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Supreme Court Chutzpah: Merck Says It Should Have Been Sued Sooner on Vioxx

Merck (MRK) got a rough ride at the U.S. Supreme Court on Monday. The justices ridiculed the company's argument that investors in its stock should have sued the company earlier over its misrepresentations about Vioxx even though they would not have had the evidence for their suits to succeed at that time. The Wall Street Journal observed the oral argument:
"Companies can't have it both ways," Justice Anthony Kennedy told a lawyer for Merck.

Justice Stephen Breyer said Merck's position, in effect, would require plaintiffs to file lawsuits before they had enough evidence to back them up. "That doesn't make sense to me," he said.

But before you conclude that Merck has lost this case, remember that the Supremes' decision will rest not on the quality of Merck's lawyering but on the simpler question of when investors had enough information to suspect securities fraud. Investors have a two-year window in which to sue as soon as legitimate suspicions bloom. BNET argued in May of this year that Merck will win this case because those suspicions were writ large in the media in September 2001, more than two years before the plaintiffs filed in November 2003. By that time at least three red flags had been flown over problems with Vioxx:

March 2000: VIGOR results were released which showed better cardiovascular outcomes with naproxen over Vioxx. Investors found this information confusing because it was impossible to tell whether naproxen had CV benefits for users or whether Vioxx was simply worse for CV events.

August 2001: JAMA published a study of Vioxx that raised a "cautionary flag" regarding CV events and Vioxx.

September 2001: The FDA issued Merck a warning letter. Its states: "You have engaged in a promotional campaign for Vioxx that minimizes the potentially serious cardiovascular findings that were observed in the [VIGOR] study, and thus, misrepresents the safety profile for Vioxx." The stock fell $4.16 but rebounded within a month.

The next warning wasn't until October 2003, when a Harvard study found that there was an increase in heart attacks among Vioxx patients.

The Supremes like to keep things simple. They're going to look at the warnings investors had and make a decision as to which was the crucial one. And when the FDA says Merck "misrepresents the safety profile for Vioxx," and the stock loses more than four bucks, that's the kind of warning that can't be ignored.

Merck's argument may contain some technical chutzpah, but the company is still likely to win. (Consider the standard the court would have to adopt for plaintiffs to win: The two-year clock only starts ticking once plaintiffs believe they have discovered enough definitive evidence to bring and win a case. That's a two-year deadline that is meaningless because it essentially allows plaintiffs to define when the clock starts.)

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