The Supreme Court Considers the ‘Inquiry Notice’ Standard in Federal Securities Fraud Cases
The Supreme Court heard oral arguments yesterday in Merck & Co, Inc. v. Reynolds, No. 08-905, a case in which the Court may clarify what constitutes discovery of facts supporting a federal securities fraud claim for purposes of the statute of limitations. Specifically, the Court in Reynolds is poised to resolve a circuit split concerning whether the Third Circuit erred in holding, in accord with the Ninth Circuit but in contrast to most of the other Courts of Appeals, that "under the ‘inquiry notice’ standard applicable to federal securities fraud claims, the statute of limitations does not begin to run until an investor receives evidence of scienter without the benefit of investigation." In re Merck & Co., Inc. Litigation, 543 F.3d 150, 161 (3rd. Cir. 2008). Under 28 U.S.C. § 1658(b), claims of "fraud, deceit, manipulation or contrivance" concerning the Securities Exchange Act of 1934 can be made either "[two] years after the discovery of the facts constituting the violation," or "[five] years after such violation," whichever is earlier. In contrast, the other circuits have held that "a plaintiff who suspects the possibility that the defendant has engaged in wrongdoing is on inquiry notice and thereafter must exercise reasonable diligence in investigating his potential claim," and therefore the limitations period is triggered by not only actual, but also constructive, notice of the facts constituting the violation.