March 25, 2015
On March 24, 2015, the Supreme Court of the United States issued its long-awaited decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 575 U.S. ___, 2015 WL 1291916 (U.S. Mar. 24, 2015). In an opinion delivered by Justice Kagan, in which six other justices joined, the Court resolved a circuit split regarding the scope of liability under Section 11 of the Securities Act of 1933 for false statements of opinion. Section 11 provides purchasers of securities a right of action against the issuer and others where the registration statement "contained an untrue statement of material fact" or "omitted to state a material fact . . . necessary to make the statements therein not misleading." 15 U.S.C. § 77k(a). The meaning of this language as applied to statements of opinion–or as the Court put it, "what the [registration] statement says and . . . what it leaves out"–is at the heart of the Omnicare analysis. Slip op. at 2.
The Supreme Court ultimately addressed two issues: (1) "when an opinion itself constitutes a factual misstatement," and (2) "when an opinion may be rendered misleading by the omission of discrete factual representations." Id. at 5. With respect to the first issue, the Court held that statements of opinion are not actionable under Section 11 unless the speaker either subjectively believes the opinion to be untrue or the statement of opinion includes a statement regarding an underlying fact that is untrue. Id. at 8-9. A statement of a genuinely held opinion, regardless of whether it can ultimately be proved wrong, is not an "untrue statement of material fact" under Section 11. Section 11 is not, as the Court put it, "an invitation to Monday morning quarterback an issuer’s opinions." Id. at 9.
However, the Court went on to consider whether the omission of a fact could make a statement of opinion–even where the opinion itself does not give rise to liability–misleading to a reasonable investor. The Court held that a statement of opinion is misleading–and actionable under Section 11–when the "registration statement omits material facts about the issuer’s inquiry into or knowledge" about such a statement of opinion and those facts "conflict with what a reasonable investor would take from the statement itself." Id. at 12. While this standard may be easier said than applied, the Court cautioned that the plaintiffs’ burden for pleading a claim under a Section 11 omission theory remains high.
Factual Background and Procedural History
This case arises out of two statements of opinion contained in a registration statement filed by Omnicare–a provider of pharmacy services to nursing home residents–in connection with a public offering of its common stock. First, Omnicare stated, "We believe our contract arrangements with other healthcare providers, our pharmaceutical suppliers and our pharmacy practices are in compliance with applicable federal and state laws." Id. at 3. Second, Omnicare stated, "We believe that our contracts with pharmaceutical manufacturers are legally and economically valid arrangements that bring value to the healthcare system and the patients that we serve." Id. Both statements were accompanied by cautionary language that governmental entities, both through words and legal action, had taken issue with certain of these practices, and that the legal landscape could therefore change in the future. See id.
Plaintiffs brought suit alleging that Omnicare’s statements were both false in and of themselves and false by way of omission because lawsuits by the Federal Government suggested that Omnicare had violated anti-kickback laws. See id. The District Court granted Omnicare’s motion to dismiss, concluding that Omnicare’s statements were statements of opinion that would only give rise to liability if Omnicare knew that its statements were untrue (which plaintiffs did not allege). See id. at 4. The Court of Appeals for the Sixth Circuit reversed, holding that plaintiffs need only allege that Omnicare’s statements were "objectively false"–and not that Omnicare actually believed that its statements were false. See id. The Sixth Circuit’s holding was in conflict with decisions in other circuits, and the Supreme Court granted certiorari.
The Supreme Court’s Opinion
A. When an Opinion Itself Constitutes a Factual Misstatement
The Court’s analysis focused on the distinction between "fact" and "opinion," as Section 11 holds issuers liable for "an untrue statement of material fact." The Court reasoned that "a statement of fact (‘the coffee is hot’) expresses certainty about a thing, whereas a statement of opinion (‘I think the coffee is hot’) does not." Id. at 6-7 (an opinion expresses only "a view, not a certainty"). Because statements of opinion thus do not purport to be factual statements, the Court held that Section 11 liability does not attach to "a sincere statement of pure opinion," as Section 11, "limited as it is to factual statements, does not allow investors to second-guess inherently subjective and uncertain assessments." Id. at 9.
