Omnicare: Good and Bad News for Security Issuers Offering Statements of Opinion

by Perkins Coie
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Securities issuers breathed a collective sigh of relief last week when the U.S. Supreme Court ruled in Omnicare Inc. et al. v. Laborers District Council Construction Industry Pension Fund et al. that Section 11 of the Securities Act does not apply strict liability to statements of opinions.  Justice Kagan authored the unanimous decision rejecting a U.S. Court of Appeals for the Sixth Circuit opinion that imposed Section 11 liability based on a statement of opinion that turned out to be wrong.  Following holdings from the Second, Third and Ninth Circuits, the Supreme Court held that an opinion is actionable as a “false statement” only if the speaker did not genuinely hold the opinion at the time it was expressed.

But although it slammed shut the door opened by the Sixth Circuit, the Court ventured beyond the lower courts’ analysis and enunciated a new theory under which Section 11 liability may attach even to genuinely held statements of opinion.  This portion of the opinion was not unanimous.  Justice Scalia and Justice Thomas refused to sign on to this expansion of liability.

After Omnicare, issuers must consider whether, prior to expressing an opinion, they have conducted a “reasonable inquiry” upon which to base that opinion—reasonable not from the issuer’s perspective, but from the perspective of a “reasonable investor.”  If they have not conducted such an inquiry, or if the opinion expressed cannot be squared with the issuers’ knowledge or the registration statement as a whole, the issuers must disclose facts necessary to make their opinion not misleading.

The Omnicare Case

Although Section 11 liability is expressly limited to false statements of “fact” (either the expression or omission of them), the Second, Third and Ninth Circuits have recognized that a statement of opinion may be considered a “false fact” if the issuer did not genuinely hold that opinion at the time it was made.  Thus, a plaintiff could base a claim on an opinion if the opinion was wrong (objective falsity) and the issuer did not actually hold the expressed opinion at the time it was made (subjective falsity). 

The plaintiffs in Omnicare were union pension funds (the Funds) that invested in securities offered by Omnicare.  The Funds alleged that two statements in the registration statement expressing the opinion that Omnicare was in material compliance with applicable laws were false.  The complaint did not allege that Omnicare or any of its officers and directors held a different opinion, only that their opinion turned out to be wrong.

The district court dismissed the complaint for failure to state a claim under Section 11.  The Sixth Circuit held that because Section 11 is a strict liability statute, a plaintiff need only plead and prove objective falsity—that the opinion turned out to be wrong—to sustain a claim.

The Supreme Court granted certiorari to resolve the circuit court split. The Court rejected the Sixth Circuit’s analysis and firmly established that Section 11 liability cannot attach merely because an opinion proves to be in error.  Both objective and subjective falsity are necessary to sustain a claim. 

A New Pathway to Opinion Liability

Although it rejected the Sixth Circuit’s analysis, the Court created a new omissions-based theory by which liability may still attach, even to sincerely held opinions.  The majority held that not only does a statement of opinion imply the “fact” that the speaker actually possesses that opinion, but also that the asserted opinion is based on some meaningful inquiry. 

The Court found that the statement “we believe our conduct is lawful,” although an opinion, may be misleading if the speaker (1) has not consulted a lawyer or (2) if a lawyer is consulted, the issuer states an opinion contrary to that lawyer’s advice, or with knowledge that the government was taking the opposite view and such disagreement is not disclosed.

New Levels of Scrutiny on Issuers’ Inquiry and Reasonableness

The new test for omissions-based opinion liability opens up for scrutiny not only the quality and quantity of the issuer’s inquiry, but also the “reasonableness” of the opinion reached.  Will an investor reasonably expect the issuer to obtain second opinions?  At what point in the issuer’s level of confidence in the opinion is a duty triggered to disclose the details of the inquiry?  Fifty percent sure?  Sixty percent sure?  If someone else could look at the same evidence and reasonably reach a different opinion, does that create a duty to disclose the issuer’s thought process or other inquiry in reaching the opinion?

Justice Scalia expressed these and other concerns about the majority’s new test, which he believed to be inconsistent with the common law and common sense.  In his view, an issuer’s expression of opinion fairly implies only (1) that the issuer is genuinely of the opinion expressed, (2) that the issuer believes the basis for the opinion is sufficient and (3) that the issuer is not certain of the result.  Under Justice Scalia’s proposed test, a genuinely held opinion would only risk omission-based liability under Section 11 if the issuer did not in fact believe a sufficient inquiry had been performed to support the opinion.

Justice Thomas would have avoided the issue altogether, calling the majority’s opinion a “novel legal theory that [was] not fairly included in the question presented” before the Court. 

High Pleading Standards May Be Issuers’ Saving Grace

The Court did impose a high bar for pleading an opinion-based omissions theory.  Investors cannot plead a claim merely by alleging that the issuer failed to reveal the basis for the opinion.  Nor can they rely on conclusory assertions that the issuer lacked a reasonable basis for an opinion, or simply recite statutory language that the issuer “omitted to state facts necessary to make the statement not misleading.”  Rather, “[t]he investor must identify particular (and material) facts going to the basis for the issuer’s opinions—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.”

Recognizing that the lower courts had not considered an omissions theory, nor applied the theory newly articulated in the opinion, the Supreme Court remanded the Omnicare case for determination of whether the Funds stated a viable omissions claim, and if not, whether they should have a chance to replead.

Although Omnicare closed one door on opinion-based liability, it opened another that is sure to trigger future opinions by district and circuit courts exploring the boundaries of liability for an issuer’s failing to conduct a reasonable inquiry, or failing to disclose that failure.

Practical Tip

In her analysis, Justice Kagan notes that a registrant could potentially be liable under Section 11 for expressing an opinion that, while sincerely held, omits some material conflicting facts.

As a result, issuers will want to consider not just the disclosure in the balance of the registration statement as a whole, including Private Securities Litigation Reform Act risks and disclaimers, but also industry customs and practices that would be known to a reasonable reader. Issuers should also consider drafting the text surrounding the expression of the opinion with disclosure, just as her opinion describes Omnicare as doing, of governmental investigations or third-party litigation that shows the uncertain or contingent nature of future events.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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