In the spring of this year, the Supreme Court issued its long-awaited decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S.Ct. 1318 (2015), resolving a circuit split regarding the scope of liability under Section 11 of the Securities Act of 1933 for false statements of opinion. The Omnicare decision enshrines the distinction between “opinions” and “facts,” but leaves some uncertainty regarding proving liability for omitting a fact from a statement of opinion. As a result, the decisions has important implications for how companies prepare registration statements and how Section 11 claims are litigated.
Omnicare—a provider of pharmacy services for nursing homes—filed a registration statement that stated Omnicare “believe[s]” that its “contractual
arrangements” “are in compliance with applicable federal and state laws” and that its “contracts with pharmaceutical manufacturers are legally and economically valid arrangements that bring value to the healthcare system and the patients that we serve.” Omnicare, 135 S.Ct. at 1323. Pension funds that
purchased Omnicare stock filed suit under Section 11, which gives purchasers a cause of action against issuers for material misstatements or omissions in a
registration statement. Id. at 1324. They claimed that Omnicare’s legal compliance opinions were material misrepresentations, based on later-filed lawsuits that alleged payments from drug manufacturers to Omnicare violated anti-kickback laws. Id. The plaintiffs also alleged that Omnicare omitted facts to make its opinion not misleading because it failed to disclose that none of Omnicare’s directors and officers “possessed reasonable grounds” for concluding the opinions were truthful and complete. Id.
The district court dismissed the complaint because it failed to allege the defendants knew their opinionwas false. Id. The Sixth Circuit reversed, holding that a plaintiff need only allege that a statement of opinion is objectively false; a “defendant’s knowledge is not relevant” because Section 11 provides for strict
liability with no scienter requirement. 719 F.3d 498, 503-05 (6th Cir. 2013). In reaching this conclusion, the Sixth Circuit parted ways with the Second and Ninth Circuits, which had held that a plaintiff must allege an opinion is both objectively and subjectively false to state a claim under Section 11. Fait v. Regions Fin. Corp., 655 F.3d 105, 110 (2d Cir. 2011); Rubke v. Capitol Bancorp Ltd., 551 F.3d 1156, 1162 (9th Cir. 2009).
The Omnicare Decision
The Supreme Court reversed, holding that statements of opinion are not actionable under Section 11 unless the speaker subjectively believes the opinion is untrue, regardless of whether the opinion is objectively untrue. Omnicare, 135 S.Ct. at 1325-27. Section 11 “does not allow investors to second-guess inherently subjective and uncertain assessments.” Id. at 1327.
As to omissions, the Court held it is actionable if “material facts about the issuer’s inquiry into or knowledge concerning a statement of opinion” are omitted and “those facts conflict with what a reasonable investor would take from the statement itself.” Omnicare, 135 S.Ct. at 1329. The Court explained that this standard should not be viewed as an invitation to allege omission claims based on conclusory assertions. The plaintiff “must identify particular (and material) facts going to the basis for the issuer’s opinion . . . whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.” Id. at 1332.
The Omnicare decision has several implications for how registration statements are prepared and how securities lawsuits are litigated. First, the decision
strengthened defendants’ ability to defend against opinion-based Section 11 claims. If the defendant did not know the opinion was untrue, there is no liability. Second, notwithstanding the Court’s admonition that omissions-based opinion claims may not be pled in conclusory terms, expect claims based on omissions to be a new avenue of Section 11 litigation. To reduce the risk of Section 11 liability, issuers should consider accompanying statements of opinion with the bases for the belief, as well as qualifications that make clear any uncertainties or limitations to the opinion. Third, although Omnicare dealt specifically with Section 11, expect plaintiffs to seek to extend its omissions holding to claims under other federal securities statutes. For example, district courts are already beginning to address arguments that Omnicare applies to claims under Sections 10(b) and 18 of the Securities Exchange Act. See In re Merck Litig., 2015 WL 2250472, at *23 (D.N.J. May 13, 2015); Special Situations Fund III QP v. Deloitte Touche Tohmatsu CPA, Ltd., 2015 WL 1474984, at *15 (S.D.N.Y. Mar. 31, 2015); Corban v. Sarepta Therapeutics, Inc., 2015 WL 1505693, at *6-7 (D. Mass. Mar. 31, 2015).
Although issuers should be sure their process for drafting registration statements and related work accounts for the Omnicare decision, they should also monitor decisions by the lower courts as they apply Omnicare—and spell out its full implications—over the coming years.
Jeff Hammer is an attorney at Caldwell Leslie’s Los Angeles office. Jeff’s practice focuses on complex commercial litigation in state and federal court where he has represented clients as both plaintiffs and defendants in litigation involving business torts, trade secret claims, contract disputes, and state and federal securities claims. For more info about Jeff, click here.