Yesterday, SCOTUS heard oral argument  in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund. The case seeks to answer this question: when can a statement of opinion be actionable as a “false statement of material fact”?  That is, for purposes of Section 11, a “strict liability” statute, should a statement of opinion be considered “untrue” only if, in addition to actually being false, the speaker believed that it was untrue – if it was “subjectively false” – or will it suffice if the statement was just objectively false, even if the issuer believed that it was true? What if the issuer believed the statement was true, but had no reasonable basis for his belief?

In a 2005 registration statement, Omnicare stated that it had complied with relevant laws.  Turns out that it reached a $98 million settlement with the Justice Department in 2009 in connection with alleged kickbacks paid to nursing homes, kickbacks received from drug companies and false claims submitted to Medicare and Medicaid.  Another settlement for $120 million was reached in a case similarly involving alleged kickbacks. In a securities fraud lawsuit in connection with the registration statement, the 6th Circuit held that, under Section 11 strict liability, the company could be liable for statements that proved to be untrue, regardless of whether the company believed they were true at the time. As a result, the complaint could survive a motion to dismiss without pleading knowledge of falsity. The 2nd,  3rd and 9th Circuits have taken the opposite position, relying on SCOTUS’s opinion in Virginia Bankshares Inc. v. Sandberg. The 6th Circuit distinguished that case on the basis that it was a 14(a) (proxy) case, not a Section 11 case.

The Union Pension Fund that brought the claim initially supported the decision of the 6th Circuit, arguing that, with respect to factual representations that are expressed or implied in statements of opinion, if the issuer makes a false statement, the issuer’s belief or state of mind is not relevant to a strict liability claim. Instead, it argued, in a registration statement, “because it’s strict liability, it shifts the risk of error to the issuer.” Its counsel indicated (perhaps as an alternative) that the Fund also “endorsed” the government’s middle ground (discussed below). The key concern for the Fund was any requirement to show “subjective falsity:  “if you have to prove that the person didn’t believe the implied fact is to say it’s not a strict liability statute, it’s essentially scienter.” If the Court refined the rule for applying Section 11, counsel urged, “what you do is affirm and correct what you regard as the misapprehension of the Sixth Circuit’s rule.”

Omnicare contended that, unless the issuer “says something” about the basis for its statement, “the only fact conveyed by  statement of opinion or belief is the fact that the speaker held the stated belief. [A] statement of opinion or belief can, therefore, be actionable only if the speaker did not actually hold the stated belief.” Therefore, counsel argued, the only question is whether the statement was subjectively true. According to Omnicare, reasonable belief is not a separate or alternative component of the test; rather, the absence of a reasonable basis for the statement on the part of the issuer could be used to show the issuer’s disbelief. On a policy basis, counsel for Omnicare maintained that  “an amorphous liability standard like the reasonable basis standard will really have a chilling effect in cases of this variety.” In Omnicare’s view, if the Court agreed that “the legal standard turns on subjective disbelief,” further action in the lower court on remand is foreclosed because the Fund “disclaimed” allegations regarding state of mind.  However, Omnicare agreed that, if the legal standard advocated by the U.S were adopted, the case would have to be vacated and remanded because the 6th circuit did not apply that legal standard.

In an amicus brief, the U.S. government argued that the lower court erred “in holding that a statement of opinion is actionably false whenever it is ultimately determined to be wrong,” and urged the court to send the case down for further consideration. However, the lower court was not entirely wrong. In oral argument, the government explained that  “we  agree with the Court of Appeals halfway. The first question is do you always have to have subjective disbelief to recover under Section 11 for an opinion. The Court of Appeals correctly said the answer to that  was no….” But that is not the end of the story.  in addition to showing the objective falsity of the express or implied fact, the government argued, the plaintiff must show “[e]ither [the issuer] didn’t believe what they were saying, or there was no reasonable basis for what they were saying.”  In addition, according to the government, “this is a context­-specific inquiry, and the burden is on the plaintiff to come forward with an omitted material fact that should have been stated.  And in the context about an opinion, the kinds of things that would be omitted material facts that would matter are things that undercut a basis that you would expect. So it could be a lack of any investigation whatsoever. But it could be, as Justice Kagan said, that you have been sued.  And several courts have held against you.  Those are the kind of facts.”  In other words, statements of opinion should be qualified to show the risks related to the opinion and, if they are not, that could be a material omission that makes the statement of opinion misleading.

A number of the Justices seemed to question the correctness of the standard used by the 6th Circuit.  But what standard they ultimately decide to apply remains to be seen. From the questioning, it appeared that several of the justices shared the view that it was not enough that a statement be false, that the issuer must also have “no reasonable basis for holding it.” According to Justice Breyer, “those two  things, I think, do require reversal.”  Justice Ginsburg contended that the Pension Fund was “really saying there is no such thing as an opinion versus a fact, that it’s just the same as if they left out ‘we believe.'”  On the other hand, Chief Justice Roberts questioned whether an issuer can escape liability by simply adding “we believe” in front of a precise factual statement.  Justice Alito indicated that, since the 6th Circuit did not find that the reasonable basis standard had been satisfied, “don’t we at a minimum have an obligation to vacate and remand?” However, he agreed with Omnicare that a reasonable basis standard could be “very open-ended” and that, in hindsight, it can always appear the correct information could have been ascertained if only the issuer had performed more due diligence — how much due diligence would be required to constitute a reasonable investigation? Similarly, Chief Justice Roberts seemed intrigued by an aspect suggested by the Omnicare argument, which would use the absence of a reasonable basis, not as a separate or alternate test, but rather as a way to challenge the sincerity of the issuer’s subjective belief.

Of course, it’s always hard to predict outcome based on the questioning, but the government’s middle ground requiring either subjective falsity or lack of a reasonable basis seemed to have some appeal. Apparently, others have no difficulty with reading the Justices’ tea leaves: Reuters concluded that, “Judging from questions posed during an hour of oral arguments, the most likely outcome is that the nine justices will throw out the appeals court decision.”  On the hand, SCOTUSblog concluded that, “[f]ollowing yesterday’s oral argument, there is not much doubt that the Supreme Court is inclined to affirm the decision of the Sixth Circuit….”