Section 804(a) of the Sarbanes-Oxley Act of 2002 provides that a private action claiming fraud under section 10(b) of the Exchange Act (and Securities and Exchange Commission Rule 10b-5 promulgated thereunder) must be brought “not later than the earlier of – (1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation.” 28 U.S.C. § 1658(b). Every court of appeals to have addressed this provision has held that the statute of limitations may be triggered by constructive as well as actual discovery, and that constructive discovery turns at least in part on when a plaintiff is on “inquiry notice” of the alleged fraud.
In its petition for certiorari, Merck argued that the various Circuit courts have issued conflicting opinions on what is required to put a plaintiff on “inquiry notice” sufficient to trigger the running of the statute of limitations. Merck argued that the Third Circuit, together with the Ninth Circuit but in contrast to the other circuits, had held that “no duty to investigate arises, and the statute of limitations does not begin to run, until the plaintiff receives specific evidence of the elements of its claim without the benefit of any investigation.” Merck argued that as a result of its “more lenient” standard, “the Third Circuit has excused an investor from asking a single question until it has evidence not just of scienter, but of materiality and loss causation as well.” Merck contended that the Third Circuit’s standard “runs contrary to the fundamental purpose of inquiry notice – to encourage the timely filing of fraud claims by placing an affirmative burden on plaintiffs to investigate potential claims.”
The Supreme Court has an opportunity to provide plaintiffs and defendants with a more predictable standard on when “inquiry notice” is sufficient to trigger the statute of limitations. However, “inquiry notice” by its very nature is a fact intensive inquiry, and even the Supreme Court’s guidance may not ensure that the circuit courts apply a uniform “inquiry notice” standard in a consistent manner.
