On March 24, 2015, the U.S. Supreme Court issued a unanimous decision in Omnicare, Inc. v. Laborers District Council Const. Industry Pension Fund, and in doing so resolved a circuit split concerning liability under section 11 of the Securities Act of 1933 for statements of opinion made in an issuer’s registration statements. Both the securities plaintiffs and defense bars will likely claim the decision as a “victory.” On one hand, the Court turned back the Sixth Circuit’s attempted expansion of liability under section 11 by reaffirming the subjective falsity requirement in order to state a claim for an untrue statement of fact. On the other hand, the Court arguably created a new basis for opinion liability based on omissions by adopting a “reasonable investor” standard for determining whether an omission of facts supporting or negating a statement of opinion results in section 11 liability.
Background of the Circuit Split
In Omnicare, the Supreme Court addressed a split of authority created when the Sixth Circuit reversed a district court dismissal of the section 11 claims against Omnicare, Inc. section 11 imposes liability on issuers and signers of registration statements that contain either untrue statements or omissions of material fact. 15 U.S.C. § 77k(a). The Second, Third, and Ninth Circuits have previously held that, to state a section 11 claim on the basis of an untrue statement of material fact, the plaintiff must allege that the opinion was both objectively and subjectively false. See Fait v. Regions Financial Corp., 655 F.3d 105 (2d Cir. 2011); In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357 (3d Cir. 1993); Rubke v. Capitol Bancorp Ltd, 551 F.3d 1156 (9th Cir. 2009). This requires a plaintiff to plead facts showing that the issuer’s actual opinion was different from the one expressed in the registration statement, or that it had knowledge of its falsity. These circuits extended the Supreme Court’s ruling in Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1087 (1991), and its requirement of both subjective and objective falsity, to section 11 claims concerning statements of opinion.
The Sixth Circuit broke from this precedent, rejecting the subjective falsity requirement and concluding that Virginia Bankshares did not extend to section 11 claims concerning statements of opinion. Indiana State Dist. Council of Laborers and HOD Carriers Pension and Welfare Fund v. Omnicare, Inc., 719 F.3d 498, 503 (6th Cir. 2013). The Sixth Circuit held that, unlike section 10(b) claims under the Securities Exchange Act of 1934, that “require a plaintiff to prove scienter” as an aspect of fraud, section 11 “provides for strict liability” for registration statements containing untrue statements of material fact. Id. Once the falsity of a statement has been established, a “defendant’s knowledge is not relevant to a strict liability claim.” Id. at 505. The Sixth Circuit criticized its sister courts for their extension of Virginia Bankshares to section 11, concluding that they “read more into Virginia Bankshares than the language of the opinion allows and have stretched to extend this § 14(a) case into a § 11 context.” Id. at 506. The Sixth Circuit reasoned that, because the Court in Virginia Bankshares “assumed knowledge of falsity for the purposes of the discussion,” it therefore treated section 14(a) “as a statute that required scienter.” Id. at 506–7. As a result, the Sixth Circuit concluded that Virginia Bankshares “has very limited application to § 11; a provision which the Court has already held to create strict liability.” Id. at 507. As a result, the Sixth Circuit refused to extend its ruling to impose a “knowledge of falsity” requirement upon section 11 opinion claims, thereby creating a split of authority with the Second, Third, and Ninth Circuits.
Background of the Omnicare Case
Omnicare is the nation’s largest provider of pharmacy services for residents of nursing homes. In a 2005 registration statement filed in conjunction with a public offering of its common stock, Omnicare expressed opinions that its contracts and practices complied with federal and state laws, and that its contracts with pharmaceutical manufacturers were legally and economically valid arrangements. Omnicare, Inc. v. Laborers District Council Const. Industry Pension Fund, — S.Ct. — at *4 (2015). These opinions were, however, accompanied by several caveats. For example, Omnicare mentioned “several state-initiated ‘enforcement actions against pharmaceutical manufacturers’ for offering payments to pharmacies such as Omnicare that dispensed their products.” Id. Omnicare also warned that “the laws relating to that practice might ‘be interpreted in the future in a manner inconsistent with our interpretation and application.’” Id. Finally, Omnicare noted that the federal government had expressed “significant concerns” about the manufacturer rebates, and warned investors that business could suffer if the rebates did not continue. Id.
