In a March 24, 2015 opinion in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund (here), the U.S. Supreme Court set aside the Sixth Circuit’s ruling that allegations of “objective falsity” were sufficient to make a statement of opinion in securities offering documents actionable. The Supreme Court remanded the case to the lower court to consider whether the plaintiffs had sufficiently alleged that facts had been omitted from the opinion so as to make the statement of opinion misleading, in light of the entire context. The Court’s decision is briefly summarized in the accompanying guest post from the Skadden law firm.
The Omnicare case involves the standard for liability under Section 11 for statements of opinion in a company’s offering documents. The Supreme Court took up the case to determine whether or not it is sufficient to survive a dismissal motion for a plaintiff in a Section 11 case to allege that a statement of opinion was objectively false, or whether the plaintiff must also allege that the statement was subjectively false – that is, that the defendant did not believe the opinion at the time the statement was made. The Supreme Court’s granted the writ of certiorari in the Omnicare case because of a a split in the circuits between those (such as the Second and Ninth Circuits) holding that in a Section 11 case allegations of knowledge of falsity are required; and those (such as the Sixth Circuit, in the Omnicare case) holding that allegations of knowledge of falsity are not required.
In the Omnicare case, the plaintiff shareholders alleged that two statements in its registration statement filed in connection with its $765 million securities offering in December 2005 had been misleading – first, the statement by the company that “we believe” that the company’s contractual arrangements with various third parties are “in compliance with applicable federal and state law,” and second, the statement by the company that “we believe” that its contracts with pharmaceutical manufacturers “are legally and economically valid arrangements that bring value to the healthcare system.” The plaintiffs alleged, in reliance on separate enforcement actions the federal government filed against Omnicare alleging that the company had paid kickbacks, that these two statements were false and misleading.
The defendants moved to dismiss the complaint and the district court granted the motion to dismiss. However, the Sixth Circuit reversed the district court, holding that the shareholders complaint alleged that the two statements were “objectively false,” and further, that the defendants did not need to allege that anyone at Omnicare disbelieved the statements.
In its March 24, 2015 opinion, the Court vacated the Sixth Circuit’s opinion and remanded the case to the Sixth Circuit for further proceedings. The Court’s opinion was written by Justice Elena Kagan and in which all nine justices joined in the court’s judgment – although Justices Scalia and Thomas wrote concurring opinions voicing their separate concerns with aspects of the majority opinion.
Justice Kagan’s opinion divided the consideration of the case into two parts, based on two parts of Section 11, because she said, the two parts raise different issues. The first part of her analysis related to the portion of Section 11 making companies and corporate officials liable for “untrue statement[s] of . . . material fact” and the second part makes the same defendants liable if they “omitted to state a material fact . . . necessary to make the statements [in its registration filing] not misleading.”
Omnicare had tried to argue that a defendant can never be liable for a mere opinion. Justice Kagan rejected this argument, saying that “as even Omnicare acknowledges, every such statement explicitly affirms one fact: that the speaker actually holds the stated belief.”If the speaker did not hold the belief, then he or she can be held liable.
Moreover, she added, if the statement of opinion includes a “supporting fact” — such as the statement about patented technology in this statement of opinion: “I believe our TVs have the highest resolution available because we use a patented technology to which our competitors do not have access” – the speaker can not only be held liable under the false statement portion of the Section 11 if the “speaker did not hold the belief she professed” but also “if the supporting fact she supplied were untrue.”
The plaintiffs in this case, she noted, cannot avail itself of either of these two types of false statement liability, because the statements on which the plaintiffs rely are “pure statements of opinion.” Basically, Justice Kagan said, the statements on which plaintiffs rely amounted to the company’s saying “we believe we are obeying the law.” Plaintiffs argue that these statements turned out to be untrue because the company was paying kickbacks. But the mere fact that statements turned out to be untrue cannot serve as the basis of liability because “a sincere statement of pure opinion is not an ‘untrue statement of material fact,’ regardless whether an investor can ultimately prove the belief wrong.” Contrary to the plaintiffs’ argument and the Sixth Circuit’s opinion, Section 11’s false statement provision is not “an invitation to Monday morning quarterback an issuer’s opinions.”
Justice Kagan then went on to analyze the plaintiffs’ claims under Section 11’s omissions provision. The question, she said is, “when, if ever, the omission of a fact can make a statement of opinion like Omnicare’s, even if literally accurate, misleading to an ordinary investor.” In reaching the conclusion that a statement of opinion might under some circumstances support an omission claim, she said that “a reasonable investor may, depending on the circumstances, understand an opinion statement to convey facts about how the speaker has formed the opinion.” If, she said, “the real facts are otherwise, but not provided, the opinion statement will mislead its audience.” For example, a company might say “we believe our conduct is lawful” without having consulted a lawyer, which she said, would be “misleadingly incomplete.” Thus, she said, “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 §11’s omissions clause creates liability.”
