Corporate Governance

The Supreme Court and the Mission to Restrict Investor Protection: Merck v. Reynolds (Part 2: The Facts)

By J. Robert Brown

We are discussing the Supreme Court's decision to grant cert in Merck v. Reynolds, a case addressing the statute of limitations under Rule 10b-5. 

Merck disclosed the results of a study about the effects of Vioxx in March 2000.  The study, a comparison between Vioxx and naproxen, showed that Vioxx users had a higher incidence of cardiovascular events (a category that can include heart attacks) than the users of naproxen.  Merck hypothesized that the results were not a result of Vioxx producing harmful results but from naproxen reducing the harmful results (the naproxen hypothesis).

Subsequently, the FDA sent Merck a letter (and published it on the agency's website) concluding that the company had engaged in "promotional activities" that "misrepresent[ed] the safety profile for Vioxx."  The letter conceded that the "exact reason" for the increased harm from Vioxx was "unknown," but that the explanation that the data was explained by the positive effects of naproxen was "hypothetical," and has "not been demonstrated by substantial evidence."  After release of the letter, the stock price of Merck fell slightly (6.6% over five days) but quickly rebounded.  The period also saw a number of suits filed, some based upon consumer fraud, others based upon products liability.

In 2004, Merck withdrew Vioxx from the market.  An article in the Wall Street Journal stated "internal Merck e-mails and marketing materials as well as interviews with outside scientists show that the company fought forcefully for years to keep safety concerns from destroying the drug's commercial prospects."

Plaintiffs alleged that Merck knew about the harmful effects of Vioxx but nonetheless promoted other explanations.  As the opposition brief described:

• Reviewing those data, Merck internally concluded that Vioxx caused the higher rates of adverse cardiovascular events suffered by Vioxx users. Indeed, in a March 9, 2000 internal email, a senior Merck officer who was also the Company's top scientist responsible for the development of Vioxx wrote that the cardiovascular events among Vioxx users in the VIGOR trial 'are clearly there' and that 'it is mechanism based as we worried it was.'

• Despite having internally reached this conclusion, when Merck announced the VIGOR results to the market, it opined that the difference in rates of adverse cardiovascular events was likely the result of alleged cardio-protective properties of naproxen rather than a harmful effect of Vioxx (the 'naproxen hypothesis').

The case, therefore, turned on whether it was enough for the market to know that Merck could be wrong in articulating the naproxen hypothesis, thereby triggering a duty to investigate, or whether plaintiffs could wait for the emergence of facts suggesting that in fact Merck knew the hypothesis was inaccurate.  This was the issue that largely divided the Third Circuit.

The cert petition and other primary materials can be found on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on June 16, 2009 (boomark / email).