Merck Loses Challenge to Company Stock Fiduciary Claims

In his opinion, U.S. District Judge Stanley R. Chesler said the facts alleged by retirement plan participants overcome the presumption of prudence allowed for plans that must invest in employer stock according to plan terms, and permit a finding that the fiduciaries abused their discretion by continuing to invest in company stock.

Chesler pointed to a previous ruling that determined a “plaintiff must show that the ERISA fiduciary could not have believed reasonably that continued adherence to the ESOP’s direction was in keeping with the settlor’s expectations of how a prudent trustee would operate.” To meet this standard on the pleadings, Chesler said the facts alleged must depict the kind of “dire situation” at the subject company which would require plan fiduciaries to disobey plan terms to invest in company stock so that they might satisfy their prudent investment obligation to plan participants.

Facts that could indicate that plan fiduciaries abused their discretion by continuing to invest in company stock include, as in the prior case, a “precipitous decline in the price of [the employer’s] stock,” together with allegations that plan fiduciaries knew of the stock’s “impending collapse.” Chesler said a company did not have to be on the brink of bankruptcy in order for fiduciaries to go against the terms of the plan.

According to the opinion, Merck stock plunged 27% on September 30, 2004, the day Merck withdrew its “blockbuster” arthritis drug Vioxx from the market. The stock continued to fall, and by November 2004, the stock had fallen about 13% more. Vioxx was the biggest drug, measured by sales, ever withdrawn from the market at that time, and the stock plunge erased about $26.8 billion in market value for Merck.

Chesler said these facts, taken as true, demonstrate a “crisis situation” faced by Merck as a result of Vioxx’s failure and an ongoing internal discussion at Merck, combined with attention from the FDA and mounting data, that could reasonably support a conclusion that the fiduciaries knew about the potential for a significant loss of value in Merck stock should the company’s safety concerns with Vioxx materialize into an adverse financial event related to the marketability of Vioxx.

Chesler also declined to dismiss the employees’ claim that the Merck defendants breached their ERISA duties by withholding the truth about Vioxx’s risks. He rejected Merck’s argument that this claim could not go forward because the employees did not plead “loss causation and damages.”

The court said: “An ERISA communications claim which involves allegedly deliberate efforts to mislead investors is not subject to the same lack of loss causation defect inherent in a pure non-disclosure claim,” and found that the defendants allegedly made affirmative misrepresentations about the safety profile of Vioxx with the intent of keeping the sales high, which in turn overstated the strength of Merck and increased its market value.

The case is In re Merck & Co. Securities, Derivative & “ERISA” Litigation, D.N.J., No. MDL 1658 (SRC).