Respondents were pension funds that purchased Omnicare stock in the 2005 public offering. The funds later brought suit alleging that Omnicare’s statements of opinion regarding legal compliance gave rise to liability under section 11, citing lawsuits later filed by the federal government that suggested Omnicare’s receipt of payment from drug manufacturers was in violation of antikickback laws. According to the amended complaint, given Omnicare’s alleged illegal activities, its statements regarding legal compliance with the law were materially false and misleading and therefore in violation of section 11. Additionally, the complaint alleged that Omnicare omitted material facts that were necessary to make its representations not misleading. For example, the complaint noted that one of Omnicare’s attorneys warned that a specific contract carried a heightened risk under antikickback laws. Id.
The district court granted Omnicare’s motion to dismiss, holding that the funds were required, but failed, to plead knowledge of falsity on the part of Omnicare for both of its section 11 claims. Id. The Sixth Circuit reversed on the basis that the funds needed only to allege that the stated opinion was objectively false.
The Supreme Court granted certiorari “to consider how § 11 pertains to statements of opinion.” Id. at *5. The Court’s analysis, authored by Justice Elena Kagan, is broken into two questions: First, when does a statement of opinion contained in a registration statement amount to “an untrue statement of material fact”? Id. Second, under what circumstances are opinions in registration statements “misleading” due to the omission of the material facts supporting them? Id.
The Court’s Analysis Regarding Express Statements of Opinion
The Court soundly rejected the Sixth Circuit’s interpretation of section 11 with regard to untrue statements of material fact as applying the “wrong standard,” and in effect restated the standard announced in Virginia Bankshares: To properly state a section 11 claim based on a statement of opinion, the plaintiff must demonstrate that the opinion was not genuinely held by the speaker, in addition to merely pleading its objective falsity. Id. While the Sixth Circuit “held, and the Funds now urge that a statement of opinion that is ultimately found incorrect—even if believed at the time made—may count as an ‘untrue statement of material fact,’” the Court dispatched this notion, stating that the Sixth Circuit’s holding “wrongly conflate[d] facts and opinions.” Id. The Court went on: Whereas a statement of fact “expresses certainty about a thing,” a statement of opinion does not and, as such, Congress “incorporated just that distinction in § 11’s first part by exposing issuers to liability not for ‘untrue statement[s]’ full stop…but only for ‘untrue statement[s] of…fact.’” (emphasis in original). Id. The Court alluded to several hypotheticals and observed how the words “I believe” or “I think” transform a statement of fact into a less-than-certain statement of opinion. Id. at *6. These words admit the possibility of error “precluding liability for an untrue statement of fact.” Id. This remains the case if the opinion concerns issues of legal compliance:
If, for example, [a CEO] said, ‘I believe our marketing practices are lawful,’ and actually did think that, she could not be liable for a false statement of fact—even if she afterward discovered a longtime violation of the law. Once again, the statement would have been true, because all she expressed was a view, not a certainty, about legal compliance.
Though it rejected the Sixth Circuit’s approach, the Court noted that its holding leaves open the possibility of section 11 false-statement liability for expressions of opinion because “every such statement explicitly affirms one fact: that the speaker actually holds the stated belief.” Id. If it can be shown that the speaker in fact holds a belief different than the one expressed, the speaker would still remain subject to liability under section 11’s first prong. Id. Additionally, some statements that begin with “opinion words” (e.g., “I believe”) contain embedded statements of fact that may be read to affirm not only the speaker’s state of mind, but also that underlying fact. Id. These caveats, however, did not apply to Omnicare’s statements of opinion. Id. The stated opinions contained no embedded facts and respondents did not contest that Omnicare genuinely held the opinion. Id. As a result, the first prong of section 11 did not apply to Omnicare’s statements of opinion and the Court vacated the Sixth Circuit’s opinion in that respect.
