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Supreme Court Upholds Right of Investors to Protect Their Investments

The U.S. Supreme Court unanimously upheld practical application of the statute of limitations in securities fraud cases. AARP's brief asked the Court to allow lawsuits by investors who relied on statements made by drug manufacturer Merck about now-discredited pain medication Vioxx.

As an increasing number of investors are making their own investment decisions, and those decisions affect hard-earned retirement benefits, it is important that investors be able to access full and accurate information about their investments and have access to courts to enforce their rights.


Vioxx was aggressively marketed to both doctors and consumers, and 84 million people worldwide (including 2 million Americans) used the drug during the five years it was available. It was withdrawn from the market, in 2004, however, after numerous reports that the drug had very significant negative side effects and may have contributed to heart attacks and strokes. So far, nearly 10,000 lawsuits have been filed against the drug's manufacturer, Merck, by Vioxx users and their families. Many of the lawsuits allege that Merck had numerous early warnings of the drug's potential cardiovascular risk.

After withdrawing the highly profitable medication, Merck was hit by a number of securities fraud lawsuits claiming that it had misrepresented the drug's risks, which artificially inflated the value of Merck stock. Investors point to internal documents showing disputes within the company over studies indicating risks. In a November 2004 Wall Street Journal article, a securities analyst commented that "new information" indicated to sophisticated analysts that information from Merck may not have been as "innocent as we thought"; for many ordinary investors that was the first indication they had that corporate misrepresentation may have occurred.

Federal law imposes a two-year statute of limitations for securities fraud claims beginning when an investor becomes aware that fraud may have occurred. However, courts are widely split on how to determine when the clock actually begins to tick. In Merck's case, the company argued that the clock began to tick when the federal Food and Drug Administration (FDA) sent a warning letter — posted on FDA's webpage — to Merck in 2001 that aired concerns about how the drug was being marketed to doctors. Investors argued that this health-oriented warning was not the same as a warning of intentional fraud for which an ordinary investor should take note and that the clock on the statute of limitations did not begin to run until later news accounts of the alleged misrepresentations came to light. The U.S. Court of Appeals for the Third Circuit agreed with the investors, and ruled that the two-year filing period does not begin to run until an investor comes upon actual evidence that the misrepresentations were intentional. Merck challenged that ruling by appealing to the Supreme Court. The issue in Merck & Co. Inc. v. Reynolds was precisely what constitutes "evidence" of intentional fraud. Merck's theory of the case was that the FDA warning had amounted to "storm warnings" that served notice to investors of potential claims against the company for fraud.

AARP's Brief

AARP Foundation Litigation attorneys filed AARP's "friend of the court" brief in the case, tracking the securities fraud statute closely to determine what Congress meant by an investor's discovery of fraud. The brief pointed out that both the plain language of the statute and its legislative history make it clear that "discovery" means actual knowledge. If Congress wanted an alternative interpretation — a "should have known" standard instead of an "actually knew" standard — then Congress could certainly have written the statute in that way, as it had done in other legislation. AARP's brief also discussed the meaning of the statutory language as used in ordinary English dictionaries and argued that careful analysis of the critical words leads to the same conclusion: Knowledge means actual knowledge, whether in legal jargon or in ordinary discussion.

Moreover, AARP pointed out, there is ample reason for Congress to give investors two years after discovering actual evidence of fraud, because securities fraud can take years to unravel even with the full resources of the FBI and state or federal securities law enforcement agencies. For example, one of the largest fraud cases in American history — Enron's massive fraud — took years for sophisticated investors and investigators to understand.

Finally, AARP's brief took up the issue of the 2001 FDA warning letter, noting that the letter did not provide ordinary investors with sufficient evidence of fraud, as the letter merely scolded Merck for being overly zealous in promoting Vioxx to physicians. Moreover, following the public release of that letter, Merck stock actually went up. "It is unreasonable to expect an 'ordinary' investor somehow to be better at noticing fraud than the informationally efficient market," the brief argued.

The Court's Ruling and its Significance to Ordinary Investors

The Supreme Court first analyzed the meaning of the word "discovery," ruling that in this securities regulatory provision the statute of limitations began to run when a person actually discovered the fraud or a reasonably diligent person should have discovered the fraud.

The court then differentiated suspicion from actual evidence. The Court ruled that " 'discovery' of facts that put a plaintiff on 'inquiry notice' does not automatically begin the running of the limitations period … The limitations period begins to run only when the plaintiff thereafter discovers or a reasonably diligent plaintiff would have discovered 'the facts constituting the violation.' "

The Court went on to address the 2001 FDA warning letter, flatly rejecting Merck's argument, and finding the letter "shows little or nothing" about the knowledge plaintiffs would need to show intentional misrepresentations by defendant so as to start the limitations clock ticking at that point.

More and more investors are making their own investment decisions — by choice or by necessity. Therefore it is critically important that investors be able to access full and accurate information about their investments, and that they have access to courts to enforce their rights. Efforts to curtail hard-won investor rights or limit available remedies threaten the economic security of investors. Particularly hard hit are those who rely on investments as a major source of retirement income.