Omnicare Before the Supreme Court: Is an Issuer Liable Under Section 11 for Stating an Opinion it Honestly Believes, but Which is Plainly False?
Kenneth J. Vianale / February 12, 2015
The U.S. Supreme Court heard oral argument on November 3, 2014 in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, No 13-435. The Court considered an important securities law issue under Section 11 of the Securities Act of 1933 (15 U.S.C. §77k): Can a company escape liability for a statement of opinion contained in its registration statement that may be even blatantly false, as long as the company honestly believed that opinion, no matter how baseless?
I. Omnicare’s Allegedly False Registration Statement
Investors attacked statements in Omnicare’s December 2005 registration statement for the sale of 12.8 million shares of common stock to the public. Omnicare provides pharmaceutical-care services for aging nursing home residents. In its registration statement, Omnicare said its business arrangements with suppliers and business partners complied with all 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.
Investors sued in 2006, after qui tam suits were unsealed, alleging that Omnicare’s statement of legal compliance was materially false when made because Omnicare was then allegedly receiving kickbacks from pharmaceutical manufacturers for promoting their drugs to nursing homes, and repackaging and reshipping drugs with varying expiration dates, including some expired drugs. Investors alleged all of this violated Medicare and Medicaid regulations. Omnicare and certain of its executives had signed the December 2005 registration statement.
II. The Litigation Trek
The parties made two round trips through the trial court and Sixth Circuit. On the second trip to the Sixth Circuit, the plaintiff- investors challenged the trial court’s dismissal of their complaint for failing to allege Omnicare did not believe its own opinions on legal compliance. The Sixth Circuit reversed, rejecting the district court’s categorical rule that materially false opinions are actionable under Section 11 only if the speaker disbelieves them, known as “subjective falsity.” Indiana State District Council of Laborers v. Omnicare, Inc., 719 F.3d 498 (6th Cir. 2013). 1 Although Omnicare failed to win en banc review, the U.S. Supreme court granted Omnicare certiorari. 134 S. Ct. 1490 (2014).
III. The Legal Issue Before the Supreme Court: Is an Issuer Liable Under Section 11 for Stating an Opinion it Honestly Believes, but Which is Plainly False?
Argument before the Court was held on November 3, 2014. Three parties presented argument: Petitioners, who included Omnicare and some of its executive officers (“Omnicare”); Respondents, who were purchasers of Omnicare common stock in the 2005 offering whose Section complaint had been partially upheld by the Sixth Circuit; and the Solicitor General’s Office, which appeared as amicus.
A. Petitioner’s Brief — Omnicare’s Arguments
According to Omnicare, “opinions” are not “facts,” and only misstatements of material fact subject one to liability under Section 11, which prohibits “an untrue statement of material fact required to be stated [in a registration statement] or necessary to make the statements therein not misleading ….”
Omnicare argued that “‘fact’ conveys an element of certainty [and o]pinions and beliefs, by contrast are inherently subjective assessments.” (Omnicare Opening Br. at 11, available on www.scotusblog.com). Omnicare contended that “[t]he only ‘fact’ conveyed by a statement of opinion or belief is the fact that the speaker held the stated belief. It naturally follows that such a statement can be ‘untrue’ as to a ‘material fact’ only if the speaker did not actually hold the stated belief.” (Id.) Omnicare argued this result comported with common sense and the Court’s seminal decision in Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991).
Omnicare saw Virginia Bankshares as imposing liability for a statement of opinion or belief only when plaintiffs alleged a “misstatement of the psychological fact of the speaker’s belief in what he says.” Id. at 1095. Virginia Bankshares, it claimed, compels a plaintiff to show the speaker’s disbelief in his, her, or its statement. (Omnicare Opening Br. at 11).
Omnicare argued the Sixth Circuit had simply misread Virginia Bankshares, and cited two other circuits going Omnicare’s way. Both the Second and Ninth Circuits had construed Section 11 to require a plaintiff challenging a statement of opinion to plead and prove both the objective falsity of the statement and the speaker’s own disbelief in the opinion: Fait v. Regions Financial Corp., 655 F.3d 105 (2d Cir. 2011) and Rubke v. Capitol Bancorp Ltd., 551 F.3d 1156 (9th Cir. 2009).
Omnicare contended the Sixth Circuit had mistakenly failed to follow the rationale of its sister circuits, providing a legal conflict justifying certiorari. Under the Sixth Circuit’s view, however, the Second and Ninth Circuits had gotten Virginia Bankshares wrong. That decision, the Sixth Circuit wrote, had reviewed a fraud claim asserted under Section 14(e) of the ’34 Act to challenge a false proxy statement. The Sixth Circuit reasoned that a proxy claim, unlike a Section 11 claim, requires proof of scienter, at least in the Sixth Circuit. Section 11 of the ’33 Act has no scienter requirement; it makes issuers strictly liable for false statements of material fact or material omissions in registration statements. (15 U.S.C. §77(a)).
Omnicare asked for reversal and reinstatement of the judgment of the trial court dismissing plaintiffs’ Section 11 claim. (Omnicare Opening Br. at 39).
B. Respondents’ Brief — the Investors’ Arguments
The investors took sharp issue with Omnicare’s claim that the only “fact” conveyed by a statement of opinion is the fact that the speaker held the stated opinion. They argued that statements of opinion in registration statements can mislead investors with regard to (1) the subject matter and/or (2) the implication that the speaker has a reasonable basis for his or her views, and one not undercut by undisclosed facts. (Respondents’ Br. at 20, available on www.scotusblog.com).
Respondents argued that a Section 11 plaintiff need only allege an issuer’s opinion was objectively wrong when it was made or, at most, that it lacked a reasonable basis. (Id. at 21). Statements of opinion can mislead investors, Respondents contended, because they imply knowledge of the facts. Statements of opinion, they argued, can lead the listener to believe the speaker has a reasonable understanding of the underlying facts, particularly when the speaker is in a superior position, like Omnicare was when opining on the legality of its own business practices.
This is especially true with respect to legal compliance issues like those at issue in Omnicare. An opinion of law requires an exercise of judgment; investors will expect that such opinions will be based on “methods of analysis that are recognized as reasonable in the field.” (Respondents’ Br. at 33). Thus, for example, investors would expect that “when a company says it believes its sales practices are legal, it is not obtaining contracts by bribing foreign officials, because they will reasonably assume that the FCPA prohibits that conduct.” (Id.).
The investors also noted that Section 11 was in some ways unique among the provisions of the securities laws because “Congress intended Section 11 to assure investors that they can place unreserved confidence in the accuracy of the information conveyed in registration statements, thereby creating an efficient market environment that benefits investors and issuers alike.” (Respondents’ Br. at 39). Thus, “it is fair and reasonable to put the risk of error in a registration statement on the shoulders of those responsible for what it says, and on the company that stands to financially benefit from investors’ misunderstanding of material facts relating to the company or its securities.” (Id.) The purpose of Section 11 is not to punish wrongful conduct, but to provide full disclosure and apportion risk of error. (Respondents’ Br. at 40).
According to the investors, Omnicare could have disclosed the facts surrounding its arrangements with pharmaceutical companies when opining that it was in full compliance with applicable laws. (Respondents’ Br. at 18). Then investors could decide for themselves the risk of investing in Omnicare’s common stock. (Respondents’ Br. at 34). Instead, Omnicare gave no basis for its opinion of legal compliance. Information about Omnicare’s arrangements with pharmaceutical companies came to light only after the unsealing of several qui tam suits naming Omnicare and others – suits Omnicare ultimately settled for a total of $196.5 million. (Respondents’ Br. at 13).
Investors argued that their complaint properly alleged Omnicare’s failed to make a reasonable investigation and lacked reasonable grounds to believe the challenged statements were true or complete. The investors asked for affirmance of the Sixth Circuit’s judgment. (Respondents’ Br. at 58).