The Court held that statements of opinion can give rise to Section 11 liability in very limited circumstances. First, if the one making the statement of opinion does not subjectively believe in the truth of the opinion, then the maker of the statement has violated Section 11. Id. at 8. This is so, the Court reasoned, because all statements of opinion "explicitly affirm one fact: that the speaker actually holds the stated belief." Id. at 7. Second, where a statement of opinion incorporates an underlying fact, Section 11 liability attaches when the underlying fact is untrue. Id. at 9. The Court used the following hypothetical statement to illustrate its holding: "I believe our TVs have the highest resolution available because we use a patented technology to which our competitors do not have access." If the company did not in fact use a patented technology, then this statement, even though couched as an opinion, would give rise to Section 11 liability. Id. at 8-9.
B. When an Omission of Fact Makes a Statement of Opinion Misleading
Though the Court found the fund plaintiffs failed to allege actionable statements of opinion, the inquiry did not end there. While Justice Thomas thought the issue not yet properly before it, the Court considered whether Plaintiffs’ alleged claim of omission liability–that Omnicare "’omitted to state facts necessary’" to make the legal compliance opinion "’not misleading’"–was cognizable under Section 11. Id. at 10 (quoting complaint). Omnicare took the position that an opinion, if sincerely held, could never mislead an ordinary investor by omission of related facts. Id. The Court recognized that "a statement of opinion is not misleading just because external facts show the opinion to be incorrect. Reasonable investors do not understand such statements as guarantees, and [Section] 11’s omissions clause therefore does not treat them that way." Id. at 11. Neither does Section 11 treat an opinion statement as misleading "when an issuer knows but fails to disclose, some fact cutting the other way." Id. at 13. "A reasonable investor," the Court reasoned, "does not expect that every fact known to an issuer supports its opinion statement." Id. at 13.
However, "if a registration statement 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, then [Section] 11’s omissions clause creates liability." Id. at 12. The Court reasoned that depending on the circumstances, a reasonable investor could "understand an opinion statement to convey facts about how the speaker has formed the opinion." Id. at 11. Whether an omission of facts renders an opinion statement misleading will always depend on the context. As the Court noted,
Investors do not, and are right not to, expect opinions contained in those statements to reflect baseless, off-the-cuff judgments, of the kind that an individual might communicate in daily life. At the same time, an investor reads each statement within such a document, whether of fact or of opinion, in light of all its surrounding text, including hedges, disclaimers, and apparently conflicting information. And the investor takes into account the customs and practices of the relevant industry. So an omission that renders misleading a statement of opinion when viewed in a vacuum may not do so once that statement is considered, as is appropriate, in a broader frame. The reasonable investor understands a statement of opinion in its full context, and §11 creates liability only for the omission of material facts that cannot be squared with such a fair reading.
Id. at 14. Thus, "to avoid exposure for omissions under [Section] 11," the Court summarized, "an issuer need only divulge an opinion’s basis, or else make clear the real tentativeness of its belief." Id. at 19.
While a seemingly amorphous concept, the Court went to some lengths to emphasize that an investor must plead more than conclusory assertions to adequately state such an omission claim. Citing its opinion in Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009), the Court explained that an "investor must identify particular (and material) facts going to the basis for the issuer’s opinion–facts about the inquiry the issuer did or did not conduct or the knowledge it did or did not have–whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context." Id. at 18. As the Court put it, "[t]hat is no small task for an investor." Id.
The Omnicare case and its impact will undoubtedly continue to be closely followed by plaintiff and defense counsel alike. Having provided guidance on an omission theory of liability, the Court remanded the case for further proceedings on plaintiffs’ omission claim. Id. at 19. How the lower court applies the standard to plaintiffs’ allegations and whether it permits plaintiffs to replead in light of the decision could be telling with respect to the viability of Section 11 omission claims. As with most such decisions, the proof is in the pudding: Omnicare’s impact on Section 11 litigation will be borne out in the coming months and years as lower courts grapple with the decision.
And while Omnicare‘s relevance beyond Section 11 will no doubt be debated, the opinion’s reach, particularly to federal securities law claims that require scienter, is questionable. A more subjective standard, such as that set forth in Justice Scalia’s concurrence, likely remains more fitting for scienter-based claims. Concurring in part and concurring in the judgment, Justice Scalia wrote that the majority extended Section 11 liability for an omission too far. See slip op. at 1. In his view, the speaker’s belief in the reasonableness of his statement of opinion (in light of what the speaker–not the recipient of the opinion–believes was a reasonable investigation into the basis for the opinion) should control when determining whether a speaker should be liable for an omission under Section 11. See id. at 7. But regardless of how the omission standard is applied to federal securities law claims requiring scienter, plaintiffs still face a high pleading burden in such cases.
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