Federal securities law does not preclude Merck and Schering-Plough investors from bringing individual suits against the drugmakers under state law after opting out of a securities class action settlement, the U.S. Court of Appeals for the Third Circuit ruled Friday.

By a 2-1 margin, the appeals court reversed the order of a federal trial judge who dismissed state-law fraud claims against the drugmakers under the preclusion provision of the Securities Litigation Uniform Standards Act. But SLUSA does not disturb the right to opt out of a class action, and U.S. District Judge Freda Wolfson of the District of New Jersey, who dismissed the 16 plaintiffs' opt-out suits, was wrong to deride their lawsuits as "gamesmanship," the Third Circuit ruled.

The case concerns shareholder litigation against Merck and Schering-Plough over their attempts to conceal unfavorable clinical trial results about effectiveness of two of the drugmakers' blockbuster cholesterol drugs, Vytorin and Zetia. Plaintiffs alleged that the companies postponed release of the reports while it conducted a $4 billion stock offering to the public. When the results for the two drugs became public in 2007, Merck's stock price declined 38% and Schering's fell 52%.

A series of securities class actions followed. In 2013, Merck, which by that time had merged with Schering, settled the litigation for $688 million.

Merck argued before Wolfson that the state-law claims were precluded under SLUSA because the class actions and opt-out suits were "joined, consolidated, or otherwise proceeding as a single action for any purpose."

Wolfson concluded that the plaintiffs' claims were barred under SLUSA because the individual suits and class actions have proceeded as a single action. She inferred that because Congress did not explicitly exempt opt-out suits from SLUSA, it necessarily "envisioned the aggregation of opt-out suits with related class actions" under SLUSA's mass-action provision. She also concluded that SLUSA's legislative history required it to "construe the definition of a 'covered class action' broadly," the appeals court said. Wolfson also drew upon several district court decisions that, "building upon each other, have espoused increasingly capacious interpretations of the mass-action provision," the appeals court said.

On appeal, Judge Cheryl Ann Krause of the U.S. Court of Appeals for the Third Circuit wrote for the court that Merck gave a "strained reading" of the single action requirement that demanded a mere "functional relationship" between two suits. Judge Stephanos Bibas joined Krause in the opinion.

Merck's reading is "an amorphous standard so broad and flexible" that it would "seemingly embrace every suit that happens to share similar substantive allegations," and thus "contravenes both the plain text and underlying constitutional principles," Krause wrote.

Krause wrote that since Congress adopted the Securities Act of 1933, it has embraced a dual system of remedies for aggrieved investors under federal and state law. But Congress enacted SLUSA in 1998 to curtail a shift of securities litigation class actions to state courts. That law still permitted individual plaintiffs or groups of fewer than 50 plaintiffs to enforce any state-law cause of action, but precludes investors from litigating their state-law claims alleging securities fraud through a "covered class action."

Under SLUSA, a covered class action includes lawsuits that are "filed in or pending in the same court"; involve common legal or factual questions; seek damages for more than 50 persons; and "are joined, consolidated, or otherwise proceed as a single action for any purpose."

Merck contended that the "joined, consolidated, or otherwise proceeded as a single action for any purpose" condition applied to the present litigation and interpreted the single action requirement to consist of a "functional relationship" between the suits. But the appeals court called that standard "amorphous" and said it was "so broad and flexible that it would seemingly embrace every suit that happens to share similar substantive allegations." Merck's "strained reading contravenes both the plain text and underlying constitutional principles," Krause wrote. Some coordination is required to constitute a single action and there was no such coordination between the opt-out plaintiffs and the prior class actions, the court said.

Judge Patty Shwartz dissented, saying the opt-out plaintiffs, as members of the class, benefited in numerous pretrial proceedings in the Vytorin and Zetia litigation. Therefore, their opt-out actions functionally proceeded as a single action with the class suits, Shwartz said. Therefore, the opt-out suits were correctly dismissed by Wolfson under SLUSA's preclusion provision.

Merck and attorney Daniel Kramer of Paul, Weiss, Rifkind, Wharton & Garrison in New York, who argued for the drugmaker, did not respond to a request for comment. Daniel Juceam and Theodore Wells Jr. were also part of the Paul Weiss team representing Merck.

Daniel Hume of Kirby McInerney in New York, who argued for the opt-out plaintiffs, did not respond to a request for comment. Hume was also joined by colleagues Karina Kosharskyy, Ira Press and Meghan Summers.