On April 27, the Supreme Court decided Merck & Co. v. Reynolds, No. 08-905, holding that the two-year statute of limitations on claims under the federal securities laws does not begin to run until the plaintiff actually discovers, or a reasonably diligent plaintiff would have discovered, "the facts constituting the violation," including facts showing the defendant's "scienter"—its intent to deceive, manipulate or defraud.
Plaintiff investors sued Merck & Co. under section 10(b) of the Securities Exchange Act of 1934, claiming that Merck had knowingly misrepresented the heart-attack risks associated with its drug Vioxx. Such a claim is timely if filed no more than "two years after the discovery of the facts constituting the violation" or five years after the violation. The district court dismissed plaintiffs' complaint, holding that events occurring more than two years before plaintiffs filed suit should have alerted them to the possibility of Merck's alleged misrepresentations but that they failed to undertake a reasonably diligent investigation at that time. The Third Circuit reversed, holding that the events occurring more than two years before the plaintiffs' filing to which the district court pointed did not suggest that Merck acted with scienter, which is an element of a § 10(b) violation, so those events did not trigger the running of the limitations period.
The Supreme Court affirmed. The statute provides that the limitation period runs from "discovery" of "the facts constituting the violation." The Court first construed the term "discovery," consistently with how the courts of appeals have unanimously interpreted it, as meaning either when the plaintiff actually knew those facts or when a reasonably diligent plaintiff would have known them. Although events such as those cited by the district court may have identified a time when a reasonably diligent plaintiff would have started to investigate, the limitations period does not begin to run until such an investigation would have led to actual "discovery," by either the actual plaintiff or a reasonably diligent plaintiff, of all of the facts "constituting the violation." In an action under § 10(b), one of those "facts" is scienter, which the Court noted is an "important and necessary element" of a § 10(b) violation. Indeed, a complaint that failed to plead facts showing that it is more likely than not that the defendant acted with the required intent would be dismissible because of that failure.
The Court rejected the argument that knowledge of facts tending to show a materially false or misleading statement or omission should be enough to constitute knowledge of scienter for this purpose, noting that, in the context of section 10(b), "the relation of factual falsity and state of mind is more context specific." Nor does the limitations period begin upon "inquiry notice" — the point at which the facts would lead a reasonably diligent plaintiff to investigate further. That point is not the point at which the plaintiff would already have discovered "the facts constituting the violation," which is what the statute requires.
Justice Breyer delivered the opinion of the Court, in which Chief Justice Roberts and Justices Kennedy, Ginsburg, Alito, and Sotomayor joined. Justice Stevens filed an opinion concurring in part and concurring in the judgment. Justice Scalia filed an opinion concurring in part and concurring in the judgment, in which Justice Thomas joined.