Back in District Court, Merck Securities Class Action Concerning Vioxx Continues On
Christina DeIasi | Bloomberg Law
The U.S. District Court for the District of New Jersey narrowed investors’ claims that Merck & Co., Inc. (Merck) and several of its officers (collectively with Merck, Defendants) committed securities fraud by not disclosing the heart attack risks of Merck’s blockbuster pain relief drug Vioxx. The procedural history of this class action is long, and it is not over yet. Back in 2007, the Court dismissed plaintiffs’ claims as time-barred. The U.S. Court of Appeals for the Third Circuit reversed, and last year, the U.S. Supreme Court affirmed the Third Circuit’s ruling in a decision that rejected the inquiry notice standard for determining when the statute of limitations for securities fraud claims begins to run.
Plaintiffs claim that between May 21, 1999 and October 29, 2004, Defendants “overstated the commercial viability of Vioxx by deliberately, or at the very least recklessly, downplaying the possible link between Vioxx and an increased risk of heart attack or other cardiovascular (CV) events.” The alleged misstatements can be grouped into three categories by date.
— Pre-VIGOR Statements
Defendants allegedly made the first category of statements between May 21, 1999, when Merck announced Food and Drug Administration (FDA) approval of Vioxx, and March 2000, when it announced the results of its “VIGOR” Vioxx trial (Pre-VIGOR Statements). In these statements, plaintiffs claim, “Merck introduced the subject of Vioxx’s safety profile and then violated its duty to speak fully and truthfully on that subject by failing to disclose material information suggesting a link between Vioxx and increased CV events.”
The Court held that most of the Pre-VIGOR Statements constitute misrepresentations actionable under Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder. Specifically, the Court determined that plaintiffs adequately alleged that the information Defendants failed to disclose was material. It explained that Defendants touted Vioxx’s safety despite information from a February 1998 internal analysis comparing CV events in patients taking Vioxx with patients given a placebo. Plaintiffs’ complaint also alleges internal communications at Merck, as early as 1997, discussing Vioxx’s possible prothrombotic qualities and efforts to avoid evidence of such. For instance, plaintiffs claim that “Merck deliberately deferred conducting a large-scale trial of GI outcomes, which would compare Vioxx and a traditional NSAID, for fear that it would show a greater incidence of adverse CV events in Vioxx users.” The Court concluded that a reasonable investor would have found that disclosure of the withheld information would have altered the total mix of information available.
— Post-VIGOR Statements
Plaintiffs also challenge statements that Defendants made following the publication of the VIGOR results on March 27, 2000, through August 2004 (Post-VIGOR Statements). VIGOR studied the gastrointestinal (GI) side effects of Vioxx compared to naproxen. When VIGOR allegedly revealed increased CV events in patients taking Vioxx, Defendants assured investors that naproxen must be cardioprotective and Vioxx is not prothrombotic. Plaintiffs challenge Defendants’ statements espousing this “naproxen hypothesis.”
The Court held that plaintiffs stated an actionable misstatement of opinion under Exchange Act Section 10(b). It explained that
In spite of Merck’s arguments that the cardioprotectiveness of naproxen was the subject of active and ongoing debate in the scientific community, the Complaint sets forth an extensive number of detailed facts indicating not only that Merck disbelieved the hypothesis, but also that it was aware of many facts undermining its explanation of the “likely” reason for the VIGOR results.
Accordingly, plaintiffs adequately alleged that Merck had no reasonable basis to publicly describe the naproxen hypothesis as the reason for the VIGOR results.
— Withdrawal from Market
Third, plaintiffs attacked a statement made on September 30, 2004, when Merck withdrew Vioxx from the market, that the adverse CV data precipitating the withdrawal was “totally unexpected.” The Court, however, dismissed all claims regarding this statement, explaining that by this point, “investors were fully aware that Vioxx was no longer commercially viable due to its association with the increased risk of adverse CV events.”
— Judicial Estoppel
The Court also rejected Defendants’ argument that plaintiffs should be judicially estopped from pursuing claims regarding any misstatements other than those concerning the naproxen hypothesis. When the district court previously dismissed plaintiffs’ claims as time barred, they appealed to the Third Circuit. There, the Court explained, plaintiffs presented the naproxen hypothesis as the gravamen of their complaint. However, the Court continued, plaintiffs never repudiated their fact-based claims, including that Defendants allegedly misrepresented Vioxx’s safety profile.
