Supreme Court Holds that Securities Fraud Two-Year Statute of Limitations Does Not Begin to Run Until Discovery of Facts Showing Fraudulent Intent
In Merck & Co. v. Reynolds, Case No. 08-905 April 27, 2010, the U.S. Supreme Court held that, for a securities fraud lawsuit under §10(b) of the Securities Exchange Act of 1934, the two-years-after-discovery statute of limitations in 28 U.S.C. § 1658(b)(1) begins to run only when the plaintiff discovers — or a reasonably diligent plaintiff would have discovered — the facts constituting all elements of the violation, including scienter (i.e. that the actions were taken with intent to deceive, manipulate or defraud). Merck held that, because facts showing defendants' scienter are among those constituting the violation, knowledge of materially false or misleading statements or material omissions alone is ordinarily not sufficient to show scienter, and thus is not sufficient to start the running of the two-year period. This decision is likely to extend statute of limitations deadlines in some §10(b) securities fraud cases (subject to the Sec. 1658(b)(2) absolute limit of five years after the violation).
This case involved plaintiffs' claim that Merck had knowingly misrepresented the heart-attack risks associated with its drug Vioxx. The district court had dismissed the complaint as untimely because the plaintiffs should have been alerted to the possibility of Merck's misrepresentations more than two years before filing the lawsuit and they had failed to undertake a reasonably diligent investigation. The Third Circuit had reversed, holding that the events more than two years before the filing did not suggest that Merck had acted with the requisite scienter.
The Court's decision articulated the following reasoning in reaching its decision. First, although section 1658(b)(1) sets the limitation as "2 years after the discovery of the facts constituting the violation," that language is not limited to when a plaintiff actually discovers such facts, but also includes when a reasonably diligent plaintiff would have discovered such facts (which may be earlier than the plaintiff's actual discovery). Second, the issue is not when "storm warnings" might have arisen, but rather when the plaintiff — or a reasonably diligent plaintiff — would have discovered the facts constituting the violation, including scienter. The Court specifically held that scienter in a §10(b) case (defendants' intent to deceive, manipulate or defraud) is a fact, and that therefore the limitations period in such cases does not begin to run until the plaintiff discovers facts suggesting the requisite scienter in §10(b) cases. Third, the Court rejected Merck's argument that discovery of facts showing a materially false or misleading statement, or a material omission, is ordinarily sufficient to show scienter. The Court held that, while showing certain statements to be false normally shows scienter, where §10(b) is at issue section 1658(b)(1) may require discovery of scienter-related facts beyond the facts that show a statement or omission to be materially false or misleading (as such statement or omission might be a result of a mistake or disagreement). Fourth, the Court rejected Merck's argument that the limitations period begins when the facts would lead a reasonably diligent plaintiff to investigate further. The Court noted that this is not necessarily the point at which the plaintiff would have discovered the facts showing scienter or other facts constituting the violation. The statute says that plaintiff's claims accrue only after "discovery" of the facts.
Finally, the Court held that facts to which Merck had pointed, which occurred and were known more than two years before plaintiffs filed the suit, might have raised issues about the correctness of Merck's public statements, but they showed little or nothing about whether Merck had made statements with fraudulent intent. None of them revealed the relevant scienter, and thus they did not trigger the start of the two-year limitations period.
After several cases in which the Court has established more stringent pleading standards favorable to defendants, this decision is a welcome relief for plaintiffs laboring under a relatively short statute of limitations.
This case involved plaintiffs' claim that Merck had knowingly misrepresented the heart-attack risks associated with its drug Vioxx. The district court had dismissed the complaint as untimely because the plaintiffs should have been alerted to the possibility of Merck's misrepresentations more than two years before filing the lawsuit and they had failed to undertake a reasonably diligent investigation. The Third Circuit had reversed, holding that the events more than two years before the filing did not suggest that Merck had acted with the requisite scienter.
The Court's decision articulated the following reasoning in reaching its decision. First, although section 1658(b)(1) sets the limitation as "2 years after the discovery of the facts constituting the violation," that language is not limited to when a plaintiff actually discovers such facts, but also includes when a reasonably diligent plaintiff would have discovered such facts (which may be earlier than the plaintiff's actual discovery). Second, the issue is not when "storm warnings" might have arisen, but rather when the plaintiff — or a reasonably diligent plaintiff — would have discovered the facts constituting the violation, including scienter. The Court specifically held that scienter in a §10(b) case (defendants' intent to deceive, manipulate or defraud) is a fact, and that therefore the limitations period in such cases does not begin to run until the plaintiff discovers facts suggesting the requisite scienter in §10(b) cases. Third, the Court rejected Merck's argument that discovery of facts showing a materially false or misleading statement, or a material omission, is ordinarily sufficient to show scienter. The Court held that, while showing certain statements to be false normally shows scienter, where §10(b) is at issue section 1658(b)(1) may require discovery of scienter-related facts beyond the facts that show a statement or omission to be materially false or misleading (as such statement or omission might be a result of a mistake or disagreement). Fourth, the Court rejected Merck's argument that the limitations period begins when the facts would lead a reasonably diligent plaintiff to investigate further. The Court noted that this is not necessarily the point at which the plaintiff would have discovered the facts showing scienter or other facts constituting the violation. The statute says that plaintiff's claims accrue only after "discovery" of the facts.
Finally, the Court held that facts to which Merck had pointed, which occurred and were known more than two years before plaintiffs filed the suit, might have raised issues about the correctness of Merck's public statements, but they showed little or nothing about whether Merck had made statements with fraudulent intent. None of them revealed the relevant scienter, and thus they did not trigger the start of the two-year limitations period.
After several cases in which the Court has established more stringent pleading standards favorable to defendants, this decision is a welcome relief for plaintiffs laboring under a relatively short statute of limitations.
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