The Third Circuit Federal Court of Appeals recently reversed a lower court dismissal of a shareholder class action, finding that the plaintiffs' suit was not barred by the statute of limitations in the absence of "storm warnings of possible fraud."  Alaska Electrical Pension Fund, et al. v. Pharmacia Corp., et al., Nos. 07-4500 and 07-4564 (January 30, 2009).  
The securities class action against Pharmacia Corporation ("Pharmacia"), Pfizer, Inc. (Pfizer") and certain directors and officers of Pharmacia and Pfizer was initiated on April 7, 2003.  The District Court denied defendants' motion to dismiss and granted the plaintiffs' motion for class certification, but shortened the class period by more than one year, finding that investors could not have reasonably relied on defendants' alleged misrepresentations after February 1, 2006, the date the Food and Drug Administration ("FDA") staff published a report on a clinical study of Celebrex, a popular anti-inflammatory medication.  Defendants subsequently moved for summary judgment on statute of limitations grounds, asserting that if reliance was unreasonable after February 1, 2006, the plaintiffs must necessarily have been on inquiry notice of their claims at that time.  Because the first securities class action complaint was filed on April 7, 2003, and the statute of limitations for a  Section 10(b) claim under the Securities Exchange Act of 1934 and SEC Rule 10b-5 is two years, the defendants asserted that the plaintiffs' claims were untimely.
The District Court determined that the plaintiffs were on inquiry notice of possible securities fraud as of February 2001 and granted summary judgment to the defendants. However, by opinion dated January 30, 2009, the United States Court of Appeals for the Third Circuit, relying on a recent decision in In re Merck & Co., Securities Derivative, & ‘ERISA’ Litigation, 543 F. 3d 150 (3d Cir. 2008), reversed the District Court.  The Third Circuit explained that in Merck , the Third Circuit had found that inquiry notice, in securities fraud suits, requires  "storm warnings"  indicating that the defendants had acted with scienter.  Accordingly, the Third Circuit found that in order for investors to be on inquiry notice of section 10(b) claims, there must be some indication that defendants did not, in fact, hold the views expressed.
In support of a finding of inquiry notice in February 2001, the defendants pointed to, among other things, the drop in price of Pharmacia's stock, FDA staff reports, reports prepared by the FDA's Arthritis Committee, and analyst reports discussing the events at the FDA.  However, the Third Circuit found that these facts did not provide "storm warnings of possible fraud" and that the totality of the evidence in the public realm as of February 2001 did not indicate a possibility of fraud or even hint at any malfeasance or intentional improprieties; rather,  the evidence only supported the view that there existed a legitimate dispute over scientific and statistical models.
The Third Circuit concluded that investors are not placed on inquiry notice of fraud when an apparently legitimate scientific dispute arises between the FDA and a pharmaceutical company: "[a] rule that would place investors on inquiry notice of fraud the moment that the FDA questions the seemingly good faith scientific analysis of a pharmaceutical company would encourage putative plaintiffs to file premature securities suits." 
For a full copy of the opinion, please click here.