On March 24, 2015, the Supreme Court issued its much anticipated decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, No. 13-435, 2015 WL 1291916 (Mar. 24, 2015). With some significant caveats (discussed below), the decision is largely protective of issuers: it enshrines the distinction between “opinions” and “facts,” and generally makes it difficult to hold issuers liable for securities fraud based on statements of opinion.
In brief, the Court held that issuers that include opinions in a registration statement may be liable under Section 11 of the Securities Act of 1933 (the “Securities Act”) for making an untrue statement of fact only when the issuer does not subjectively believe the stated opinion. In so holding, the Court rejected the Sixth Circuit’s view that an honestly-held opinion that was at the time or later proved to be untrue could subject the issuer to liability. As the Court put it, Section 11 “is not, as the Court of Appeals and the [plaintiffs] would have it, an invitation to Monday morning quarterback an issuer’s opinions.”
However, the Court also held that an opinion, even if honestly believed, could be actionable if it misleads a “reasonable investor” as to the basis for the opinion due to the omission of material facts. That aspect of the Court’s holding will most likely create substantial uncertainty regarding what a “reasonable investor” understands to be the implied basis for a particular opinion and potentially could lead lower courts to diverge in addressing that issue.
The Omnicare litigation arose out of a 2005 stock offering by Omnicare, Inc. (“Omnicare”), the nation’s largest provider of pharmacy services for nursing home residents. See Omnicare, 2015 WL 1291916, at *4. Omnicare’s registration statement for the offering included the following statements of opinion:
- “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.”
- “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.”
See id. at *4 (emphasis added).
Several years later, the Justice Department filed a civil False Claims Act suit against Omnicare alleging that the Company solicited and received millions of dollars in kickbacks from pharmaceutical manufacturers. Thereafter, certain pension funds (the “Funds”) sued Omnicare and certain of its directors and officers under Section 11 based on allegations that the compliance-with-law opinions in Omnicare’s registration statement were false and misleading. See Indiana State Dist. Council of Laborers & HOD Carriers Pension & Welfare Fund v. Omnicare, Inc., 2012 WL 462551 (E.D.Ky. Feb. 13, 2012).
The district court granted Omnicare’s motion to dismiss, holding that “statements regarding a company’s belief as to its legal compliance are considered ‘soft’ information” that is not actionable unless the speaker “knew [the statements] were untrue at the time.” See Omnicare, 2015 WL 1291916, at *4. There were no allegations of intentional deception in the Funds’ complaint (in fact, the complaint expressly disavowed any attempt to allege intent or scienter on the part of defendants, no doubt to avoid triggering Fed. R. Civ. P. 9(b)’s requirement to plead fraud “with particularity”). On appeal, the Sixth Circuit reversed, holding that it was sufficient for the Funds to allege that “the stated belief was ‘objectively false'” irrespective of whether the issuer subjectively believed the opinion. Id. The Supreme Court granted Omnicare’s writ of certiorari to decide when statements of opinion are actionable under Section 11 of the Securities Act.
Opinions Alleged To Be Misstatements of Fact: Writing for the Court, Justice Kagan[1] first addressed when a statement of opinion could constitute an “untrue statement of . . . material fact.” See Omnicare, 2015 WL 1291916, at *5. The Court quickly brushed aside the Funds’ argument (and the Sixth Circuit’s holding) that subjective disbelief was not required as “conflating” facts and opinions: “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.” Section 11 exposes issuers to liability not for “untrue statement[s],” but for “untrue statement[s] of . . . fact.” Id. (citing 15 U.S.C. § 77k(a) (emphasis added)). The only “fact” typically implied in an opinion is “that the speaker actually holds the stated belief.”[2]
Therefore, an opinion is actionable as a misstatement of fact under Section 11 only if the speaker actually does not believe the statement: “[A] sincere statement of pure opinion is not an ‘untrue statement of material fact,’ regardless whether an investor can ultimately prove that belief wrong.” The Court illustrated the point: “If, for example, [a CEO] said ‘I believe our marketing practices are lawful,’ and actually did think that, [the CEO] could not be liable for a false statement of fact—even if [the CEO] afterward discovered a longtime violation of law.” Because the Funds’ complaint failed to plead that Omnicare did not actually hold the challenged opinions, they were not actionable as misstatements of fact under Section 11.
