United States: Claims Against Accounting Firms – Implications of Merck & Co. v. Reynolds

Originally published April 30, 2010

Keywords: securities fraud, claims, accounting firms, discovery rule, Merck, PSLRA, limitations defense

On April 27, 2010, the US Supreme Court issued a decision that effectively tolled the statute of limitations applicable to securities fraud litigation until plaintiffs discover or reasonably should have discovered sufficient evidence of scienter to plead a fraud claim in conformity with the Private Securities Litigation Reform Act (PSLRA), i.e., fraudulent intent.

Under the Securities and Exchange Act of 1934, the statute of limitations for securities fraud is two years after the "discovery" of facts constituting the violation (the "discovery rule"). There is also a repose period of five years after the occurrence of the violation itself. In Merck & Co., Merck moved to dismiss, based on the two-year statute of limitations, the plaintiffs' claims alleging that Merck made false statements concerning the painkiller Vioxx's cardiovascular risks. The district court rejected this statute of limitations defense and the circuit court affirmed. The Supreme Court has now affirmed the decisions of the lower courts.

Supreme Court Holding

The Supreme Court held, first, that while the statute referred to "discovery" of the violation, discovery meant actual discovery of facts giving rise to the cause of action or facts showing that plaintiffs with the exercise of reasonable diligence should have discovered. Second, that "facts constituting the violation" included facts giving rise to a strong inference of scienter — that the plaintiff knew or should have known that the defendant knew, or was reckless in not knowing, that there was a material false or misleading statement. On this point, the Court reasoned that because securities plaintiffs must plead with specificity facts giving rise to a strong inference of scienter in order to survive a motion to dismiss, to not extend the statute of limitations to discovery of evidence of scienter would bar claims simply because a defendant was able to conceal its fraudulent intent for more than two years. Finally, the Supreme Court rejected the concept of "inquiry notice," to which some circuits previously subscribed. Inquiry notice provides that the statue of limitations begins to accrue when a securities plaintiff possessed enough information to suggest wrongdoing and indicate to the plaintiff that it should investigate. The Supreme Court found that inquiry notice was inconsistent with the statutory language requiring actual or constructive discovery of the facts giving rise to a securities violation.

Implications and Conclusions

While, prior to Merck & Co., there was a split among the circuits regarding inquiry notice, the Supreme Court's decision on the law itself was not a surprise because the vast majority of circuits had reached this conclusion. However, extending the discovery rule to include facts showing scienter as to the particular defendant is a crystallization of the law that could have a significant impact on accounting firms since accounting firms historically have experienced success with statute of limitations defenses, including at the motion to dismiss stage.

Scienter Pleading Requirements. Under the PSLRA, a securities fraud plaintiff must plead scienter with specificity. Defendants frequently file and prevail on motions to dismiss based on lack of sufficiently pleaded scienter. The Supreme Court decision will better enable plaintiffs to delay the filing of a complaint by claiming that they were unaware of the facts surrounding scienter and, thus, unable to yet plead a sufficient complaint under the PSLRA, all within the statute of limitations.

Discovery of Scienter. A defendant asserting a statute of limitations defense will now have to show that a reasonably diligent plaintiff would have uncovered some evidence of scienter against that defendant to start the statute of limitations. This is a higher hurdle than prior standards, in which the discovery was related to the conduct of the violation rather than the intent and knowledge of the allegedly involved parties. The Supreme Court rejected the argument that actual knowledge of scienter alone would support a statute of limitations dismissal and, therefore, motions to dismiss may be litigated based on facts relating to scienter found in the public record, thus subject to judicial notice. There will likely be many facts that will be considered too preliminary and, thus, tenuous to demonstrate scienter. As an example, the Court agreed that a pharmaceutical company's scientific debates about the potential harm of a product does not give rise to a strong inference of scienter.

No Inquiry Notice. By rejecting inquiry notice, the Supreme Court limited the circumstances in which defendants can assert a statute of limitations defense in cases involving misstatements made less than five years prior to the filing of the litigation. Previously, defendants may have been able to assert the defense in these situations upon a showing that plaintiffs had enough information to begin an investigation, such as evidence of a company's financial distress. This opportunity will no longer be available.

Additional Defendants. Plaintiffs in securities fraud actions may be tempted to use discovery to create scienter allegations against parties that were not previously involved in the litigation. The risk for an accounting firm is that a plaintiff will claim that it had no knowledge or evidence of the accounting firm's scienter until receiving the audit workpapers during discovery in the litigation filed against the accounting firm's corporate client and that the statute of limitations did not start to run until the workpapers were produced. This risk is tempered by the fact that scienter allegations against the original parties will often support sufficient allegations against added parties. In fact, the New England Health Care Pension Fund case cited and ruled upon by the Court in Merck & Co. is precisely such a case. It suggests that allegations of the accounting firm's scienter are connected to those of the corporation's scienter and held that the filing of claims against the company supported dismissal of the claims against the subsequently-added accounting firm.

Learn more about our Professional Liability practice.

Visit us at www.mayerbrown.com.

Copyright 2010. Mayer Brown LLP, Mayer Brown International LLP, Mayer Brown JSM and/or Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. All rights reserved.

Mayer Brown is a global legal services organization comprising legal practices that are separate entities (the Mayer Brown Practices). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; Mayer Brown JSM, a Hong Kong partnership, and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions