Merck & Co. v. Reynolds (08-905) and Stolt-Nielsen S.A. v. Animalfeeds International Corp. (08-1198)

April 28, 2010 Supreme Court Update

Greetings, Court fans!

The Court released an Order List yesterday and two decisions today: Merck & Co. v. Reynolds (08-905), in which the Court construed the limitations period for filing a private securities fraud action; and Stolt-Nielsen S.A. v. Animalfeeds International Corp. (08-1198), where the Court held that imposing class arbitration on parties who did not authorize class arbitration would violate the Federal Arbitration Act.

First up, in Merck & Co. v. Reynolds, the Court analyzed the limitations period for filing a private securities fraud action under § 10(b) of the Securities and Exchange Act of 1934. 28 U.S.C. § 1658(b) provides that such an action must be filed not later than "2 years after the discovery of the facts constituting the violation," or "5 years after the violation." Here, plaintiffs filed suit on November 6, 2003, asserting that Merck defrauded investors by promoting the "naproxen hypothesis" – in which Merck claimed that any increased adverse cardiovascular events observed in a clinical trial comparing Vioxx to Naproxen were due to Naproxen's salutary cardiovascular effects, rather than Vioxx's adverse effects. The issue was whether the suit was untimely under the 2-year discovery limitations period since significant information was already in the public domain regarding the possible adverse cardiovascular effects of Vioxx by the November 6, 2001 (two years before the date the suit was filed). Specifically, the FDA had already required Merck to issue a warning letter in September 2001 acknowledging that its marketing of Vioxx was "lacking in fair balance, or otherwise misleading" because it did not acknowledge the alternate possibility that Vioxx itself caused the adverse events. Merck also cited to product liability lawsuits filed prior to November 2001 alleging that Merck had knowingly downplayed the risks of Vioxx.

The Court found this evidence insufficient to start the clock running. In an opinion by Justice Breyer, six members of the Court concluded that the limitations period for a securities fraud claim begins to run once the plaintiff actually discovers or a reasonably diligent plaintiff would have discovered the facts constituting the violation. (Justice Scalia and Thomas did not agree with this portion of the opinion. They would conclude that discovery under this statute means actual discovery only, not constructive discovery. Justice Stevens, for his part, would simply defer this issue for a case where it made a difference – which was not this one.) All nine Justices agreed that the facts constituting the violation include mens rea (i.e., intent to deceive), which is an element of a securities fraud violation. Here, there was no publicly available evidence that Merck knew the Naproxen hypothesis was false until after November 6, 2001, so plaintiff's suit was timely.

The Court split 5-3 (Sotomayor did not participate) in Stolt-Nielsen S.A. v. Animalfeeds International Corp., where the conservative wing of the Court found that an arbitration agreement that was entirely silent on the issue of class arbitration did not authorize it. Justice Alito authored the majority opinion, which relied heavily on the notion that, under the Federal Arbitration Act ("FAA"), arbitration is a creature of contract and therefore the intent of the parties is paramount. Here, there was no evidence (in or outside of the arbitration clause) that the parties intended to permit class arbitration and "class-action arbitration changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their dispute to arbitration." For example, a party might elect to forego the procedural rights and appellate review available in courts for the efficiency of arbitration in a bilateral situation, but might decline to do so if the matter involved a class given the enormous potential costs of such a proceeding. Therefore, the arbitrators exceeded their authority by finding that class arbitration was authorized here. (Stolt-Nielsen is a major departure from the Court's 2003 decision in Green Tree Financial Corp. v. Bazzle, which many perceived as a green light for class arbitrations where the agreement of the parties was silent. As the majority here pointed out, however, Green Tree was a fractured opinion with no majority, so the Court did not even have to overrule it to come out as it did. The Court took pains to point out that Green Tree was not controlling even on issues not presented here – such as whether a court or arbitrator should decide the availability of class arbitration in the first instance, potentially putting this issue back in play.)

Justice Ginsburg, joined by Justices Stevens and Breyer dissented. They would not have even agreed to hear the case in light of the fact that the arbitrator's ruling regarding the class issue was wholly interlocutory in nature. If the merits had to be reached, however, they would uphold the arbitrators' decision allowing class arbitration to proceed. In their view, because the parties consented to allow the arbitrators to determine the class issue initially, the arbitrators obviously acted without their authority by deciding the issue – whether their ruling was correct as a legal matter or not. End of story. (Because the majority decided this case based on its conclusion that the arbitrators exceeded their authority, they did not decide whether manifest disregard of the law is a basis to overturn an arbitration award. However, assuming that ground exists, the majority found it satisfied under these facts.)

The Court granted cert in two cases that are pretty intriguing:

First, the Court will take up an issue near and dear to many parents out there – violent video games. Schwarzenegger v. Entertainment Merchants (08-1448), presents two questions for review: "(1) Does the First Amendment bar a state from restricting the sale of violent video games to minors? (2) If the First Amendment applies to violent video games that are sold to minors, and the standard of review is strict scrutiny, under Turner Broadcasting Systems, Inc. v. F.C.C. (1994), is the state required to demonstrate a direct causal link between violent video games and physical and psychological harm to minors before the state can prohibit the sale of the games to minors?"

Ortiz v. Jordan (09-737), where the Court will determine whether a party can appeal an order denying summary judgment after a full trial on the merits if the party did not attempt to appeal the order before trial.

Finally, in another (and perhaps final) blow to Michigan's efforts to block invasive carp from entering the Great Lakes, the Court denied its bid to reopen and issue a supplemental decree in three original cases (Wisconsin v. Illinois (1, Orig.), Michigan v. Illinois (2 Orig.), and New York v. Illinois (3 Orig.)).

That's it for today, though perhaps not for the week. As always, thanks for reading!


From the Appellate and Complex Legal Issues Practice Group at Wiggin and Dana
For more information, contact Kim Rinehart or any other member of the Practice Group at 203-498-4400