Securities Law Updates | New Judicial Opinions

September 15, 2008

Third Circuit Reinstates Vioxx Class Action Suit Against Merck

In re: Merck & Co., Inc. Securities. Derivative & ERISA Litigation
Nos. 07-2431, 07-2432, U.S. Court of Appeals for the Third Circuit, 9/9/2008

Third Circuit Reinstates Vioxx Class Action Suit Against Merck

Holding:

In this precedential case, a divided U.S. Court of Appeals for the Third Circuit reversed a district court's judgment dismissing a securities class action law suit against Merck & Co., Inc. ("Merck") relating to its pain reliever drug, Vioxx. Appellants, share holders of Merck, filed the law suit in the U.S. District Court for the District of New Jersey, alleging that the company misrepresented the safety profile and commercial viability of Vioxx. The district court dismissed the action, holding that appellants were put on inquiry notice of the alleged fraud more than two years before they filed suit, and thus their claims were time-barred by the statute of limitations. On appeal, the Third Circuit reversed. In particular, it held that the district court acted prematurely in finding as a matter of law that appellants were on inquiry notice of the alleged fraud before October 9, 2001. As of that date, market analysts, scientists, the press, and even the Food and Drug Administration ("FDA") agreed that a particular hypothesis relating to the drug's safety profile was plausible, at the very least. None suggested that Merck believed otherwise. On the other hand, Senior Judge Jane R. Roth dissented. She wrote that FDA’s September 17, 2001 warning letter, in and of itself, provided sufficient warnings to put the appellants on inquiry notice of their claims regardless of any significant change in stock price or analysts’ stock ratings or projections at that time.

Detailed Summary:

Appellants, purchasers of Merck stock, filed the first of several class action securities fraud complaints on November 6, 2003, alleging that the company and certain of its officers and directors (collectively, “Merck”) misrepresented the safety profile and commercial viability of Vioxx, a pain reliever that was withdrawn from the market in September 2004 due to safety concerns. Opinion, p. 3.

The district court granted Merck’s motion to dismiss the complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure, holding that appellants were put on inquiry notice of the alleged fraud more than two years before they filed suit, and thus their claims were barred by the statute of limitations. Appellants argued that the district court erred in finding as a matter of law that there was sufficient public information prior to November 6, 2001 to trigger appellants’ duty to investigate the alleged fraud. Id.,  pp. 3-4.

By way of background, in May 1999, the FDA approved Vioxx, a new drug introduced by the pharmaceutical company Merck. Vioxx is the brand name of rofecoxib, a nonsteroidal anti-inflammatory drug (“NSAID”) used in the treatment of arthritis and other acute pain. Most NSAIDs, such as aspirin, ibuprofen, and naproxen, function by inhibiting two enzymes: cyclooxygenase-1 (“COX-1”), which is associated with the maintenance of gastrointestinal (“GI”) mucus and platelet aggregation, and cyclooxygenase-2 (“COX-2”), which is associated with the response to pain and inflammation. Id. The inhibition of COX-1 leads to harmful GI side effects. Because Vioxx was designed to suppress COX-2 without affecting COX-1, Merck marketed Vioxx as possessing the beneficial effects of traditional NSAIDs but without the harmful GI side effects associated with those drugs. Id. The market viewed Vioxx as a potential “blockbuster” drug for the company.  Id, citing App. at 469, and as its “savior.” Id., citing App. at 494.

In January 1999, Merck commenced the VIOXX Gastrointestinal Outcomes Research (“VIGOR”) study, which compared Vioxx to naproxen, the active ingredient in brand-name pain relievers such as Aleve and Naprosyn. Id., p. 5. Although the study showed that Vioxx had a GI safety profile superior to that of naproxen, it also showed that Vioxx users had a higher incidence of CV events than naproxen users. Id.

On August 22, 2001, the Journal of the American Medical Association (“JAMA”) reported the results of a study of Vioxx and Celebrex clinical trials. The JAMA article asserted that available data raised a “cautionary flag” about the risk of CV events associated with COX-2 inhibitors. Id., p. 8, citing App. at 748. It also stated that “[c]urrent data would suggest that use of selective COX-2 inhibitors might lead to increased cardiovascular events.” Id., citing App. at 752.

On September 21, 2001, the FDA posted on its website a warning letter that its Division of Drug Marketing, Advertising, and Communications (“DDMAC”) had sent to Merck four days earlier regarding its marketing and promotion of Vioxx. In the letter, the DDMAC stated that Merck’s “promotional activities and materials” for the marketing of Vioxx were “false, lacking in fair balance, or otherwise misleading in violation of the Federal Food, Drug, and Cosmetic Act (the Act) and applicable regulations.” Id., p. 9, citing App. at 713.

On October 9, 2001, the New York Times published an article about COX-2 inhibitors entitled “The Doctor’s World; For Pain Reliever, Questions of Risk Remain Unresolved.” App. at 653. The article reported on “troubling questions about whether Vioxx may have an unexpected side effect—a very slight increase in the risk of heart attack.” Id., p. 12, citing App. at 653.

The first class action securities complaint initiating this lawsuit was filed on November 6, 2003, just weeks after the media reported the results of the Harvard study and declining Vioxx sales. After numerous nationwide class actions were consolidated, Appellants filed a fourth amended consolidated class action complaint. The complaint alleged that “Defendants’ statements and omissions during the Class Period materially misrepresented the safety and commercial viability of VIOXX.” Id., p. 15, citing App. at 489, in violation of sections 11, 12(a)(2), and 15 of the Securities Act of 1933, sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. Id.

