Court Opinion

ID: 9563911
Source: CourtListenerOpinion
Date Created: 2023-08-21 18:49:54.073432+00
Date Added: 2024-06-11T09:18:07.883182
License: Public Domain

*173ROTH, Circuit Judge,
dissenting.
I believe “storm warnings” alerting a reasonable investor of possible culpable activity on the part of Merck were evident more than two years prior to the filing of appellants’ complaint. In particular, I believe that the FDA’s September 17, 2001, warning letter, in and of itself, provided sufficient “storm warnings” to put the appellants on inquiry notice of their claims regardless of any significant change in stock price or analysts’ stock ratings or projections at that time. I therefore respectfully dissent.
Under the “inquiry notice” test, the statute of limitations for securities claims “begins to run when the plaintiffs ‘discovered or in the exercise of reasonable diligence should have discovered the basis for their claim’ against the defendant.” Benak v. Alliance Capital Management L.P., 435 F.3d 396, 400 (3d Cir.2006) (quoting In re NAHC, Inc. Securities Litigation, 306 F.3d 1314, 1325 (3d Cir.2002) (citations omitted)). In order to establish that plaintiffs were on inquiry notice, a defendant must demonstrate that, as of a particular date, there existed “storm warnings” sufficient to alert “a reasonable investor of ordinary intelligence” to “possible wrongdoing” on the part of defendants. Id. (quoting In re NAHC, 306 F.3d at 1325) (explaining that the question is whether plaintiffs had “sufficient information of possible wrongdoing to place them on ‘inquiry notice’ or to excite ‘storm warnings’ of culpable activity”) (emphasis added).
Furthermore, it is well established that “[t]he existence of storm warnings is a totally objective inquiry[,]” that is based on whether a “reasonable investor of ordinary intelligence would have discovered the information and recognized it as a storm warning[,]” Mathews v. Kidder Peabody & Co., Inc., 260 F.3d 239, 252 (3d Cir.2001) (emphasis added); see also In re NAHC, 306 F.3d at 1325. We do not require that plaintiffs “know all of the details or ‘narrow aspects’ of the alleged fraud to trigger the limitations period[,]” but rather “the period begins to run from the time at which plaintiff should have discovered the general fraudulent scheme.” In re NAHC, 306 F.3d at 1326 (internal quotations and citations omitted). Most importantly, we recognize that triggering data for “storm warnings” may include any information that would alert a reasonable investor to the possibility that the defendants engaged in the “general fraudulent scheme ” alleged in the complaint. Id. (emphasis added). Finally, such triggering data must “relate[ ] directly to the misrepresentations and omissions alleged.” DeBenedictis, 492 F.3d at 217-18 (quoting Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161, 171 (2d Cir.2005)).
In applying the above inquiry notice standard to the instant case, I am reminded of a classic fairytale: The Emperor’s New Clothes, by Danish author and poet, Hans Christian Anderson.18 As the child *174in The Emperor’s New Clothes saw — that the Emperor walked naked down the street — any reasonable investor reading the FDA’s September 17, 2001, warning letter could see the problem with Yioxx— the misrepresentation of its safety profile and the “possibility” that Merck had fraudulently misrepresented the cardiovascular safety of its “blockbuster” product. The warning letter to Merck, which was published on the FDA’s public website, stated in pertinent part:
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. Specifically, your promotional campaign discounts the fact that in the VIGOR study, patients on Vioxx were observed to have a four to five fold increase in myocardial infarc-tions (Mis) compared to patients on the comparator [NSAID], Naprosyn (na-proxen).
Although the exact reason for the increased rate of Mis observed in the Vioxx treatment group is unknown, your promotional campaign selectively presents the following hypothetical explanation for the observed increase in Mis. You assert that Vioxx does not increase the risk of Mis and that the VIGOR finding is consistent with naproxen’s ability to block platelet aggregation like aspirin. That is a possible explanation, but you fail to disclose that your explanation is hypothetical, has not been demonstrated by substantial evidence, and that there is another reasonable explanation, that Vioxx may have pro-thrombotic properties.
Your minimizing these potential risks and misrepresenting the safety profile for Vioxx raise significant health and safety concerns. Your misrepresentation of the safety profile for Vioxx is particularly troublesome because we have previously, in an untitled letter, objected to promotional materials for Vioxx that also misrepresented Vioxx’s safety profile.
