The 3rd U.S. Circuit Court of Appeals’ recent decisions in In re Merck & Co. Inc. Securities, Derivative & ERISA Litigation and Alaska Electrical Pension Fund v. Pharmacia Corp. , illustrate an unintended consequence of the Private Securities Litigation Reform Act’s, or PSLRA, heightened pleading requirements: an increase in the defendant’s burden to show that a plaintiff’s federal securities fraud claim is time-barred under the “inquiry notice” standard. Because the PSLRA requires that a plaintiff plead her claims with particularity, the Merck and Pharmacia decisions hold that a plaintiff is not on inquiry notice until she is able, in the exercise of reasonable diligence, to file an adequately pleaded securities claim under the PSLRA.

The Inquiry Notice Standard Before Merck and Pharmacia

Under the PSLRA, a plaintiff must file a claim for securities fraud “not later than the earlier of (a) 2 years after the discovery of the facts constituting the violation; or (b) 5 years after such violation.” To determine whether the two-year limitations period applies to a particular claim, all U.S. circuit courts of appeals apply an “inquiry notice” standard, though they have adopted varying interpretations of this requirement. The inquiry notice standard discourages investors from opportunistically sitting on their rights in order to wait and see what ultimately happens to the stock price. Without an inquiry notice requirement, investors could hedge their bets by stalling and taking their profits if the price rebounds or suing for damages if the price stays low.

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