N. Sound Capital LLC v. Merck & Co.

314 F.Supp.3d 589

NORTH SOUND CAPITAL LLC, et al.,

v.MERCK & CO., INC. f/k/a Schering–Plough Corporation, et al.

GIC Private Limited,

v.Merck & Co., Inc. f/k/a Schering–Plough Corporation, et al.

North Sound Capital LLC, et al.,

v.Merck & Co., Inc., et al.

GIC Private Limited,

v.Merck & Co., Inc., et al.

3:13–cv–7240 (FLW) (DEA)

3:13–cv–7241 (FLW) (DEA)

3:14–cv–242 (FLW) (DEA)

3:14–cv–241 (FLW) (DEA)

United States District Court, D. New Jersey.

Signed May 15, 2018

Karina Kosharskyy, Kirby McInerney LLP, New York, NY, for North Sound Capital LLC, et al.

Brian M. English, Tompkins, McGuire, Wachenfeld & Barry, LLP, Newark, NJ, Theodore V. Wells, Jr., Paul, Weiss, Rifkind, Wharton & Garrison, LLP, New York, NY, for Merck & Co., Inc. f/k/a Schering–Plough Corporation, et al.

OPINION

WOLFSON, United States District Judge:

This case concerns the preclusive scope of Title I of the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), which bars plaintiffs in a "covered class action" from asserting state law claims alleging "a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security." 15 U.S.C. § 78bb(f)(1)(A). SLUSA's definition of a "covered class action" reaches "any group of lawsuits filed in or pending in the same court and involving common questions of law or fact, in which ... damages are sought on behalf of more than 50 persons ... and the lawsuits are joined, consolidated, or otherwise proceed as a single action for any purpose." 15 U.S.C. § 78bb(f)(5)(B)(ii).

The instant actions are brought on behalf of sixteen institutional investors¹ that opted out of two class actions in this District, see In re Schering–Plough Corp./ENHANCE Sec. Litig. , No. 08–397 (D.N.J.) (the "Schering Vytorin Class Action"); In re Merck & Co., Inc. Vytorin/Zetia Sec. Litig. , No. 08–2177 (D.N.J.) (the "Merck Vytorin Class Action") (collectively, the "Vytorin Class Actions"), and then, after the Vytorin Class Actions were settled and dismissed, filed four individual actions² (collectively, the "Individual Actions") against Defendants Merck & Company, Inc., Merck/Schering–Plough Pharmaceuticals, MSP Distribution Services (C) LLC, MSP Singapore Company LLC, Richard T. Clark, Deepak Khanna, Fred Hassan and Carrie S. Cox (collectively, "Defendants"), asserting claims under Sections 10(b), 20(a) and 20A of the Securities Exchange Act of 1934 (the "Exchange Act" or "1934 Act"), as well as a common law fraud claim. The complaints filed in the Individual Actions substantially mirror the consolidated complaints filed in the Vytorin Class Actions, alleging that, between December 2006 and March 2008, Plaintiffs purchased securities issued by Merck and Schering, in reliance on material misrepresentations or omissions that Defendants made regarding the "ENHANCE" clinical trial, an interim study on the efficacy of the cholesterol-lowering drug Vytorin.

Following the dismissal of Plaintiffs' Exchange Act claims, Defendants filed the instant Motion to Dismiss, pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6), arguing that Plaintiffs' sole remaining claim for common law fraud is barred by SLUSA. This Court held oral argument on Defendants' Motion on April 11, 2018. For the reasons that follow, Defendants' Motion to Dismiss is granted.

I. BACKGROUND ³

The Court assumes the parties' familiarity with the underlying facts of this case, which are set forth in detail in this Court's August 26, 2015 Opinion, and thus, recites only those facts necessary to decide the instant Motion.

A. The ENHANCE Trial

In 2002, Merck and Schering entered into a joint venture for the purpose of combining their cholesterol treating drugs—Zocor and Zetia, respectively—to form a new pharmaceutical product called Vytorin. See North Sound Schering Compl. ¶¶ 30–31.⁴ To demonstrate the benefits of Vytorin, Merck and Schering designed a clinical trial known as ENHANCE, which examined the effectiveness of Vytorin relative to Zocor. Id. at ¶ 41. Specifically, Merck and Schering anticipated that the ENHANCE trial would establish that Vytorin not only lowered LDL cholesterol levels, but also resulted in other "measurable benefits to patients," including reduction of the intima-media thickness of the carotid arterial wall. Id.

The ENHANCE trial ran from August 2002 to April 2006. Id. at ¶ 42. However, according to the Complaint, researchers and executives recognized a critical design flaw in the ENHANCE trial shortly after its inception, rendering it unlikely that the trial would produce favorable results. Id. at ¶¶ 47–52. Specifically, Plaintiffs allege that data from early enrollers demonstrated that high-cholesterol participants entered the ENHANCE trial with their arterial walls already "near-normal," due to years of taking cholesterol medication, and thus, that it would be difficult to demonstrate the effectiveness of Vytorin in reducing or slowing the progression of the thickness of the carotid arterial walls in those participants. Id. at ¶¶ 47–52. In short, Plaintiffs allege that Defendants were aware, from an early stage, that the ENHANCE trial was doomed from its incipiency.