We have idenitified a Merck press release entitled, “Merck Confirms Favorable Cardiovascular Safety Profile of VIOXX,” dated May 22, 2001, that is also false or misleading for similar reasons stated above. Additionally, your claim in the press release that VIOXX has a “favorable cardiovascular safety profile, ” is simply incomprehensible, given the rate of MI and serious cardiovascular events compared to naproxen. The implication that Vioxx’s cardiovascular profile is superior to other NSAIDs is misleading; in fact, serious cardiovascular events were twice as frequent in the VIOXX treatment group (101 events, 2.5%) as in the naproxen treatment group (46 events, 1.1%) in the VIGOR Study.
App. at 713-14, 718 (emphasis added).19
The warning letter clearly and explicitly reprimanded Merck for its (1) deceptive *175and misleading conduct in publicly endorsing the naproxen hypothesis as the sole explanation for the higher rate of cardiovascular events in VIGOR study participants taking Vioxx, despite knowing that any purported cardiovascular protective effect of naproxen was unproven, and (2) downplaying of potential safety problems in failing to disclose the possibility that Vioxx increases the risk of heart attack. As the letter explained, this was not the first time the FDA had charged Merck with misrepresenting Vioxx’s safety profile. The language used in the letter was particularly strong and indicated the FDA’s significant concern for the public’s health. Aso, the warning letter cannot be said to have constituted mere speculation, but was rather a formal report of “objective wrongdoing.” See Benak, 435 F.3d at 402 (explaining that, in determining whether a plaintiff has inquiry notice, “[sjpeculation should not be given the same weight as reports of objective wrongdoing”). Furthermore, the warning letter was published on the FDA’s website where it would have been discovered by a reasonable Merck investor. See In re NAHC, 306 F.3d at 1325.
Moreover, the charges in the warning letter relate directly to the misrepresentations and omissions alleged in the appellants’ complaint: that the company and certain of its officers and directors intentionally misrepresented the cardiovascular safety of Vioxx and, consequently, the impact that Vioxx would have on Merck’s financial health. See DeBenedictis, 492 F.3d at 217-18; see, e.g., Amended Complaint, App. at 468 (stating that “Defendants made ... materially false and misleading statements and omissions concerning ... the safety profile of ... VIOXX”); App. at 470 (stating that “Defendants misrepresented the safety profile of VIOXX, including concealing and minimizing the significantly increased risk of heart attacks in patients taking the drug”); App. at 482 (describing a “wrongful scheme ... which included the dissemination of materially false and misleading statements and concealment of material adverse facts”); App. at 497 (stating that “Defendants falsely conditioned the market to believe VIOXX was safe”). Accordingly, I believe that the FDA’s warning letter to Merck sufficiently alerted a reasonable investor to the possibility that Merck fraudulently misrepresented the cardiovascular safety of Vioxx — its “blockbuster” product.20
Even assuming that the FDA’s warning letter alone did not sufficiently excite “storm warnings,” the total mix of information in the public realm which followed the warning provided more than adequate “storm warnings” to put appellants on inquiry notice.
In response to the FDA’s warning letter, there was widespread media and fi*176nancial analyst coverage commenting on the FDA’s charges against Merck, with some reports noting that such warnings are reserved for the more serious offenders. See e.g., App. at 2353 (Reuters, September 24, 2001) (reporting that “U.S. Regulators have charged ... Merck ... with misleading doctors about its blockbuster painkiller Vioxx with promotions that downplayed a possible risk of heart attacks”); App. at 2752 (Merrill Lynch, September 24, 2001) (stating that “[t]he FDA issued a warning letter to Merck ... [and] is looking for Merck to cease all violative promotional activities.... We do not see how this ... can be helpful to Merck in promoting Vioxx”); App. at 2355 (USA Today, September 25, 2001) (reporting that “Merck’s marketing efforts ... have minimized Vioxx’s known and potential cardiovascular risks, the FDA wrote in an eight-page ‘warning letter’.... So far this year, the FDA has sent drug companies fewer than a dozen warning letters, which the agency reserves for activities that raise significant public health concerns”); App. at 2768 (UBS Warburg, September 25, 2001) (stating that the “FDA [has] issue[d][a] warning to Merck for marketing only one side of the Vioxx safety argument. ... Merck was cited several times for promoting the story that the outcome of the VIGOR study was due to Naproxen being cardioprotective and that there is no unusual cardiovascular safety risk with Vioxx.”); App. at 2360 (Associated Press, September 25, 2001) (reporting that “Merck has argued that [the VIGOR study results make] Vioxx falsely look[] risky because naproxen thins the blood ... and thus protects] against heart attacks.... ‘In fact, the situation is not all that clear,’ [according to] the FDA”); App. at 2757 0Credit Suisse First Boston, September 25, 2001) (stating that “the FDA [has] issued a warning letter citing Merck with making misleading statements in the promotion of ... Vioxx”); App. at 2361 (The Wall Street Journal, September 25, 2001) (reporting that “Federal regulators warned Merck & Co. for improper marketing of its blockbuster arthritis drug Vioxx, saying the company had misrepresented the drug’s safety profile and minimized its potential risks[,]” and “[w]hile the FDA sends out dozens of routine citations annually, it issues only a handful of these more-serious warning letters each year”); App. at 2363 (The New York Times, September 26, 2001) (stating that “[t]he [FDA] has ordered Merck & Company to cease promotions intended to persuade doctors to prescribe its arthritis painkiller Vioxx, saying the promotions minimize potential risks”). Even appellants themselves recognized in their complaint that “FDA Warning Letters are sent only to address serious circumstances.” App. at 1280.
