ENHANCE: Legacy Schering-Plough ERISA Fiduciaries Lose Another Round

I've been busy on other (non-blogging) matters, but this deserves mention -- even late at night. I won't hold it until morning. Just yesterday, on June 29, 2010, Judge Cavanaugh handed the legal team at New Merck yet another defeat -- related to the various would-be federal class actions that arose from the ENHANCE delayed-disclosure debacle. And -- as irony would have it -- the able judge relied on precedents established in the Merck Vioxx securities and ERISA cases.

You'll recall that this same judge ruled against Ex-CEO Fred Hassan and crew, and current CEO Dick Clark and crew twice last week, in an analogous New Merck ERISA setting (called Cobb v. Merck), and in a Schering-Plough securities suit (called Polk v. Schering-Plough). Yesterday, in Gradone, Judge Cavanaugh has now held that the plaintiffs in the legacy Schering-Plough ERISA plans have mustered enough evidence to survive a motion to dismiss.

In ERISA cases, that is a pretty significant event, given that -- in general -- ERISA plan fiduciaries enjoy the benefit of a presumption that they acted appropriately. That is, an "ordinary" stock price decline will be not be actionable -- as a breach of ERISA fiduciary duties. Judge Cavanaugh ruled that these ERISA plan investors have overcome that presumption -- and he's done so by citing as authority Judge Chelser's rulings in the Merck Vioxx ERISA litigation -- from the full 17 page opinion (a PDF file), then:

. . . .Plaintiffs have alleged “dire circumstances” sufficient to overcome the presumption of prudence at this stage. In particular, Plaintiffs have alleged: precipitous decline in the value of Company stock, Defendants’ knowledge of the anticipated harm to the company, as well as the conflicted status of fiduciaries. See Moench, 62 F.3d at 572; In re Merck & Co., Inc. Sec., Derivative & ERISA Litig., 2009 U.S. Dist. LEXIS 22923, at *3 (D.N.J. Mar. 23, 2009) (J. Chesler).

As Judge Chesler explained in a case analogous to the one before this Court,

[t]hough it is clear from this vantage point that Merck survived the withdrawal of Vioxx from the market, the allegations in the Complaint depict a company facing a dire situation. Merck stock plunged by almost 40% following the withdrawal of Vioxx. Billions of dollars in Merck’s market value evaporated. The precipitous decline in the company’s stock price occurred in the midst of controversy regarding the cardiovascular risks of the drug and Merck’s alleged misrepresentations about its safety. The company faced significant exposure to monetary damages claimed in product liability suits. . . . Plaintiffs allege that various studies conducted by Merck over the years it sold Vioxx reinforced the company’s concerns with the cardiovascular hazards of Vioxx. Merck's marketing of the drug attracted the attention of the FDA. . . . Yet, the Complaint alleges, all the while Merck continued to promote Vioxx as safe, sales increased, and the company’s stock price rose as a result. When the product was ultimately pulled from the market, the effect on Merck’s stock was severe.

In re Merck & Co., 2009 U.S. Dist. LEXIS 22923, at *3.

Similarly, here, although in hindsight it appears that Schering stock has recovered, the Complaint sufficiently alleges the existence of a dire situation during the relevant period. Plaintiffs’ Amended Complaint contains allegations that (1) study results regarding the efficacy of VYTORIN would greatly diminish both future VYTORIN sales and Schering-Plough’s earnings, thereby driving down the price of Schering-Plough’s Stock; (2) “[t]he $17.14 stock price drop between [the beginning and end of the Class Period] equaled a 55.29% drop in Schering-Plough’s capitalization, and a corresponding drop in the value of the Schering-Plough shares held in the accounts of the Plans’ participants and beneficiaries”; (3) Schering faced numerous governmental investigations regarding the disclosure of the ENHANCE study results, including the U.S. Justice Department, a group of 35 attorneys general, the House Energy and Commerce Committee, and the Food and Drug Administration; (4) Schering faced multi-million dollar product liability claims stemming from VYTORIN’s marketing. . . . In short, Plaintiffs assert that VYTORIN (the key product in Schering’s portfolio), was critical to the company’s continuing success -- and the above developments could potentially have a severe impact on the product’s sales.

The facts, as alleged by Plaintiff, are sufficient at this stage to meet the joint requirements of FED. R. CIV. P. 12(b)(6), Moench and Edgar. . . .

Once again, Ex-CEO Fred Hassan is named individually in this Gradone ERISA suit -- to be held personally responsible, by the plaintiffs, should they prevail, as would be Hans Becherer, the now-departed head of the Schering Board's Compensation Committee.

New Merck should really be thinking about settling all these cases -- there is a clear message in these -- not one, not two, but three rulings -- in seven days' time.