Opinions Alleged To Be Misleading Due To Omitted Information: Next, the Court addressed whether an opinion, “even if literally accurate” as honestly believed, may be actionable because the omission of “discrete factual representations” makes it “misleading to an ordinary investor.” Much of this analysis was devoted to the expectations of a “reasonable investor.” As a starting point, the Court observed that a reasonable person understands and takes into account the difference between statements of fact and opinion, particularly when found in a registration statement, “which the reasonable investor expects has been carefully worded to comply with the law. When reading such a document, the investor thus distinguishes between the sentences ‘we believe X is true’ and ‘X is true.'” A reasonable investor, according to the Court, “grasps” that opinions lack certainty and are not “guarantees,” and therefore, the omission of a fact that “merely rebuts” the opinion does not render it misleading.
On the other hand, the Court rejected Omnicare’s argument that an opinion can never be actionable due to omitted material facts. Rather, a reasonable investor may, “depending on the circumstances, understand an opinion statement to convey facts about how the speaker formed the opinion—or, otherwise put, about the speaker’s basis for holding that view. And if the real facts are otherwise, but not provided, the opinion statement will mislead its audience.” The Court then proceeded to illustrate its point, and in the process highlighted the uncertainty now confronting issuers when they offer opinions in securities filings. Using the hypothetical statement “we believe our conduct is lawful,” the Court explained what a reasonable investor might plausibly understand as to the basis for such an opinion:
- The statement was made after consulting with a lawyer or, in the securities context, based on “meaningful legal inquiry;”
- The opinion is consistent with “advice from regulators or consistent industry practice;”
- There is no contrary legal advice; and/or
- There is no knowledge that the “Federal Government was taking the opposite view.”
The Court also offered additional guidance in stating that reasonable investors:
- “understand that opinions sometimes rest on weighing competing facts,” and therefore would not infer that “every fact known to an issuer supports its opinion statement”;[3]
- consider the statement in context in light of “all its surrounding text, including hedges, disclaimers, and apparently conflicting information”; and
- take into account industry customs and practices.
The Court discounted Omnicare’s argument that the potential for liability based on misleading (but literally accurate) opinions threatens issuers with massive liability. The Court emphasized that an investor cannot state a claim by simply alleging that the issuer failed to reveal the basis for its opinion. Citing Ashcroft v. Iqbal, 556 U.S. 662 (2009), the Court stated that a plaintiff “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.” To the Court, “that is no small task for an investor.”
The Court remanded the case to the district court to determine whether a reasonable investor could have been misled as to the basis for Omnicare’s opinions.[4]
Takeaways
In at least one sense, the impact of Omnicare is apparent: issuers and other participants in a public offering will not be liable for making untrue statements of fact under Section 11 for honestly-held opinions that turn out to be false. That ruling, in and of itself, offers significant protection to U.S. securities issuers. In other ways, however, the opinion raises a new set of questions, some of which will not be definitively answered for some time.
The Decision Generally Should Apply to Opinions Challenged Under Section 12(a)(2) of the Securities Act and Section 14(a) of the Exchange Act. While Omnicare involved statements of opinion challenged under Section 11 of the Securities Act, the decision should apply to opinions challenged under certain other federal securities law liability provisions, including Section 12(a)(2) of the Securities Act and Section 14(a) of the Exchange Act. The decision itself does not address the issue, nor does it expressly limit its holding to Section 11. In fact, the Court grappled at several points in the opinion with arguments based on its decision in Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991), which addressed when statements of opinion are actionable under Section 14(a) of the Exchange Act in the context of an allegedly misleading proxy solicitation. The Omnicare Court never raised the fact that Virginia Bankshares arose under Section 14(a) as a basis for distinguishing or otherwise dealing with that decision. We perceive no reason for applying a different framework for determining when statements of opinion are actionable under most other Securities or Exchange Act liability provisions, with the exception of Section 10(b). Because scienter is an essential element, it is difficult to perceive how an honestly held opinion could ever be actionable under Section 10(b) as misleading due to the omission of material facts.
Plaintiffs Confront A Difficult Dilemma In Attempting to Plead a Section 11 Claim Challenging an Opinion. The Fund plaintiffs in Omnicare chose not to plead (and expressly disavowed any allegations of) an intent to deceive on the part of defendants. That pleading technique avoids implicating the heightened pleading requirements in Rule 9(b) of the Federal Rules of Civil Procedure, which requires that fraud be pled with particularity. In this instance, however, it also doomed plaintiffs’ claim that the challenged opinion constituted a misstatement of fact because, as the Court held, opinions typically imply only the fact that the speaker believes the opinion. Going forward, issuers and their counsel may benefit from plaintiffs having to choose, in challenging an opinion, between pleading subjective disbelief (thereby triggering Rule 9(b)), or omitting such an allegation and forfeiting a claim that an opinion is false (other than as lacking a reasonable basis).
The Court’s Reference to Iqbal Reinforces That Conclusory Assertions Are Insufficient To Survive a Motion to Dismiss. Recognizing that Section 11 is not a “general disclosure requirement,” the Court emphasized that to adequately plead that an opinion is misleading, an investor “cannot simply say that the issuer failed to reveal its basis.” Instead, it must plead—with more than conclusory statements—the omission of a material fact that renders the opinion misleading. While not breaking new ground, the Court’s statement, made in the context of rejecting Omnicare’s concerns about the “breadth of liability,” reinforces the vitality of Bell Atlantic, Inc. v. Twombly, 550 U.S. 544 (2007), Iqbal, and their progeny in requiring plaintiffs to plead “plausible” claims for relief.
There Could Be Significant Uncertainty Regarding When an Opinion Has a Reasonable Basis. On the other hand, by adopting a test that looks to a reasonable investor’s understanding, the Court has injected significant uncertainty into how lower courts will assess when an opinion is misleading. Courts almost certainly will have different views on what reasonable investors would understand as the basis for a particular opinion; the Court’s reference to industry customs and norms opens the door to a battle of the experts on those issues; and the Court’s emphasis on the context for the opinion begs the question of what the relevant context is and how it informs a reasonable investor’s understanding of the opinion. In short, the Court has created a test that very well may be rife with factual disputes, possibly making it difficult (notwithstanding Twombly and Iqbal) for an issuer to succeed on a motion to dismiss at the outset of the litigation.
For a copy of the decision, please click here.
[1] Justice Kagan’s opinion was joined by Chief Justice Roberts and Justices Kennedy, Ginsburg, Breyer, Alito and Sotomayor. Justices Scalia and Thomas issued separate concurring opinions.
[2] Justice Kagan acknowledged that a statement beginning with “I believe” could contain “embedded statements of fact,” using the example “I believe our TVs have the highest resolution available because we use a patented technology to which our competitors do not have access.” See Omnicare, 2015 WL 1291916, at *6 (emphasis added). The italicized portion of that quotation is a fact, not a statement of opinion.
[3] As an illustration, the Court stated that an issuer would be justified in not disclosing that a single junior attorney “expressed doubts about a practice’s legality when six of his more senior colleagues gave the stamp of approval.”
[4] In his concurring opinion, Justice Scalia took issue with the Court’s holding that a reasonable investor “is right to expect a reasonable basis for all opinions in registration statements” on the ground that it unreasonably presumes “expertise on all topics volunteered within a registration statement.” Justice Scalia suggested that the test adopted by the Court “invites roundabout attacks upon expressions of opinion” that turn out to be wrong based on allegations that the speaker’s basis was not “objectively adequate,” even if the speaker subjectively believed he or she had an adequate basis for the opinion. Justice Thomas, in his concurring opinion, stated that the Court should not have opined on the question of “whether and under what circumstances an omission may make a statement of opinion misleading” because it was not ruled on by the courts below.