Furthermore, in addition to the first lawsuit filed before the FDA’s warning letter, three product liability and consumer fraud actions had been filed in September and October 2001, all alleging that Merck had misrepresented the cardiovascular safety of Vioxx. See App. at 1748 (May 29, 2001, product liability class action alleging that “Merck’s own research [demonstrated that] users of Vioxx were four times as likely to suffer heart attacks as compared to other less expensive medications ..., [but that] Merck ... [took] no affirmative steps to communicate this critical information to class members”); App. at 1557 (September 27, 2001, consumer fraud class action alleging that “Merck [had] omitted, suppressed, or concealed material facts concerning the dangers and risks associated with the use of Vioxx, including ... cardiovascular problems ... [and] purposely downplayed and/or understated the serious nature of the risks associated with Vioxx”); App. at 1574 (September 28, 2001, product liability *177and consumer fraud action alleging that Merck had “misrepresented that Yioxx was ... safe and effective ..., when in fact the drug causes serious medical problems such as an increased risk of cardiovascular events, including strokes, heart attacks and death”); App. at 1611 (October 1, 2001, product liability action alleging that Merck failed to “[ ]diselose[ ]” that “Vioxx causes heart attacks”). While these law suits did not allege securities fraud, the general allegations contained within these complaints relating to Merck’s intentional misrepresentation with regard to Vioxx’s safety similarly formed the basis of appellants’ complaint.
Moreover, The Neto York Times article, dated October 9, 2001, quoted defendant Scolnick as explicitly stating that “[n]a-proxen lowers the heart attack rate, or Vioxx raises it” App. at 2367 (emphasis added). Based on my review of the record, this express acknowledgment by a Merck representative of the possibility that Vioxx actually raises the risk of heart attack appears to be not only the first time such statement had been made by the company, but also in stark contrast to Merck’s prior representations. Therefore, because of what I perceive to be significant media and financial analyst attention directed at the explicit and serious nature of the FDA’s warning letter, the allegations in the multiple lawsuits which followed, and Merck’s change of tone in the October 9, 2001, article, I cannot see how a reasonable investor could not be aware of the possibility that Merck had been fraudulently misrepresenting the cardiovascular safety of Vioxx.
Because the objective evidence indicated the possibility of culpable activity on the part of Merck, a lack of significant stock movement and decreases in analysts’ stock ratings and projections do not negate a finding of “storm warnings” under our in-
quiry notice standard. Appellants argue that “storm warnings” could not have existed prior to the 2003 Harvard Study because the total mix of public information did not have a negative effect on the price of Merck stock or cause analysts to drop their ratings for Merck or lower their projections for Vioxx sales. It is true, as the majority points out, that our past inquiry notice decisions have taken into consideration the market’s response to disclosures alleged to constitute “storm warnings.” However, I do not believe the law requires that, in order to make a determination that “storm warnings” in fact exist, the total mix of public information (purported to constitute “storm warnings”) must have a negative effect on stock prices or cause analysts to drop their ratings or lower their projections. See Benak, 435 F.3d at 400 (“information [need only suggest] possible wrongdoing ... to excite ‘storm warnings’”) (quoting In re NAHC, 306 F.3d at 1325) (emphasis added). As we recognized in In re NAHC:
[S]torm warnings may take numerous forms, and we will not attempt to provide an exhaustive list. They may include, however, substantial conflicts between oral representations of the brokers and the text of the prospectus, ... the accumulation of information over a period of time that conflicts with representations that were made when the securities were originally purchased, or any financial, legal or other data that would alert a reasonable person to the probability that misleading statements or significant omissions had been made.
