gastrointestinal Outcomes Research) study comparing Vioxx to naproxen. The study found that Vioxx users had greater protection from gastrointestinal problems but also suffered significantly more heart attacks than naproxen users. Merck hypothesized that the results were due to naproxen lowering the incidence of heart attacks rather than Vioxx increasing the risk.

"To say that, you must believe that there is substantial evidence of fraud when there is simply substantial evidence of inaccuracy," Justice Antonin Scalia told Shanmugam. "What evidence of scienter [i.e., intent to deceive or defraud] was there?"

Shanmugam cited the warning letter FDA issued in 2001 accusing Merck of misrepresenting the cardiovascular safety profile of Vioxx. Justice Ruth Bader Ginsburg noted, however, that Merck submitted a curative label and continued to give the naproxen hypothesis. She also pointed out that doctors continued to write prescriptions for Vioxx.

How Much Research Do Plaintiffs Need To Do?

Ginsburg asked how most diligent plaintiffs would have gone about finding out whether Merck really had no good faith belief in the naproxen hypothesis. Shanmugam responded that they could have talked to experts to test the validity of the hypothesis.

Justice Sonia Sotomayor later pressed him on this point, asking what further investigation investors could have undertaken to discover sufficient information to file a lawsuit. Shanmugam replied that they could have talked to former Merck employees and consultants.

Justices Anthony Kennedy and Stephen Breyer also appeared to reject Merck's argument. "You have to have specific evidence of scienter. And there is noting to indicate that the plaintiffs had that," Kennedy stated.

Breyer presented a scenario in which investors would have to wait to get additional information to pursue litigation. "Let's imagine that on Jan. 1 some investors look out and there are not only storm clouds, thunder, whatever you want, lots to put them on notice," he stated. "So then the statute begins to run."

"But it could be the case that once they start to investigate there is a key element, say scienter, the only evidence for which would take them an extra six months to find because it's in the hands of a person who is in jail in Burma," he said.

Breyer asked if the statute would then begin running on July 1. Shanmugam replied yes. Breyer responded that this would be "a real morass for courts to get into" to treat these situations differently.

Why Did The Plaintiffs File Suit When They Did?

David Frederick, an attorney for the shareholder respondents, said they did not know of Merck's belief that Vioxx caused cardiovascular events until the publication of a Wall Street Journal article in November 2004. Sotomayor asked Frederick if he was admitting he did not have a good-faith basis for filing the initial securities fraud complaint in November 2003.

Frederick, a partner at Kellogg, Huber, Hansen, Todd, Evans & Figel, responded that shortly before filing the complaint a Harvard Brigham and Women's study became public that disproved an aspect of the naproxen hypothesis.

The Merck case is significant for the pharmaceutical industry since a ruling that narrows when investors can pursue litigation could eradicate many suits. Merck noted in one of its Supreme Court filings that "although the respondents have never specified the exact amount they are seeking in damages, they do not dispute that it runs into the billions of dollars - largely because their delay in filing suit allowed them to expand the size of their class."

Deputy Solicitor General Malcolm Stewart told the court that the ultimate question is when would a reasonably diligent person have obtained actual knowledge of fraud. The Solicitor General asserted in an amicus brief that FDA's warning letter and other documents did not put investors on notice of possible misconduct by Merck because they gave investors "no reason to suspect Merck's statement of its belief in the naproxen hypothesis was made with scienter" (Also see "Should FDA Warning Letter Prompt Securities Suit? Government, PhRMA Disagree" - Pink Sheet, 27 Oct, 2009.).

-Brenda Sandburg ([email protected])

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