In re Merck & Co. Securities & Erisa Litigation

• Decision Date: 18 July 2007
• Docket Number: No. 06-2911.,06-2911.
• Citation: 493 F.3d 393
• Parties: In re MERCK & CO., INC. SECURITIES, DERIVATIVE & ERISA LITIGATION. Consolidated Derivative Action. Hawaii Laborers Pension Plan and Halpert Enterprises, Inc., Appellants.
• Court: U.S. Court of Appeals — Third Circuit

493 F.3d 393

In re MERCK & CO., INC. SECURITIES, DERIVATIVE & ERISA LITIGATION.

Consolidated Derivative Action.

Hawaii Laborers Pension Plan and Halpert Enterprises, Inc., Appellants.

No. 06-2911.

United States Court of Appeals, Third Circuit.

Argued April 12, 2007.

Filed July 18, 2007.

Travis E. Downs III, Joseph D. Daley (argued), Lerach Coughlin Stoia Geller Rudman & Robbins, San Diego, CA, Peter S. Pearlman, Cohn Lifland Pearlman Herrmann & Knopf, Saddle Brook, NJ, Jeffrey P. Fink, Robbins Umeda & Fink, San Diego, CA, for Appellant.

Robert D. Joffe, Evan R. Chesler, Robert H. Baron (argued), David Greenwald, Cravath, Swaine & Moore, New York, NY, William R. Stein, Roberta Koss, Hughes Hubbard & Reed, Washington, DC, for Appellee.

Before: SMITH and COWEN, Circuit Judges and YOHN,^* District Judge.

OPINION OF THE COURT

SMITH, Circuit Judge.

This case is part of the massive VIOXX-related litigation. The primary—and narrow—issue on this appeal is whether the District Court erred by refusing to allow the plaintiffs leave to amend their complaint with additional materials they had proffered to the court to show that amendment would not be futile.¹

This is a shareholder suit, so in the typical situation the plaintiffs would have been required to first make demand upon Merck's Board of Directors. However, the plaintiffs pled demand futility. The District Court dismissed the suit because the plaintiffs did not meet the narrow exception where demand may be excused. Specifically, the plaintiffs did not plead with particularity facts establishing that demand would have been futile at the time they commenced the lawsuit. The District Court concluded that the plaintiffs' allegations of demand futility were "patently conclusory." In re Merck & Co., Inc., 2006 WL 1228595, MDL No. 1658(SRC), at * 13 (D.N.J. May 5, 2006). The District Court did not permit the plaintiffs to amend their complaint with after-acquired information obtained as a result of a discovery stipulation between the parties. Id. at 17-18.

We conclude that the District Court erred in denying the plaintiffs leave to amend their complaint with additional materials on the ground that the materials were acquired as a result of a consensual discovery agreement made by Merck and the derivative plaintiffs. We remand the case to the District Court to determine whether, even with these additional materials, amendment would have been futile.

I.

The District Court has stated the facts of this complicated case concisely and accurately, so we repeat them here:

Merck is a global pharmaceutical company incorporated in New Jersey, which researches, develops, manufactures and markets a broad range of medicines and vaccines that improve human and animal health. Plaintiffs are shareholders bringing this action on behalf of Merck against all individuals who were serving on Merck's Board of Directors as of March 11, 2004—the date the first shareholder derivative action relating to VIOXX was filed—as well as thirteen other current or former directors and officers of the company.

VIOXX is a member of a class of pain medications known as non-steroidal anti-inflammatory drugs ("NSAIDs"). VIOXX is one of a new generation of "selective" NSAIDs called COX-2 inhibitors, which are designed to reduce inflammation and pain while avoiding the risk of serious gastrointestinal side effects associated with traditional NSAIDs. After receiving approval from the Food and Drug Administration ("FDA"), VIOXX was introduced to the market in May 1999. VIOXX was marketed and sold for over five years until September 30, 2004, when Merck voluntarily withdrew the medication.

Plaintiffs contend that scientists within Merck were aware that VIOXX may cause cardiovascular problems for its users as early as 1996. Plaintiffs allege that, from approximately 1996 to 2004, Merck made public statements which promoted the use of VIOXX for treatment of arthritis, and for other pain sufferers. None of these statements, however, mentioned any cardiovascular risks associated with the use of VIOXX, despite Defendants' alleged knowledge of this problem. Plaintiffs contend that Defendants continued to have the Company conceal VIOXX's health risks and repeatedly emphasized safety despite scientific data to the contrary.

