By any measure, Vioxx was a blockbuster drug. The painkiller, approved by the Food and Drug Administration in 1999, was used by some 84 million people around the world for arthritis and other conditions, and generated $2.5 billion in annual revenue for drugmaker Merck.
But that superstar status was short-lived. Reports of problems with Vioxx began to emerge in 2000, and by 2001 patients were filing lawsuits alleging they had suffered heart attacks and other ailments after taking the pills. Amid growing evidence of dangerous side effects, Merck pulled the medication from the market in September 2004. This year, the company is expected to finish paying out $4.85 billion to settle the claims of about 50,000 former Vioxx users.
People who took Vioxx aren’t the only ones who say they were hurt by the drug. Merck also faced the wrath of shareholders, who complain that they lost money when the dangers of Vioxx became known and the company’s share price dropped. In a lawsuit, they contend that the company committed securities fraud by misleading them about Vioxx’s safety.
Merck fought to block the class action suit, arguing that the unhappy investors waited too long to file it. The U.S. Supreme Court unanimously sided with shareholders on April 27, marking an important turning point in the Vioxx case and a rare win for investors at the high court.
“For the little guy, and for the plaintiffs’ lawyers who represent investors in securities class actions, this is a huge win,” says Lisa Casey, an associate professor at Notre Dame Law School who joined other law and business school professors in filing a friend-of-the-court brief on behalf of the shareholders.
Advocates for investors said that a high court decision in favor of Merck would have made it much more difficult for individuals to bring securities fraud cases to court. Combating fraud in the securities industry is especially important to older Americans, the frequent victims of such deception, AARP said in a friend-of-the-court brief on behalf of the investors.
The Merck case now returns to a lower court in New Jersey, where Merck is based. Bruce Kuhlik, Merck’s general counsel, said in a press release that the company is disappointed with the decision, “but believes that the allegations in the complaint are unfounded and will continue to defend itself vigorously.”
Following the trail of trouble
The Vioxx case has all the intrigue of a corporate crime thriller, mixing markets, medicine and insider e-mails. But at its heart is a federal law that gives investors a two-year window to file securities suits, and a debate about just when that clock should start ticking.
The shareholders in Merck v. Reynolds filed their suit on Nov. 6, 2003. A district court threw out the case, agreeing with Merck’s awkward position that investors should have been aware of the possibility that the company misrepresented Vioxx’s safety more than two years before they went to court. By not heeding warning signs and not launching an investigation and filing their case earlier, the investors had exceeded their two-year statute of limitations, the district court said.
Several early indications predicted possible problems with Vioxx. In March 2000, Merck announced the preliminary results of a study it conducted comparing Vioxx with naproxen, another painkiller. While Vioxx caused fewer gastrointestinal problems, patients who took it had more cardiovascular problems—a situation that Merck suggested might be explained by the way naproxen prevented blood clots, rather than by any harm caused by Vioxx.
The FDA issued a warning letter to the public in September 2001, calling Merck’s marketing statements about those results “false, lacking in fair balance, or otherwise misleading.” At about the same time, patients who experienced problems with the drug told courts that Merck had hidden information about Vioxx.
Although that information was public, the shareholders’ lawyers said, it wasn’t enough to trigger the two-year clock. An appeals court agreed, noting that the FDA letter didn’t show that Merck was deliberately misleading patients and investors. Instead, it was intended to alert doctors and consumers that Merck’s theory about Vioxx had not been proved in a clinical study. The court also said the FDA notice didn’t constitute what lawyers call “storm warnings,” or serious enough indications of possible fraud that should have prompted investors to start their case.
Clear storm warnings did come later. Chief among them was a November 2004 front-page story in the Wall Street Journal—a year after the shareholders filed their securities fraud suit—that included internal e-mails showing that Merck had known for years that Vioxx caused heart problems.
“On March 9, 2000, the company’s powerful research chief, Edward Scolnick, e-mailed colleagues that the cardiovascular events ‘are clearly there’ and called it a ‘shame,’ ” the Journal reported. “He compared Vioxx to other drugs with known side effects and wrote, ‘there is always a hazard.’ But the company’s public statements after Dr. Scolnick’s e-mail continued to reject the link between Vioxx and increased intrinsic risk,” the newspaper said.
