Merck & Co. v. Reynolds

Background

A group of investors sued Merck over its pain drug Vioxx, saying Merck knowingly downplayed heart-attack risks and misled the market. They filed on November 6, 2003 under the federal rule that allows fraud claims within two years after 'discovery of the facts constituting the violation' or within five years after the violation. The District Court dismissed as untimely, the Third Circuit reversed, and the Supreme Court reviewed whether the two-year clock had begun before November 6, 2001.

Reasoning

The Court held the two-year period begins when the plaintiff actually discovered, or when a reasonably diligent plaintiff would have discovered, the facts constituting the violation — and those facts include scienter, the defendant’s intent to deceive. The Court relied on earlier decisions and the statute’s language, saying inquiry notices or 'storm warnings' may prompt investigation but do not themselves start the limitations clock. Applying the rule to the record, the Court found pre-November 2001 reports and the FDA warning did not show facts proving Merck’s fraudulent intent.

Real world impact

The decision affects investors, companies, and courts handling securities fraud. Investors can only trigger the two-year deadline when facts, including evidence of intent to deceive, are known or would be found with reasonable diligence. Ambiguous public signals do not by themselves start the clock. Defendants keep protection from stale suits because the statute imposes an absolute five-year limit.

Dissents or concurrances

Some Justices wrote separately. Justice Stevens agreed with the judgment but suggested reserving the larger question about constructive discovery. Justice Scalia (joined by Justice Thomas) agreed the suit was timely but would require actual discovery, not hypothetical discovery by a reasonably diligent investor.