Notwithstanding the hurdles attributable to ENHANCE's experimental design, Plaintiffs allege that, from 2006 onward, Defendants made a series of misrepresentations regarding Vytorin's prospects for clinical efficacy. Id. at ¶ 39. Specifically, Plaintiffs identify seventeen misrepresentations that Defendants made regarding Vytorin, the last by Schering on November 19, 2007, and by Merck on January 30, 2008. Id. at ¶¶ 207–89, 317–18. Plaintiffs further allege that these misrepresentations artificially inflated the price of Schering securities. Id. at ¶ 310. Plaintiffs also aver that an individual defendant made sales of Schering stock based on insider knowledge of the results of ENHANCE, with the last insider transaction occurring on May 1, 2007. Id. at ¶¶ 353–55.

The final results of the ENHANCE trial became public in early 2008, and the data collected from the trial confirmed what the early outputs had suggested—that Vytorin did not produce any added benefit when compared to Zocor alone. Id. at ¶ 45. Indeed, one cardiologist concluded that the ENHANCE trial raised the possibility that the active pharmaceutical ingredient in Vytorin was merely an "expensive placebo." Id. at ¶ 142.

Plaintiffs allege that in the period immediately following the release of the ENHANCE trial's results, Schering's "common stock price fell more than 52%, wiping out more than $23.63 billion in market capitalization, and [Schering's] preferred stock price similarly fell more than 40%, ... wiping out $1.039 billion in market capitalization." Id. at ¶ 320. Plaintiffs attribute the decline in Schering's stock price to the "disclosure of previously concealed information relating to [Defendants'] material misstatements and omissions ...." Id. at ¶ 321. Plaintiffs further allege that, in the absence of Defendants' misrepresentations, Plaintiffs "would not have purchased Schering securities at artificially inflated prices and they would not have proximately suffered losses as the previously-withheld information became revealed to the market." Id. at ¶ 322.

B. The Vytorin Class Actions

In 2008, the Vytorin Class Actions were filed in this District, asserting federal securities claims arising out of the alleged material misstatements and omissions made in connection with the ENHANCE trial. Both cases were presided over by the Honorable Dennis M. Cavanaugh, U.S.D.J. (Ret.). On September 25, 2012, Judge Cavanaugh granted class certification in both actions. See Schering Vytorin Class Action, ECF Nos. 314–15; Merck Vytorin Class Action, ECF Nos. 250–51. Under the class notices published in the Vytorin Class Actions, class members were given a March 1, 2013 opt-out deadline. See Schering Vytorin Class Action, ECF No. 331–1 ¶ 8; Merck Vytorin Class Action, ECF Nos. 266–1 ¶ 8, 271–1 ¶ 8. Plaintiffs exercised their opt-out rights on March 1, 2013.

On October 1, 2013, Judge Cavanaugh approved settlements and entered final judgments in the Vytorin Class Actions, dismissing the claims asserted therein with prejudice. See Schering Vytorin Class Action, ECF No. 440; Merck Vytorin Class Action, ECF No. 353.

C. Plaintiffs Opt Out of the Vytorin Class Actions and file the Individual Actions

Having opted out of class membership in the Vytorin Class Actions, Plaintiffs filed the four Individual Actions in this Court on November 14, 2013⁵ and January 14, 2014,⁶ asserting claims under Sections 10(b), 20(a) and 20A of the Exchange Act. Plaintiffs' federal claims are premised on factual allegations virtually identical to those alleged in the Vytorin Class Actions. Unlike the complaints in the Vytorin Class Actions, however, Plaintiffs also assert an additional common law fraud claim in the Individual Actions. See North Sound Schering Compl. ¶¶ 360–65; GIC Schering Compl. ¶¶ 357–62; GIC Merck Compl. ¶¶ 474–79; North Sound Merck Compl. ¶¶ 475–80. Nonetheless, Plaintiffs' common law fraud claim is based on the same factual allegations as the federal claims; i.e. , Plaintiffs allege that but for Defendants' material misrepresentations or omissions in connection with the ENHANCE trial, Plaintiffs would not have purchased Schering or Merck securities, or would not have paid an artificially inflated price for those securities.⁷ See id.

D. The Initial Motion to Dismiss the Individual Actions as Untimely

As the Court has already explained, the last insider transaction alleged in the Complaint was executed on May 1, 2007, and the final alleged misstatement was made on January 30, 2008, more than five years before Plaintiffs initiated the Individual Actions. This was significant, because the statutes under which Plaintiffs asserted their Exchange Act claims contained five-year limitations periods, found in 28 U.S.C. § 1658(b)⁸ for claims under §§ 10(b) and 20(a), and in 15 U.S.C. § 78t–1(b)(4)⁹ for claims under § 20A....