The Supreme Court, in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (Mar. 24, 2015), recently addressed the scope of potential liability for expressions of opinions under section 11 of the Securities Act of 1933 and, in doing so, cast a considerable cloud of uncertainty over the advisability of including unnecessary opinion statements in registration filings going forward. While the Court adopted a narrow view of when an opinion statement violates section 11’s proscription against misrepresentations of material facts, the Omnicare decision developed a more expansive view of when statements of opinion may constitute omissions of material facts. The Omnicare decision, in focusing on the reasonable understanding of the investor, rather than the subjective belief of the issuer, creates an ambiguous and potentially shifting landscape through which issuers must navigate when filing registration statements with the Securities and Exchange Commission. This uncertainty will require increased restraint when making opinion statements and heightened attention to any proffered bases for such opinions.
The Factual and Legal Background
Section 11 imposes strict liability on sellers of securities if any part of the registration statement contains a material misstatement or omission of fact. 15 U.S.C. §77k(a). Prior to Omnicare, the Supreme Court had not yet interpreted the extent to which section 11’s strict liability regime extends to the contents of opinion statements.
Omnicare is a provider of pharmacy-related services for nursing homes. Purchasers of its securities asserted section 11 liability against Omnicare based on two alleged material misstatements or omissions: The first related to the company’s belief that its contractual arrangements were in compliance with federal and state laws, and the second involved the company’s professed belief that its contracts with pharmaceutical manufacturers were “legally and economically valid arrangements that bring value to the healthcare system and the patients that we serve.” Although the registration statement contained several caveats, these statements of belief were challenged based on allegations in unrelated lawsuits that Omnicare’s contracts with third-party medical service companies were illegal kickback schemes. The section 11 plaintiffs’ allegations centered on a warning from one of the company’s attorneys indicating that one of the contracts “carrie[d] a heightened risk” of liability; thus, the plaintiffs concluded that the company did not possess reasonable grounds to believe that its expressed opinions were truthful and complete.
The Omnicare district court initially dismissed the section 11 claim for failure to allege “subjective falsity”—that Omnicare did not actually hold the opinions expressed in the registration statement—which it deemed a necessary element of a section 11 claim. This decision was reversed on appeal in a groundbreaking decision by the Sixth Circuit that equated statements of opinion with statements of fact and held Omnicare strictly liable for any materially false statement. The Sixth Circuit decision explicitly eliminated the need to look to the issuer’s subjective belief and held that any statement, “[n]o matter the framing,” will incur liability for the issuer if proven both material and false. The Supreme Court granted certiorari to address
[w]hether, for purposes of a claim under Section 11 of the Securities Act of 1993, a plaintiff may plead that a statement of opinion was “untrue” merely by alleging that the opinion itself was objectively wrong, as the Sixth Circuit has concluded, or must the plaintiff also allege that the statement was subjectively false—requiring allegations that the speaker’s actual opinion was different from the one expressed—as the Second, Third, and Ninth Circuits have held.
Omnicare’s position on appeal to the Supreme Court was that a statement of opinion is actionable only when the belief was not genuinely held by the issuer. The plaintiffs, likely anticipating a retreat from the Sixth Circuit’s expansive holding, put forth three situations in which an expression of opinion should be actionable under section 11: (1) where the opinion was not genuinely held, (2) where the opinion was misleading as to the subject matter of an opinion (for example, where the opinion assumes an underlying fact that is not true), and (3) where the opinion statement implies that the issuer had a reasonable basis for the opinion.
The Supreme Court’s Decision
The Supreme Court promptly dismissed the Sixth Circuit’s notion that section 11 liability can be established where a statement of opinion turns out to be “objectively false”—a position the Court held “wrongly conflate[d] facts and opinions.” In rejecting the “opinion as fact” construction adopted by the Sixth Circuit, the Supreme Court delineated two exceptions to the rule that opinion statements do not subject an issuer to section 11 liability. First, the Court reiterated the uncontested notion that there may be section 11 liability for a statement of opinion when the issuer does not actually hold the professed belief. Second, the majority, citing Justice Scalia’s concurrence in Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1109–10 (1991), held that opinion statements sometimes include inferences about supporting facts, and where those supporting facts are untrue (and material), section 11 liability may accrue.