Merck moved to dismiss appellants’ claims on the grounds that they were time-barred and that appellants had failed to state a claim. The district court granted that motion on the basis that the claims were time-barred. Id., pp. 15-16, citing In re Merck & Co., Inc. Sec., Derivative & “ERISA” Litig., 483 F. Supp. 2d 407, 425 (D.N.J. 2007).

In this appeal. appellants contended that the statute of limitations does not begin to run until there is sufficient evidence of “probable,” rather than “possible,” wrongdoing by the defendants. Predictably, Merck supported the latter standard, arguing that inquiry notice may be triggered by evidence of “possible” wrongdoing. According to the Third Circuit, both formulations find support in the Third Circuit’s precedents. Id, p. 18, referring to DeBenedictis v. Merrill Lynch & Co., Inc., 492 F.3d 209, 216(3d Cir. 2007), and Benak ex rel. Alliance Premier Growth Fund v. Alliance Capital Mgmt., L.P., 435 F.3d 396, 400 (3d Cir. 2006).

The Third Circuit noted that that the majority of courts of appeals that have addressed the question employ a “possibility” standard when evaluating the likelihood of wrongdoing sufficient to constitute storm warnings. Id., p. 22, reffering for example to GO Computer, Inc. v. Microsoft Corp., 508 F.3d 170, 179 (4th Cir. 2007); Tello v. Dean Witter Reynolds, Inc., 494 F.3d 956, 970 (11th Cir. 2007). The Third Circuit however qualified that simply stating that a smattering of evidence hinted at the possibility of some type of fraud does not answer the question whether there was “sufficient information of possible wrongdoing . . . to excite storm warnings of culpable activity” under the securities laws. Id., p. 23, citing Benak, 435 F.3d at 400.

In this case, because the district court believed that “[t]he wrongdoing charged in the [FDA] Warning Letter is . . . the same alleged misconduct on which the securities fraud claims in this case are predicated,” the district court asserted that it “might arguably conclude that the FDA Warning Letter alone excited storm warnings sufficient to put Plaintiffs on inquiry notice of their claims against Merck.” Id., p. 27, citing In re Merck, 483 F. Supp. 2d at 419.

But the Third Circuit disagreed. Specifically, it held that that the district court acted prematurely in finding as a matter of law that appellants were on inquiry notice of the alleged fraud before October 9, 2001. As of that date, market analysts, scientists, the press, and even the FDA agreed that the naproxen hypothesis was plausible, at the very least. None suggested that Merck believed otherwise. Id.,p. 35.

Accordingly, in April 2002, the FDA approved a labeling change for Vioxx which stated that “[t]he significance of the cardiovascular findings [from the VIGOR study] is unknown.” Id., citing App. at 553. Merck continued to reassure the investing public at this time, explaining that the naproxen hypothesis was “a position Merck has always had and now its [sic] quite clearly laid out in the labeling.” Id., citing App. at 559.

Examining the record before it, the Third Circuit stated there was no reason to suspect that Merck did not believe the naproxen hypothesis until the Harvard study in 2003 revealed an increased risk of heart attack in patients taking Vioxx compared with patients taking Celebrex and placebo. This study for the first time belied Merck’s repeated assurances that naproxen was responsible for the disparity in CV events in VIGOR and that Vioxx did not have a higher incidence of CVs compared to placebo or comparator NSAIDs, such as Celebrex. Id.

On the basis of the foregoing, the Third Circuit reversed the district court’s judgment of dismissal, and ordered remand for further proceedings consistent with its opinion.

View a PDF of the judicial opinion

Companies Mentioned

Asset Management Holding AG

Jan Charles Finance S.A.

Park East, Inc.

The Public Employees’ Retirement System of Mississippi

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Companies Mentioned

Securities Law

The following companies are mentioned in Securities Law Updates:

Securities and Exchange Commission

Harris Associates, L.P.

Banc of America Securities LLC

Citicorp USA, Inc.

The Public Employees’ Retirement System of Mississippi

Morgan Stanley & Co., Inc.

Jan Charles Finance S.A.

Park East, Inc.

CIBC World Markets Corp.

Citigroup Inc.

Barclays Capital Inc.

Citigroup Global Markets, Inc.

Harris Nesbitt Corp.

California Department of Corporations

The Royal Bank of Scotland plc

RiverSource Investments, LLC

Asset Management Holding AG

Deutsche Bank

Consolidated Management Group, LLC

The Bank of Nova Scotia

Alex Brown, Inc.

Toronto Dominion Texas, LLC f.k.a. Toronto Dominion Texas, Inc.

SG Cowen Securities Corp.

Tellabs, Inc.

Deutsche Bank Securities, Inc.

Mizuho International PLC

Lydia Capital, LLC

Suntrust Capital Markets, Inc.

Makor Issues & Rights, Ltd.

ABN AMRO Inc.

Tribune Company

Fleet Securities, Inc. n.k.a. Bank of America, N.A.

City of Philadelphia Board of Pensions and Retirement

Staples, Inc.

The Bank of New York Company, Inc.

CIBC, Inc.

Citibank, N.A.

Metal Management, Inc.

European Metal Recycling, Ltd.

Salomon Smith Barney Inc. n.k.a. Citigroup Global Markets, Inc.

Calyon Securities (USA), Inc. f.k.a. Credit Lyonnais Securities (USA) Inc.

Salomon Smith Barney, Inc.

Calyon New York Branch (successor by operation of law to Credit Lyonnais New York Branch)

Dynex Capital Inc.

Citigroup, Inc.

JPMorgan Chase & Co.

Merit Securities Corp.

JPMorgan Securities Inc.

Teamsters Local 445 Freight Division Pension Fund

Aetna, Inc.

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