Third Circuit Decision on the Statute of Limitations

In Alaska Electrical Pension Fund v. Pharmacia Corporation, Case Nos. 07-4500 & 07-4564, 2009WL213095 (3d Cir., Jan. 30, 2009), the court vacated an order from the district court granting summary judgment for defendants based the statute of limitations in a securities fraud class action. The application of the statute of limitations here was keyed to the question of ‘inquiry notice’, the point at which a reasonable investor has a duty to inquire.

Based on doctored versions of a scientific study, Celebrex - an anti-inflammatory drug distributed by the defendants - was claimed to cause fewer gastrointestinal side effects than its competitors. This claim was questioned by the FDA. Months later, following a series of positive statements about Celebrex, a major national paper reported that defendants withheld the full scientific study.

Key to the issue of statute of limitations is when an investor is placed on inquiry notice. A court will examine when the plaintiffs (“reasonable investors of ordinary intelligence”), through reasonable diligence, should have sufficient information of possible wrongdoing by defendants. Inquiry notice functions to deter punitive plaintiffs from sitting on their hands, and is triggered when plaintiffs should have discovered the general fraudulent scheme.

Reasonable investors, following reasonable diligence, are “presumed to read prospectuses, quarterly reports, and other information relating to their investments.” Courts also look to see if investors ignored ‘storm warnings’ (i.e. suspicions of corporate mischief). However, an ordinary investor need not be a scientific expert, with no requirement that an investor shift through lengthy collections of scientific data to determine what happened.

In the present case, the district court held the plaintiffs were under inquiry notice at the time of the initial FDA examination of Celebrex and therefore granted summary judgment to defendants. The Third Circuit disagreed. Merely relying on a good faith scientific disagreement between the company and the FDA was not sufficient to trigger inquiry notice since there was no indication of wrongful conduct or scienter necessary to maintain a securities fraud claim. Inquiry notice occurred months later following the disclosure of the full medical report on Celebrex.

Further, in attempting to calm investors, defendants issued statements to reassure the market following the FDA accusation. This had the effect of dissipating any ‘storm warnings’ and prevented plaintiffs from being put on inquiry notice.


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