306 F.3d at 1326 n. 5 (quoting Mathews, 260 F.3d at 252 (internal citations and quotations omitted)) (emphasis added). In my view, fluctuations in stock price and analysts’ ratings and projections, although relevant, are not a required consideration in this circuit’s objective “storm warnings” *178analysis. Here, the lack of a significant response from the market to the FDA’s warning letter does not mean that the Emperor was not walking down the street with no clothes on. It merely means that the analysts saw the emperor’s new clothes as Merck described them — not as reality presented.21
Based on the foregoing, I submit there were sufficient “storm warnings” more than two years prior to the filing of appellants’ complaint. At a minimum, I believe the FDA’s September 17, 2001, warning letter constituted more than sufficient “storm warnings” to put appellants on inquiry notice of their claims, particularly since appellants fail to demonstrate either that they conducted a diligent investigation within two years of the accrual of such “storm warnings” or that they were unable to uncover pertinent information during that time period. Accordingly, because appellants waited over two years to bring suit, I conclude that their claims were filed out of time and were properly dismissed by the District Court.

. In the story, two swindlers approached the Emperor, falsely claiming the ability to make beautiful clothes from cloth that could be seen only by those individuals fit for their positions or who were not imbecils. The Emperor immediately hired them. Word spread throughout the city about the unique quality of the cloth and the personal characteristics that an individual must possess to see clothes made of such material. After the swindlers finished weaving the Emperor's new clothes and presented them to him, neither the Emperor nor his most trusted servants would admit that they could not see the clothes for fear of appearing unfit or stupid. Instead, each exclaimed that the clothes were beautiful. Donning his new clothes, the Emperor walked in a procession through the city’s,streets. The townspeople also feared looking stupid in their neighbors' eyes. Like the Emperor and his servants, they proclaimed that the clothes were the most beautiful they had ever seen. *174It wasn't until a child exclaimed, “But, Daddy, he has nothing on!” that the crowd realized that the child spoke the truth.

. Also in the warning letter, the FDA identified specific statements made by Merck in promotional audio conferences and by Merck’s sales force demonstrating Merck's minimization and misrepresentation of the increased heart attack rates of Vioxx-taking participants in the VIGOR study and several unsubstantiated superiority claims made by Merck about Vioxx. App. at 715-16, 718-19. Finally, the warning letter concluded with a corrective action plan which required Merck to issue a " 'Dear Healthcare provider' letter to correct false or misleading impressions and information.” App. at 719.

. It is important to note that Merck's reliance on its naproxen hypothesis was proved to be unfounded from the beginning. Even before the FDA’s warning letter was issued, an April 27, 2000, Reuters article reported that (1) a spokesperson for leading naproxen manufacturer, Roche Holding Ltd., explained that "[t]o [their] knowledge, naproxen does not prevent heart attack or stroke” and (2) an ABN Amro analyst indicated that ”[m]edical authorities [he had] spoken to don’t see any special reduction of such cardiovascular events in people taking naproxen.” App. at 2288. Additionally, an August 21, 2001, Bloomberg News Article, reported a Merck representative’s comment that "[Merck] already ha[s] additional data beyond what [the JAMA article] cite[s], and the findings are very, very reassuring. VIOXX does not result in any increase in cardiovascular events compared to placebo." App. at 539. Even if this "additional data” included evidence that could support Merck's naproxen hypothesis, Merck never revealed the details of its purported "additional data.”

. Regardless, Merck's stock price did decline sharply in the months leading up to October 9, 2001, as the public controversy about Vioxx raged. From January 1, 2001, to October 9, 2001, Merck's stock price declined by $24.32 or 27.4% App. at 1770-73. As appellants themselves alleged, “Merck's stock price began its slide in approximately January of 2001, and continued and worsened after August of 2001 when the VIGOR cardiovascular data was presented more fully in the [JAMA article].” App. at 1225 (emphasis added).