Starting the countdown
In its ruling, the Supreme Court sided with the shareholders and found that the statute of limitations had not passed when they filed their suit. The court’s opinion, written by Justice Stephen Breyer, concludes that the two-year clock begins once the plaintiffs actually discover fraud, or “when a reasonably diligent plaintiff” would have discovered evidence that the company intended to deceive shareholders.
The Washington Legal Foundation, a conservative group, argued in a friend-of-the-court brief on behalf of Merck that the two-year clock should start earlier, before the plaintiff has proof that the company intended to deceive. Instead, knowledge that a company issued allegedly misleading statements should raise a suspicion of fraud, and the clock should start when “the facts would lead a reasonably diligent plaintiff to begin investigating whether fraud was present.”
Breyer’s decision “invites manipulation by investors,” says Richard Samp, the group’s chief counsel. “Instead of encouraging investors to sue promptly, the ruling effectively grants them the option of delaying suit to see what happens in the market. If during the delay the stock price rises, the investor pockets his profits; but if the price drops, he can sue to recover damages. In this manner, the investor can manipulate federal securities law to minimize his market risk,” Samp says.
But advocates for investors welcomed the ruling. Jeff Mahoney, general counsel of the Council of Institutional Investors, which also filed a brief, calls it an issue of “fundamental fairness.” Forcing investors to go to court too early would make it difficult for them to gather the evidence they need to convince a judge their case has merit, he explains. “Investors need time to make their case,” Mahoney says. “Merck wanted to start the clock too early, and investors would run out of time and not be able to gather enough information” to fight off a company’s attempts to have the case dismissed, he says.
The law in this area is designed, Mahoney says, to strike a balance, discouraging frivolous lawsuits and permitting those with merit to proceed. And while the Securities and Exchange Commission, the Justice Department and other federal agencies have a role to play in enforcing securities laws, that isn’t enough, he says. “We need the backstop of having a private-right-of-action system that is effective,” Mahoney argues. “We can’t just rely on the SEC and the DOJ and others to do this. They themselves acknowledge they don’t have the resources to do it.”
Law shaped by scandal
Changes to U.S. securities law have often come in response to scandal and market insecurity. After the stock market crash of 1929—and reports of rampant improprieties in the securities industry—Congress passed landmark securities legislation in 1933 and 1934 that still forms the basis of current law.
In 1994, as part of their party’s Contract With America, House Republicans vowed to limit “abusive securities lawsuits.” The following year they amended the earlier securities laws to make it harder for investors to file securities lawsuits. Instead of allowing plaintiffs to gather evidence of intentional fraud as a lawsuit proceeded, the new rules required strong evidence of that fraud before a suit could begin.
The law was changed again in 2002—a response to the scandals at Enron, WorldCom and elsewhere—when Congress passed the Sarbanes-Oxley Act, which set stricter accounting standards for public companies. Following the tougher environment for investors created by the 1995 legislation, the law also “gave back something to investors who wanted to prosecute their own securities fraud claims,” says Casey, making it slightly easier for them to bring fraud cases and setting out the two-year time frame that Breyer referred to in the Merck decision.
A shift from recent rulings
The Merck decision came as a welcome relief to investors’ advocates, who note several important decisions by the high court in recent years that made it more difficult for disgruntled shareholders to bring securities fraud cases. In 2007, the court ruled that shareholders must provide “compelling evidence” that someone intended to defraud them if their case is to be permitted to proceed.
The following year, the court said investors can only pursue fraud cases against those directly involved in misleading them—such as those who provided faulty information used by investors to make decisions about buying or selling shares—and not their business partners.
The court’s Merck ruling, says Notre Dame professor Casey, moves in the other direction. “This is a decision that helps investors,” she says, “after a long series of decisions that were hostile to private securities lawsuits.”
Holly Yeager lives in Washington, D.C.
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