Having said that an omission of material facts might give rise to Section 11 liability for an opinion, Justice Kagan then walked this observation back. She said that an opinion “is not necessarily misleading when an issuer knows, but fails to disclose, some fact cutting the other way,” adding that “a reasonable investor does not expect that every fact known to an issuer supports its opinion statement.” She said that “whether an omission makes an expression of opinion misleading always depends on context” because “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.”If it were otherwise, she said, a company could “nullify” the statutory requirement simply by starting a sentence with “we believe” or “we think.”
Having said that the omissions clause in Section 11 can support liability for an opinion based on what a reasonable investor might understand, she added that to establish this type of claim, a claimant must allege the “failure to include a material fact has rendered a published statement misleading.” To be specific, she said,
The 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.
Because the Sixth Circuit had not considered the Omnicare case in light of this analysis, the Supreme Court remanded the case to the lower courts for further consideration with the “right standard in mind.” On remand, and with respect to any facts the plaintiff allege were omitted, the courts below “must determine whether the omitted fact would have been material to a reasonable investor.” If the plaintiffs clear those hurdles, then the courts have to consider whether Omnicare’s legal compliance opinions were misleading “because the excluded fact shows that Omnicare lacked the basis for making those statements that a reasonable investor would expect.”She added that “the analysis of whether Omnicare’s opinion is misleading must address the statement’s context” – that is, the other statements throughout the rest of the registration statement.
Justice Scalia filed a concurring opinion, joining the Court’s judgment but differing from the majority opinion on the circumstances in which omitted facts could support Section 11 liability for an opinion. Justice Thomas also joined the Court’s judgment but said that the majority should not have reached the omission question because it was not properly before the Court.
The Supreme Court’s ruling represents, in its rejection of the Sixth Circuit’s “objective falsity” standard, a victory for the defendants. However, the Court’s conclusion that omitted facts could make a statement of opinion misleading and support Section 11 liability is more to the liking of those on the plaintiffs’ side of the aisle, even if the Court did set a rather high bar for stating a claim under the statute’s omissions prong. Even the false statement-part of the Court’s analysis arguably gives the plaintiffs something they can use, in the Court’s analysis of “supporting facts” in an opinion that might be misleading. At a minimum, the plaintiffs in this case have managed to live for another day, even though the Sixth Circuit’s ruling was set aside.
The Court seemed clear that there are basic differences between facts and opinions. However, an opinion might, we are told, might include “supporting facts.” And while Omnicare’s statement did not include supporting facts – the statements on which the plaintiffs rely, we are told, are “pure statements of opinion” – there could be “omitted facts” whose omission makes the statement of opinion misleading. Moreover, whether or not these omitted facts are sufficient to make the statement actionable depends on “context.” The difference between facts and opinions may be clear, but the two interact in complex ways.
Opinions often are involved in the allegations in Section 11 claims because financial statements contain many different types of opinions. Court have held that financial statement items such as reserves, goodwill and so on constitute opinions, and, at least until the Sixth Circuit decision in the Omnicare case, have been pretty comfortable saying that opinions are not actionable under Section 11 unless the speaker didn’t believe the opinion. Now, courts will have to consider whether the opinion included misleading “supporting facts,” and whether or not there were “omitted facts” sufficient to make the opinion misleading, taken in context of the entire Registration Statement. Maybe the lower courts will apply these standards without difficulty. I suspect some courts will labor, particularly on questions surrounding allegedly omitted facts and whether or not the alleged omissions were sufficient to make even a “pure statement of opinion” misleading, in light of the entire context.
These issues may be particularly important just now because of the increase in IPO activity in the securities marketplace in 2013, 2014 and continuing this year. As I have pointed out previously on this blog, more IPOs mean more IPO-related litigation. As plaintiffs in the IPO cases prepare their complaints, they will now be sure with respect to any statements of opinion to allege that the opinion omitted facts and were therefore both misleading and actionable. The Omnicare standards of liability for statements of opinion in registration statements are likely to get a workout in the district courts where the IPO-related lawsuits are filed.
Alison Frankel’s March 24, 2015 post on her On the Case blog (here) discusses how what she calls the Court’s “middle of the road approach” in the Omnicare case is consistent with several recent decisions from the U.S. Supreme Court. A March 24, 2015 memo from the Proskauer law firm discussing the Court’s decision can be found here.