Merck Shareholders Win on Vioxx Appeal

December 20, 2007
Corporate Governance Newsletter

A shareholder suit arising out of the Vioxx debacle at Merck & Co., Inc. recently secured the go-ahead when an appellate court allowed the plaintiffs to replead their case. Merck, the giant drug company, is alleged to have aggressively marketed the pain reliever Vioxx to millions of unsuspecting consumers – all the while knowing that the popular drug contained hidden side effects that caused heart attacks, strokes, and even death. Indeed, Congressional testimony found that Vioxx may be responsible for over 88,000 heart attacks or strokes in the US alone, and up to 55,000 deaths.

Plaintiffs representing the company in a suit against its officers and directors asked the United States Court of Appeals for the Third Circuit to review a district court decision denying Merck shareholders leave (or permission) to amend the derivative complaint. The shareholders sought to update their complaint with additional facts showing “demand futility” – i.e. that a pre-suit demand upon Merck’s board to initiate and prosecute the lawsuit would have been futile. Importantly, the new facts had been gleaned from materials that the Merck defendants had produced after the lawsuit’s initial filing. Relying on the general rule in derivative actions that prohibits “discovery” materials from being used to supplement demandfutility allegations, the lower court refused to allow plaintiffs to amend the complaint and dismissed the case with prejudice.

Following extensive briefing and argument, a unanimous Third Circuit panel reversed the lower court’s decision and ruled in the shareholders’ favor. In its published opinion, the panel concluded that the case’s unusual posture presented an exception to the general rule against using discovery to plead demand futility.

Argued by plaintiffs’ attorney Joseph Daley, the appeal’s nuances clearly piqued the panel’s interest. Of particular note were the judges’ favorable comments during argument, including the senior judge’s remark that the briefs had been “exquisite” and read “like literature.”

In re Merck & Co., Inc. Sec., Deriv. & ERISA Litig., 493 F.3d 393 (3d Cir. 2007).

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