In 1999, Merck initiated an 8,000-person VIOXX Gastrointestinal Outcomes Research ("VIGOR") trial designed to prove the drug's gastrointestinal safety benefits. The trial compared people taking a high dose of VIOXX with those taking naproxen, and excluded those at a high risk of heart problems. The results of the VIGOR study came in on March 9, 2000. The results showed that VIOXX patients suffered fewer stomach problems than the naproxen group, but significantly more blood-clot related problems. These results were published in the New England Journal of Medicine in November of 2000. Although the article discussed VIOXX's benefits for the stomach, it did not discuss in any detail information about potential cardiovascular complications.

On February 8, 2001, Merck executives met with the FDA Arthritis Advisory Committee to discuss VIOXX and the VIGOR trial. During the meeting, approximately seven doctors discussed cardiovascular complications associated with VIOXX. Plaintiffs maintain that Defendants, nonetheless, caused Merck to issue a press release on May 22, 2001 in which the Company "reconfirmed the favorable cardiovascular safety profile of VIOXX."

On August 22, 2001, researchers at the Cleveland Clinic published a study in the Journal of the American Medical Association ("JAMA") which discussed the VIGOR study and Celecoxib Long-term Arthritis Safety Study ("CLASS") studies. The article stated that "[t]he annualized myocardial infarction rates for COX-2 inhibitors in both VIGOR and CLASS were significantly higher than that in the placebo group. . . . The available data raise a cautionary flag about the risk of cardiovascular events with COX-2 inhibitors." Plaintiffs allege that prior to the publication of the article, Defendants caused Merck to publicly claim that "VIOXX does not result in any increase in cardiovascular events compared to placebo," and that it had "additional data beyond what [the Cleveland Clinic] cite[s], and the findings are very, very reassuring." On September 17, 2001, the FDA sent Defendant Gilmartin a warning letter stating that Merck's promotional campaign "minimizes the potentially serious cardiovascular findings that were observed in the [VIGOR] study, and thus, misrepresents the safety profile for VIOXX." In May 2004, Harvard researchers published the results of a Merck-sponsored study which "found VIOXX was associated with an elevated risk of heart attacks (39% higher), compared to the use of Celebrex or a placebo." Plaintiff alleges that Defendants "demanded that researchers delete or tone down their findings," and that prior to publication of the results, Defendants removed the name of a Merck employee who had worked on the study from the list of authors.

On August 25, 2004, Dr. David Graham, an FDA researcher, presented the results of an FDA study at a medical conference. The results showed that higher doses of VIOXX "may have led to more than 27,000 heart attacks and sudden cardiac deaths" and triple the risk of heart attacks and death. Plaintiffs contend that the following day, Defendants caused Merck to state publicly that they "strongly disagree[d] with Graham's conclusion, and that `Merck stands behind the efficacy, overall safety and cardiovascular safety of VIOXX.'" Plaintiffs further allege that Defendants threatened and intimidated numerous academics who publicly questioned or discussed the safety of VIOXX. Plaintiffs maintain that certain Merck directors held the power to withdraw important funding from academic research and also cancelled the presentations of doctors who questioned the safety of VIOXX.

See In re Merck & Co., Inc., 2006 WL 1228595, at **1-3 (internal citations omitted).

Because of the harm allegedly caused by VIOXX, Merck now faces thousands of lawsuits. These lawsuits come in a variety of forms, including product liability and shareholder derivative actions. On February 23, 2005, the Judicial Panel on Multidistrict Litigation transferred all VIOXX-related derivative, securities and ERISA actions to the District of New Jersey for pre-trial consideration and/or coordination. Consolidation occurred on May 6, 2005. The plaintiffs in this case filed their complaint on June 20, 2005, arguing that demand on Merck's Board of Directors would be futile. On June 27, 2005, the Magistrate Judge approved a discovery stipulation agreement between the parties that stated, in relevant part, that "all discovery in the Consolidated Derivative Action, except for requests for production of documents focused on the Merck Board of Directors' actions concerning VIOXX prior to Merck's voluntary withdrawal of VIOXX on September 30, 2004, shall be stayed pending the Court's ruling on the motion to dismiss the Consolidated Derivative Complaint, unless the Court enters an order permitting such discovery to proceed."

In late August 2005, Merck filed a motion to dismiss on the grounds that the plaintiffs had failed to make a pre-suit demand upon the March 2004 Board and had failed to adequately plead demand futility. In November 2005, the plaintiffs filed a redacted version of their memorandum in opposition to the defendants' motion to dismiss. The plaintiffs also filed an unredacted version of their opposition under seal, which contained arguments and factual assertions that relied on after-acquired information the plaintiffs obtained during the course of discovery. On December 22, 2005, Merck filed a motion to strike the extraneous documents in the plaintiffs' opposition memorandum. At an April 5, 2006 hearing, the District Court granted Merck's motion to strike because it concluded that much of the information in the plaintiffs' unredacted...