Supreme Court Hears Arguments|on Debacle of Arthritis Drug Vioxx

WASHINGTON (CN) - The Supreme Court heard arguments Monday in a case where stockholders sued pharmaceutical giant Merck & Co. over the debacle of its arthritis drug Vioxx which was found to greatly increase heart risk, news that ultimately caused the company's stock to crash. Plaintiff investors said Merck executives promoted the drug while knowing of its risk. The company took the position that they filed too late.

The case focused on when investors should know if there is a possibility of fraud, and when they are responsible for taking action.

The pharmaceutical company Merck was represented by Kannon Shanmugam from Williams & Connolly. He made the difficult argument that investors waited too long to file lawsuits because diligent investors had enough information earlier to presume the company was committing fraud. At the same time, he argued, investors still do not have enough evidence to make a case against the company.

"Companies can't have it both ways," Justice Anthony Kennedy said.

The plaintiff investors, who are suing for billions of dollars in damages, countered that they had no way of knowing the company was committing fraud before they filed suit, and argued that the timer should set when they have sufficient knowledge to file a complaint, instead of the earliest time when they might have sufficient knowledge.

David Frederic from Kellogg, Huber, Hansen, Todd, Evans & Figel argued on behalf of the shareholders. He maintained that Merck promoted an arthritis medication, Vioxx, as healthy, despite internal company emails indicating that company officials were aware of associated cardiovascular problems, which ultimately led to a stunning 27 percent stock value plunge in one day.

Justice Ruth Bader Ginsburg suggested that investors would have had difficulty questioning the safety of the medicine. "There were not signals from the market itself," she said. "Lots of doctors were writing prescriptions for this."

Justice John Paul Stevens appeared to share this sympathy with investors. "One of the things they could not have done was file a lawsuit right then," he said. "They would not have had adequate facts to comply with the rules barring plaintiffs from filing suits based on information and belief."

Scalia seemed to dislike Merck's near self-accusation. "To say that, you must believe that there is substantial evidence of fraud when there is simply substantial evidence of inaccuracy," he said. Scalia continued to suggest that the company may not have committed fraud even though it may have made inaccurate misstatements.

Frederick, who argued for the stockholders, came under fire from Sotomayor, who noticed that investors sued the company before the release of the Harvard study that they claimed was important for their case. "So you are admitting that you filed an improper complaint, that you didn't have a good-faith basis for the complaint you filed?" she said.

He replied that the publication of the study was added to strengthen their case and said it would be "the height of irony" that the case would be thrown out, and never face a day in court, because of Merck's success in concealing its fraud for so long.

The Food and Drug Administration found that Vioxx increased chances of cardiovascular events by four to five times, and the Harvard University study linked the drug to a 40 percent increased risk of heart attack.

Plagued by problems, the pharmaceutical company removed Vioxx from the market in 2004, a year after the class action was filed, and the company's stock dropped by 27 percent the next day.

The district court dismissed the class action brought by investors, citing that the two-year timeframe to file securities fraud suit had expired. But the 3rd Circuit reversed, holding that shareholders could not have known of Merck's wrongdoing in time.

Subscribe to Closing Arguments

Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.

Email *

Submit