In considering whether Omnicare’s opinion statements could trigger section 11 liability, the Court identified two types of statements that can exist within opinion statements. First, the Court found that every opinion statement necessarily implies the factual statement that the issuer actually holds the stated opinion. Second, some opinion statements contain “embedded” statements of fact and these embedded statements can, if misleading, violate section 11. As an example of an explicit embedded factual statement, the Court suggested that the statement “I believe our TVs have the highest resolution available because we use a patented technology to which our competitors do not have access” includes the embedded factual statement that the speaker uses a patented technology. However, because the statements at issue in Omnicare had already been determined to be “pure statements of opinion,” the Court dismissed the notion that either of the statements at issue contained any affirmative misstatements of material fact, whether explicit or embedded.
Turning next to the issue of whether Omnicare’s affirmative statements of opinion could implicate section 11 liability as omissions, the Court plowed new jurisprudential ground. Ignoring Justice Thomas’s admonition to avoid addressing issues not raised by the parties below, the Court framed the issue thusly: “We therefore must consider when, if ever, the omission of a legal fact can make a statement of opinion like Omnicare’s, even if literally accurate, misleading to an ordinary investor.” The Court then described two possible instances in which even an accurate statement of opinion could lead to omission liability. First, the issuer will be liable if the issuer does not actually hold the stated belief. Second, a reasonable investor may be misled where the expression of opinion “omits material facts about the issuer’s inquiry into or knowledge concerning a statement of opinion, and if those facts conflict with what a reasonable investor would take from the statement itself.”
The Court’s declaration that even a genuinely held opinion could nevertheless subject an issuer to liability in certain circumstances has the potential to expand liability significantly. While the Court’s holding may appear broad, a careful reading of the full opinion leads to the conclusion that omission liability is best seen as accreting to opinion statements when irrationally made. For example, where an opinion is made in the face of known, persuasive contrary evidence or is made with no inquiry into the facts where such an inquiry would be expected, those opinion statements could lead to liability. The Court noted that even an issuer that stated that it believed its conduct was lawful could be liable if the issuer never consulted an attorney or knew the government was taking an opposing view. Going so far as to state that if the decision “chills misleading opinions, that is all to the good,” the Omnicare decision forces issuers to provide some context behind the formation of the opinion.
The Court noted that claims of omission liability under section 11 for opinion statements require more than mere conclusory allegations and must include specific allegations of (1) an omitted fact (2) that would have been material to a reasonable investor (3) that rendered the opinion misleading because the excluded fact shows the lack of basis for the opinion. The majority neatly summarized the issuer’s duty when making opinion statements as “only [needing to] divulge an opinion’s basis, or else make clear the real tentativeness of its belief.” Conversely, a plaintiff, under Omnicare, must do more than merely assert that the opinion at issue was incorrect or that the issuer failed to reveal the basis for the opinion; rather, the plaintiff must plead specific facts about the issuer’s lack of inquiry or possession of contrary facts that would make the opinion statement misleading (and the omitted fact material).
Justice Scalia, concurring in part and concurring in the judgment, derided the majority opinion for “invit[ing] roundabout attacks on expressions of opinion” by drastically expanding the situations in which an opinion is held to infer statements regarding “collateral facts” and thus increasing potential liability. In Justice Scalia’s view, an opinion statement inherently disclaims the expression of facts, whereas the majority opinion flips that notion on its head and reads an opinion as expressing, in certain circumstances, an undisclosed basis in fact. A better approach, Justice Scalia advocated, would be to focus on whether the issuer had a reasonable basis for expressing the opinion, rather than inquiring into what a reasonable listener would deem a necessary basis for expressing the opinion.
The Omnicare decision was not a clear-cut victory for either the plaintiffs’ or defendants’ bar. While the majority failed to accede to Omnicare’s position that only opinions that were not actually held can lead to liability, it also declined to adopt the Sixth Circuit’s much more expansive view of when opinion statements can be misleading. Despite the limiting language used by the Court, the Omnicare decision will nevertheless likely have far-reaching effects on opinions expressed in registration statements going forward and undoubtedly will generate considerable discussion in cases to come. Notably, the decision fails to elucidate a bright-line standard for when opinion statements implicitly include a factual statement, and its focus on what a reasonable investor would expect further devolves the inquiry into amorphousness. Thus, where opinions are expressed in registration statements, issuers should be careful to outline the basis for those opinions. Because section 11 liability is strict, the issuer should give close and careful scrutiny to the necessity and substance of any opinions included in registration statements going forward.
Keywords: litigation, professional services liability, Securities Act, section 11, securities, opinion statements
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