Analysis of Omissions of Fact in Connection with Statements of Opinion
Although the Court turned back the Sixth Circuit’s attempted expansion of liability under section 11’s false-statement provision for opinions, it introduced a potentially new theory of omissions liability where an issuer fails to disclose material facts necessary to make its opinions not misleading. Specifically, the Court held that if a registration statement omits material facts about an “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,” there is liability under section 11’s omissions provision. Id. Omnicare argued that no reasonable investor could understand a pure statement of opinion to convey anything but the speaker’s own mindset; however, this argument went too far in the Court’s view. Id. at *8. The Court held that a reasonable investor, depending on the circumstances, may “understand an opinion statement to convey facts about how the speaker has formed the opinion…” Id. The reasonable investor “expects not just that the issuer believes the opinion (however irrationally), but that it fairly aligns with the information in the issuer’s possession at the time.” Id.
To highlight this concept, the Court offered the following hypothetical statement of opinion regarding legal compliance: “We believe our conduct is lawful.” Id. If an issuer makes such a statement without consulting with a lawyer or other meaningful inquiry, it could be “misleadingly incomplete.” Id. Further, if an issuer were to state this opinion “in the face of its lawyer’s contrary advice, or with knowledge that the Federal Government was taking the opposite view,” this too gives rise to a potential section 11 claim based on an omissions theory. Id.
The Court was careful to mention, however, that an opinion statement is not necessarily misleading simply because the issuer knows and does not disclose every fact “cutting the other way,” as reasonable investors acknowledge the need to weigh competing facts. Id. Again returning to a hypothetical opinion regarding legal compliance, the court noted that an issuer need not disclose, for instance, that a “single junior attorney expressed doubts about a practice’s legality, when six of his more senior colleagues gave a stamp of approval.” Id. Such an omission is not misleading even if the junior attorney is ultimately correct in his assessment. Id. The determination of whether an omission renders an opinion misleading “always depends on the context,” as a reasonable investor “understands [a] statement of opinion in its full context” with section 11 liability attaching only when the omission of material facts cannot be squared with such a fair reading. Id. at *9.
In their complaint, the funds alleged that Omnicare received attorney advice contrary to their stated opinion on their legal compliance associated with particular contracts, including the payments from pharmaceutical companies that formed the basis for Omnicare’s alleged culpability under antikickback laws. The Court therefore remanded the case for the lower court to determine whether (1) the excluded fact would have been “material” to a reasonable investor, and (2) whether, in light of the overall context surrounding Omnicare’s statement of opinion, “the excluded fact shows that Omnicare lacked the basis for making those statements that a reasonable investor would expect.” Id. at *12.
Practical Implications and Conclusion
In a concurrence, Justice Antonin Scalia criticized the majority’s application of an unpredictable “reasonableness” standard for section 11 omissions liability with regard to the inferences an investor can draw from an opinion in a registration statement. Justice Scalia argued that the reasonable inferences to be drawn from a statement of opinion are “nothing more” than (1) a genuine belief in the opinion, (2) that the speaker believes his basis for the opinion is sufficient, and (3) that he is not certain in his result. Id. at *16. He then argued that the majority’s “expansive application of § 11’s omissions clause” to statements of opinion will result in a “far broader” field of actionable misrepresentations and will result in “roundabout attacks” on expressions of opinion. Id. at *13, *15. He noted that litigants under this standard will always be able to charge that an ultimately incorrect belief rested on “objectively inadequate” investigations or diligence, even if the opinion rested on an investigation the corporation thought was truly adequate. Id. at 15.
It should also be noted that the Court’s opinion is limited to section 11 only, a statute limited to material misstatements and omissions in registration statements or other offering documents. There are several vital differences between section 11 and the more developed body of law governing section 10(b) liability, most important of which is the fact that section 11 plaintiffs do not have to allege scienter. Additionally, opinions contained in registration statements that are forward-looking in nature, unlike those in Omnicare, are protected by statutory or court-developed safe harbors. See, e.g., 15 U.S.C. § 77z-2(c)(1).
The Court ultimately provided clarity with regard to express statements of opinion, yet muddied the waters on the standard for admissions liability. While plaintiffs can claim victory in the Court’s willingness to approve liability for unreasonably omitted material facts, section 11 defendants can confide in the Court’s resounding rejection of the Sixth Circuit’s expansive objective falsity standard for untrue statements of material fact. The Court’s middle-ground approach ensured that there was no absolute “winner” in the outcome of Omnicare.