C. The Brief of the United States as Amicus Curiae
The United States argued that a statement of opinion is actionable under Section 11 “if it lacked basis that was reasonable under the circumstances even if it was sincerely held.” (Brief of the U.S. at 5). An opinion can be misleading, the U.S. argued, either because it is insincere or because it lacks foundation, and the plaintiff is relieved from alleging the defendant disbelieved the opinion. (Brief of the U.S. at 6). The U.S., however, believed the Sixth Circuit erred in holding that “a statement of opinion is actionably false whenever it is ultimately determined to be wrong.” (Brief of the U.S. at 10). The U.S. contended the Sixth Circuit had applied an erroneous legal standard, and it requested vacatur of the judgment and remand for further proceedings. (Id.)
IV. Oral Argument Before the Supreme Court Held on November 3, 2014
It’s never easy to tell what the Justices are thinking based on the oral argument. But, this author believes the general tenor of the questioning suggests that the majority had problems with Omnicare’s position that statements of opinion are not statements of material fact under Section 11.
A. Omnicare’s principal arguments:
• Omnicare’s counsel conceded that proof of a lack of a factual basis could be introduced, but only as some evidence the speaker did not believe his, her, or its own statement.
• When it comes to documents like registration statements that many authors probably drafted, the “speaker” whose state of mind is relevant is the person or persons who made or approved the statement at issue.
• An opinion is not a fact, whether plaintiff’s Section 11 case is one based on statements or omissions, and the only “fact” disclosed in an opinion is the fact of the speaker’s belief.
• Section 11 is a strict liability statute which the Court should construe narrowly.
B. Investors’ arguments:
• As a strict liability statute, Section 11 shifts the risks onto the issuer.
• Merely because a company puts the words “we believe” in front of a statement does not render the statement less factual or signal the speaker doubts its truth.
• On the contrary, when an issuer speaks in a registration statement, the issuer is trying to induce the investor to believe, “I wouldn’t be saying this if I didn’t have a reasonable basis.” Therefore, a reasonable basis for statements of opinion must exist, or liability for them will attach under Section 11.
• The investors endorsed the Solicitor General’s argument for imposing this “reasonable basis” standard in Section 11 cases. And when we speak about a “reasonable basis” for an opinion, we understand that it is a matter of context and circumstances, and that an analogous due diligence defense exists in Section 11 itself.
• For example, with respect to a statement of opinion on legal compliance, a reasonable basis might be that the company’s opinion is consistent with the facts – in other words, you could not reasonably hold this legal view if you were taking kickbacks and giving bribes.
C. Solicitor General’s Office:
• The statute says you cannot mislead in material matters, and statements of opinion, especially from corporate executives, can mislead investors.
• Investors and the SEC should be able to seek redress under Section 11 if the speaker lacks a reasonable basis – that is, a factual basis – for the statement of opinion.
V. Probable Outcome & Ramifications
Based on the tenor and tone of the argument, this author believes the Court will affirm the Sixth Circuit. The Government had asked for remand to the Sixth Circuit to require that court to clarify certain language in its opinion the Government thought troublesome. But that is unlikely, since the Supreme Court reviews judgments entered, and not the wording of decisions.
Omnicare warns that affirmance will “chill” corporate disclosure in registration statements. That may or may not be true. Issuers have a strong incentive – raising needed funds – to reveal the company’s beliefs and opinions on important corporate matters. When these beliefs and opinions are forward-looking, the issuer is protected by the PSLRA’s Safe Harbor provision. And with respect to opinions on present or past matters to which the Safe Harbor is inapplicable, companies can still avoid Section 11 liability. They can disclose the factual basis for their opinions, including, in the case of an opinion on legal compliance, whether the government, competitors, commentators, and the like, have expressed a contrary view on the legality of the issuer’s corporate practices.
A decision is expected this Spring.
Please Note: Information contained in this alert is for the general education and knowledge of our readers. It is not legal advice and should not be relied upon as such. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.