N. Sound Capital LLC v. Merck & Co.

Decision Date12 September 2019
Docket Number No. 18-2320,No. 18-2317, No. 18-2319, No. 18-2318,18-2317
Parties NORTH SOUND CAPITAL LLC; North Sound Legacy International; North Sound Legacy Institutional ; United Food Commercial Workers Local 500 Pension Fund; Colonial First State Investments Ltd. ; CFSIL-CFS Wholesale Indexed Global Share Fund; CFSIL-Commonwealth Global Shares Fund 4; CFSIL-Commonwealth Specialist Fund 13; CFSIL Wholesale Geared Global Shared Fund; CFSIL ATF CMLA International Share Fund; CFSIL-Commonwealth Global Shares Fund 6; CFSIL Commonwealth Shares Fund 2; CFSIL-CFS Wholesale Acadian Global Equity Fund; CFSIL-CFS Wholesale Global Health & Biotechnology Fund; CFSIL-CFS Wholesale Global Share Fund, Appellants v. MERCK & CO., INC. formerly known as Schering-Plough Corporation; Merck Schering-Plough Pharmaceuticals ; MSP Distribution Services (C) LLC.; MSP Singapore Company LLC ; Fred Hassan; Carrie S. Cox GIC Private Limited, Appellant v. Merck & Co., Inc. formerly known as Schering-Plough Corporation; Merck/Schering Plough Pharmaceuticals ; MSP Distribution Services (C) LLC; MSP Singapore Company LLC ; Fred Hassan; Carrie S. Cox GIC Private Limited, Appellant v. Merck & Co., Inc.; Merck/Schering-Plough Pharmaceuticals ; MSP Distribution Services (C) LLC; MSP Singapore Company LLC ; Richard T. Clark; Deepak Khanna North Sound Capital LLC; North Sound Legacy International; North Sound Legacy Institutional ; United Food Commercial Workers Local 1500 Pension Fund, Appellants v. Merck & Co., Inc.; Merck/Schering-Plough Pharmaceuticals ; MSP Distribution Services (C) LLC; MSP Singapore Company LLC ; Richard T. Clark; Deepak Khanna
CourtU.S. Court of Appeals — Third Circuit
OPINION OF THE COURT

KRAUSE, Circuit Judge.

In these consolidated appeals, we consider whether the Securities Litigation Uniform Standards Act (SLUSA) prohibits investors from bringing individual actions under state law if they exercise their constitutionally protected right to opt out of a class action. Hewing to SLUSA’s text, we conclude that these opt-out suits and the class actions from which these plaintiffs excluded themselves were not "joined, consolidated, or otherwise proceed[ing] as a single action for any purpose." 15 U.S.C. § 78bb(f)(5)(B)(ii)(II). Accordingly, we will reverse the District Court’s dismissal of these suits and remand for further proceedings.

I. Background

This long-running dispute concerns allegations that two pharmaceutical manufacturers, Merck and Schering-Plough, stalled the release of damaging clinical trial results for their blockbuster drugs Vytorin and Zetia for years, tried to change the endpoint of the study to produce more favorable results, and then concealed their role in pushing for the change.1 During this time, Merck and Schering-Plough allegedly made numerous statements touting the efficacy and commercial viability of Vytorin and Zetia. Plaintiffs allege that the delay allowed Schering-Plough to raise $4.08 billion through a public offering in August 2007, which the company then used to purchase another pharmaceutical company that would lessen its reliance on Vytorin and Zetia.

Amid several critical press reports and an incipient congressional investigation, Merck and Schering-Plough finally released the clinical trial results in January and March 2008. The data showed that "[i]n no subgroup, in no segment, was there any added benefit" from taking Vytorin, raising the possibility that the active-ingredient ezetimibe amounted to an "expensive placebo." App. 165–66. Based on the results, the New England Journal of Medicine, along with several leading cardiologists, recommended that doctors prescribe Vytorin and Zetia only if other classes of drugs failed to control a patient’s cholesterol.

The devastating results for these popular anti-cholesterol drugs allegedly caused Merck’s and Schering-Plough’s stock price to plummet. Between December 11, 2007 and March 31, 2008, Schering-Plough’s common-stock price declined 52%, eliminating $23.63 billion in market capitalization. And Merck’s stock price dropped 38%, amounting to around a $48 billion loss in market capitalization.

A. Investors File Putative Class Actions Against Merck and Schering-Plough

Faced with enormous losses, investors soon filed separate putative class actions in the District of New Jersey against Merck and Schering-Plough, alleging each made numerous material misrepresentations about Vytorin and Zetia. Over a year later, in September 2009, the District Court denied defendantsmotions to dismiss under the Private Securities Litigation Reform Act’s (PSLRA) heightened pleading standard. Three years after that, the District Court denied defendantsmotion for summary judgment and granted class certification.