The Supreme Court ultimately affirmed the Third Circuit’s decision that plaintiffs’ claims were not time barred. See Bloomberg Law Reports®—Securities Law, Supreme Court Holds that “Facts Constituting the Violation” Include Scienter, Merck Securities Fraud Case Timely Filed (Apr. 28, 2010). The Court noted that in rejecting the inquiry notice standard, the Supreme Court did not rely on “any particular litigation theory espoused by Plaintiffs but rather on the point at which any securities fraud claim may be deemed to have ripened.”
Turning to plaintiffs’ allegations of scienter, the Court first noted that the complaint is “rife” with group pleading, which is inconsistent with the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995. Nonetheless, plaintiffs managed to allege that Edward M. Scolnick and Alise S. Reicin—and Merck by extension—acted with scienter.
Scolnick was Executive Vice President for Science and Technology and President of Merck Research Laboratories and Reicin was the Executive Director of Clinical Research at Merck Research Laboratories. The Court found adequate allegations that Scolnick’s and Reicin’s statements about the naproxen hypothesis were belied by their participation in “various email communications, either as author or recipient, discussing the concern that Vioxx was or at the very least could be prothrombotic.” In one such exchange, on March 9, 2000, Scolnick allegedly described VIGOR as showing that “the CV events are clearly there . . . and it is mechanism based as we worried it was.” Reicin was one of the recipients of this message.
The Court rejected Scolnick’s argument that under Janus Capital Group Inc. v. First Derivative Traders, 131 S. Ct. 2296 (June 13, 2011), he could not be liable for any alleged misstatement—even those attributed to him—because he did not have “‘ultimate authority over the statement.’” The Court explained that “Janus does not alter the well-established rule that a ‘corporation can act only through its employees and agents.’” For more on Janus, see Bloomberg Law Reports®—Securities Law, Supreme Court Narrows Securities Fraud Liability to Persons with “Ultimate Authority” over a Statement (June 13, 2011).
— Dismissed Defendants
The Court dismissed plaintiffs’ Section 10(b) claims against the remaining officer defendants, including Raymond V. Gilmartin, Merck’s former Chairman, President, and CEO. The Court held that it was not enough for plaintiffs to rely on these individuals’ roles at Merck, or the fact that they signed various forms filed with the Securities and Exchange Commission, to allege their scienter.
Loss Causation and Reliance
Plaintiffs also sufficiently alleged the loss causation and reliance elements of securities fraud, the Court held. For loss causation, the Court assessed plaintiffs’ allegations that Defendants made a series of three corrective disclosures, each of which allegedly caused a drop in Merck’s stock price. The Court held that the first two disclosures were sufficient to allege loss causation, but not the third, because it post-dated the withdrawal of Vioxx from the market. For reliance, the Court held that plaintiffs’ claims qualified for both the Affiliated Ute and fraud-on-the-market presumptions of reliance.
Secondary Claims under Exchange Act
With the Section 10(b) claims resolved, the Court turned to plaintiffs’ secondary claims under the Exchange Act: (1) control person claims under Section 20(a); and (2) insider trading claims under Section 20A. The Court allowed the control person claims to proceed against Merck and Scolnick, except to the extent the claims against Scolnick are based on statements that Merck allegedly made after he retired. As to Scolnick, the Court specifically noted that the factual allegations in plaintiffs’ complaint support the inference that he “provided and was able to control the contents of Merck’s public statements about the safety of Vioxx.” Moreover, plaintiffs provide ample allegations that Scolnick was a culpable participant in Merck’s alleged fraud. Similarly, plaintiffs’ insider trading claims against Scolnick, but not any other defendant, survived dismissal.
Securities Act Claims
Lastly, the Court rejected Defendants’ arguments for dismissal of plaintiffs’ claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (Securities Act). These arguments included that (1) plaintiffs should be estopped from pursuing most of their claims, (2) the market was aware of Vioxx’s CV risks, and (3) any alleged misstatements were not material. The Court indicated that its analysis of these arguments in the context of plaintiffs’ Exchange Act claims applies to the Securities Act claims as well.
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