The U.S. Supreme Court recently clarified when the two-year statute of limitations period begins to run for private securities fraud actions brought under Section 10(b) of the Securities Exchange Act of 1934. In Merck & Co. v. Reynolds, the Court held that the two-year limitations period starts to run when a plaintiff discovers, or a reasonably diligent plaintiff should have discovered, the “facts constituting the violation,” which includes facts regarding a defendant’s scienter or fraudulent intent.¹

A group of investors filed a securities fraud action under Section 10(b) and SEC Rule 10b-5 in November 2003, claiming that Merck had knowingly mis-represented the heart-attack risks associated with Vioxx®, a drug that it manufactured. Under the applicable statute, a securities fraud complaint will be considered timely if it is filed not later than “2 years after the discovery of the facts constituting the violation” or 5 years after the violation.² Merck moved to dismiss the investors’ complaint, arguing that their lawsuit was time-barred because the investors had discovered, or should have discovered, facts constituting the securities violation more than two years before they filed suit. Specifically, Merck contended that the following circumstances had, or should have, alerted plaintiff investors to Merck’s alleged misrepresentations: (i) a study that compared Vioxx® with the painkiller naproxen in March 2000; (ii) a warning letter from the Food and Drug Administration (FDA) made publicly available on September 21, 2001 claiming that Merck’s marketing of Vioxx® was misleading; and (iii) complaints filed in various products liability actions in September and October 2001 claiming that Merck had concealed information about Vioxx®. 

The District Court for the District of New Jersey had granted Merck’s motion to dismiss, finding that the investors’ lawsuit was time-barred. The Court of Appeals for the Third Circuit subsequently reversed the opinion of the lower court, finding that, because pre-November 2001 events did not show that Merck had acted with scienter, the two-year limitations period had not been triggered at that point.

A unanimous Supreme Court held that the investors’ Section 10(b) claim was timely filed and that scienter is among the “facts constituting the violation” that a plaintiff must discover in order for the two-year limitations period to begin. Since the plaintiff investors had not discovered facts relating to Merck’s scienter or fraudulent intent more than two years before filing suit, the complaint was timely filed. Notably, in reaching this determination, the Supreme Court rejected Merck’s theory that the lawsuit was time-barred because plaintiffs had been put on “inquiry notice” that Merck had made alleged misrepresentations.

The Supreme Court also clarified what constitutes “discovery” of a Section 10(b) violation. Writing for six justices, Justice Breyer stated that “discovery,” such as triggers the two-year limitations period, includes not only a plaintiff’s actual discovery of facts constituting the violation, but also facts that a reasonably diligent plaintiff would have discovered. Justices Scalia and Thomas disagreed with the majority’s interpretation of “discovery,” believing that the statutory language did not provide for such constructive “discovery” by a reasonably diligent plaintiff.

In light of the Supreme Court’s holding in Reynolds, plaintiffs pursuing securities fraud actions under Section 10(b) may be more likely to succeed against motions to dismiss brought on statute of limitations grounds. For defendants and potential defendants facing Section 10(b) actions, it remains to be seen what facts will be considered sufficient for demonstrating scienter so as to trigger the limitations period.

 ¹    Merck & Co., Inc. v. Reynolds, No. 08-905, 559 U.S. —, 2010 WL 1655827 (U.S. Apr. 27, 2010).

²    28 U.S.C. § 1658(b)(1) & (2).