## Facts

- In January 2002, Merck & Co., Inc. (Merck) announced plans for an initial public offering (IPO) of its wholly owned subsidiary, Medco Health Solutions, Inc. (Medco), a pharmacy benefits manager.
- Medco used an aggressive revenue-recognition practice that treated customers’ pharmacy co-payments as Medco revenue, even though those co-payments were paid to pharmacies rather than to Medco.
- Merck’s initial disclosures about Medco and the planned IPO did not clearly quantify the amount of co-payment revenue Medco recognized.
- On April 17, 2002, Merck disclosed that Medco recognized customer co-payments as revenue, but did not disclose the total amount recognized under that policy.
- After the April 17 disclosure, Merck’s stock price did not drop; it slightly increased and continued to rise over the next several days.
- On June 21, 2002, *The Wall Street Journal* published an article estimating the dollar amount of co-payments Medco had recognized as revenue.
- Following the article, Merck’s stock price fell materially.
- On July 5, 2002, Merck disclosed the full amount of co-payment revenue that Medco had recognized.
- Merck ultimately cancelled the Medco IPO.
- Union Investments Privatfonds GmbH (Union), as lead plaintiff for a class of Merck shareholders, sued Merck, Medco, and certain Merck officers, alleging (1) securities fraud under § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, (2) materially false or misleading statements/omissions in registration materials in violation of § 11 of the Securities Act of 1933, and (3) control-person liability under § 20(a) of the Exchange Act.
- The District of New Jersey dismissed the complaint under Rule 12(b)(6), and Union appealed.

## Issues

1. Did Merck and Medco make materially false or misleading statements or omissions about Medco’s co-payment revenue-recognition policy (including the failure to disclose the total amount of such revenue) sufficient to state a claim under § 10(b)/Rule 10b-5 and § 11?
2. Were statements suggesting Merck and Medco would pursue “independent” strategies after the IPO materially misleading and actionable under the federal securities laws?
3. If the complaint did not plead a primary securities-law violation, could the § 20(a) control-person claims proceed?

## Decision

- The Third Circuit affirmed the district court’s Rule 12(b)(6) dismissal of all claims.
- The court held the complaint failed to plead an actionable material misstatement or omission regarding Medco’s co-payment revenue-recognition practice when the disclosures were read in context.
- The court also concluded the alleged “post-IPO independence” representations were not pleaded as materially false and actionable statements under the securities laws.
- Because the complaint did not state a primary violation, the derivative § 20(a) control-person claims were properly dismissed as well.

## Legal Principles

- Materiality turns on whether there is a substantial likelihood that a reasonable investor would view the challenged fact as significantly altering the “total mix” of available information.
- A statement or omission is evaluated in context; disclosures in SEC filings and offering materials must be read as a whole rather than as isolated phrases.
- An omission is actionable under § 11 or § 10(b) only if the omitted information is required to be stated or is necessary to make what was said not misleading.
- Under § 10(b) and Rule 10b-5, a plaintiff must plead an actionable misstatement or omission of material fact (and satisfy heightened pleading standards for fraud-based claims); failure to plead a material misstatement or omission defeats the claim.
- General, aspirational, or non-specific statements about corporate plans or future relationships are less likely to be actionable than concrete, verifiable representations.
- Section 20(a) control-person liability is derivative; without a well-pleaded primary violation, a control-person claim cannot stand.

## Conclusion

*In re Merck & Co., Inc. Securities Litigation* held that shareholders challenging Merck’s disclosures about Medco’s co-payment revenue recognition and the planned Medco IPO failed to state federal securities claims because the alleged omissions and statements, viewed in context of the disclosures as a whole, were not adequately pleaded as materially misleading. The Third Circuit therefore affirmed dismissal of the § 10(b)/Rule 10b-5 and § 11 claims, and it also affirmed dismissal of the § 20(a) control-person claims because no primary securities-law violation was pleaded.


In re Merck & Co., Inc. Securities Litigation, 432 F.3d 261 (2005)