The District Court then directed—as Rule 23(c)(2) requires—that investors receive notice of their right to opt out of the class actions. The court-approved notices provided investors with 45 days (that is, until March 1, 2013) to exclude themselves from the class actions. If they did so, the notices assured them, "you will not be bound by any judgment in this Action" and "will retain any right you have to individually pursue any legal rights that you have against any Defendants." In re Merck & Co., Inc. Vytorin/ZETIA Sec. Litig. , No. 2:08-cv-02177, ECF No. 266–1 at 11 (Dec. 19, 2012); In re Schering-Plough Corp. / ENHANCE Sec. Litig. , No. 2:08-cv-00397, ECF No. 331–1 at 11 (Dec. 19, 2012).

After the opt-out period ended, the District Court approved the settlement agreements the class-action plaintiffs reached with Merck and Schering-Plough. At the parties’ request, the District Court declined to provide class members with a second opportunity to opt out, but did offer opt-out investors 45 days to join the class actions and share in the recovery. In preliminarily approving the settlement agreements, the District Court reiterated that opt-outs "shall not be bound by the terms of the Settlement, the Stipulation, or any other orders or judgments in the Action." In re Schering-Plough Corp. / ENHANCE Sec. Litig. , Case No. 2:08-cv-00397, ECF No. 421 ¶ 11 (June 7, 2013); In re Merck & Co., Inc. Vytorin/ZETIA Sec. Litig. , Case No. 2:08-cv-02177, ECF 330 ¶ 11 (June 7, 2013). In October 2013, the District Court gave final approval to the class-action settlements and entered separate final judgments dismissing class members’ claims with prejudice.

B. Opt-Out Investors Then File These Individual Lawsuits

The sixteen plaintiffs in these consolidated appeals fell within the class definition alleged and eventually certified in the class actions against Merck and Schering-Plough. But they were not named plaintiffs, and neither they nor their counsel participated in the class-action proceedings. After the District Court certified the class actions, they opted out on the last day, March 1, 2013, and declined to opt in to participate in the settlement agreements.

In November 2013 and January 2014, after the District Court entered the final judgments in the class-action suits, these opt-out investors ("Plaintiffs") brought their own actions against Merck and Schering-Plough, which had since merged. Their complaints track, sometimes verbatim, those filed in the class actions, except they added a fraud claim under New Jersey common law. Along with their complaints, Plaintiffs identified the class-action suits as "related" on the civil cover sheet and in a certification, as required by that District’s Local Rules. See D.N.J. L. Civ. R. 5.1(e), 11.2, 40.1(c). In briefing papers before the District Court, Plaintiffs asserted in connection with an unrelated argument that "Defendants have already engaged in lengthy and expensive discovery in the class cases," so their suits would not burden defendants. App. 966. But nothing suggests that Plaintiffs coordinated their lawsuits with the class actions or received access to confidential materials therefrom.

In their first motion to dismiss, Merck did not suggest that SLUSA precluded Plaintiffs’ claims, even though that posed a threshold jurisdictional issue. See In re Lord Abbett Mut. Funds Fee Litig. , 553 F.3d 248, 254 (3d Cir. 2009). Instead, Merck contended that their federal claims were barred by the Securities Exchange Act’s statute of repose and that their state-law claims failed to plausibly allege actual reliance. The District Court rejected both arguments, but in an interlocutory appeal, we reversed the District Court’s allowance of Plaintiffs’ federal claims after the Supreme Court held that American Pipe tolling does not extend to statutes of repose. See N. Sound Capital LLC v. Merck & Co. Inc. , 702 F. App'x 75, 81 (3d Cir. 2017) ; see also Cal. Pub. Emps.’ Ret. Sys. v. ANZ Sec., Inc. , ––– U.S. ––––, 137 S. Ct. 2042, 198 L.Ed.2d 584 (2017). Our decision left Plaintiffs with only their state-law fraud claims.

On remand, Merck again moved for dismissal of Plaintiffs’ state-law claims, arguing for the first time that SLUSA precluded them because the class actions and the opt-out suits were "joined, consolidated, or otherwise proceed[ing] as a single action for any purpose." 15 U.S.C. § 78bb(f)(5)(B)(ii)(II).2 In its opinion, the District Court recognized that Merck’s argument "tests the limits of SLUSA’s preclusive scope" and "it does not appear that any prior decision has addressed this issue." N. Sound Capital LLC v. Merck & Co. , 314 F. Supp. 3d 589, 601, 615 (D.N.J. 2018). Nevertheless, the District Court concluded that Plaintiffs’ claims were barred under SLUSA because the "Individual Actions and the Vytorin Class Actions have proceeded as a single action." Id. at 619. Considering the statutory text, the District Court inferred that because Congress did not explicitly exempt opt-out suits from SLUSA, it necessarily "envisioned the aggregation of opt-out suits with related class actions" under SLUSA’s mass-action provision. Id. at 605, 611. The District Court also concluded that SLUSA’s...

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