Today, SCOTUS issued its opinion in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund. In the case, SCOTUS answers these questions: First, when can a statement of opinion be considered a “false statement of material fact”? That is, for purposes of §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? Second, when can a statement of opinion be rendered misleading by omission of discrete facts? Does a statement of opinion convey facts about the speaker’s basis for holding that view that, if omitted, can create liability? What if the issuer believed the statement was true, but had no reasonable basis for its belief?
In a 2005 registration statement, Omnicare stated that it believed its contracts and practices were in compliance with federal and state laws and that its contracts with pharmaceutical manufacturers were legally and economically valid arrangements. Those opinions were accompanied by cautionary statements regarding “state-initiated ‘enforcement actions against pharmaceutical manufacturers’ for offering payments to pharmacies that dispensed their products; it then cautioned that the laws relating to that practice might ‘be interpreted in the future in a manner inconsistent with our interpretation and application.’” It also noted “that the Federal Government had expressed ‘significant concerns’ about some manufacturers’ rebates to pharmacies and warned that business might suffer ‘if these price concessions were no longer provided.’” Turns out that, in 2009, Omnicare reached a $98 million settlement with the Justice Department 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 brought by Union Pension Funds in connection with the registration statement, the 6th Circuit held that, under §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 §11 case.
The Funds that brought the claim 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, the Court stated, they argued that “a statement of belief may make an implicit assertion about the belief ’s ‘subject matter’: To say ‘we believe X is true’ is often to indicate that ‘X is in fact true.’” Omnicare contended that, so long as an opinion is sincerely held, the statement of opinion cannot be misleading regardless of whether the opinion proved to be incorrect and regardless of any omissions. Accordingly, the only question, Omnicare argued, is whether the statement was subjectively true. 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,” but in oral argument, the government explained that, in addition to showing the objective falsity of the express or implied fact, 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.” (For a further discussion of the oral argument in this case, see this post.)
In an opinion by Justice Kagan joined by the rest of the Court, except for separate concurring opinions by Justices Scalia and Thomas, the Court vacated the decision of the 6th Circuit, holding that it had applied the wrong standards. In contrast to the decisions of the lower courts, the Court’s opinion drew a sharp line, in the context of liability for statements of opinion, between the standards applicable to untrue statements of material fact as compared with omissions of material fact necessary to make the statement not misleading.
With regard to false statements of material fact, the Court concluded that the 6th Circuit had incorrectly conflated 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. That distinction, the Court emphasized, was embedded in the language of §11, which does not create liability for all untrue statements, but rather only for untrue statements “of material fact.” Liability could arise, however, if the speaker did not hold the belief or if the statement contained embedded statements of fact that were untrue, such as when the statement of opinion also includes statements presented as facts in support of the opinion. (The example used in the opinion is a statement that “I believe our TVs have the highest resolution available because we use a patented technology to which our competitors do not have access.” The statement regarding the use of a patented technology is a statement of fact embedded in a statement of opinion.) However, neither exception was applicable to the statements at issue in this case; both statements were pure statements of opinion, and the Funds did not contend that the opinions were not honestly held, just that they turned out to be wrong. Accordingly, the Court observes, §11 is not “an invitation to Monday morning quarterback an issuer’s opinions.”
Turning next to the question of “when, if ever, the omission of a fact can make a statement of opinion like Omnicare’s, even if literally accurate, misleading to an ordinary investor,” the Court took a nuanced position. While recognizing that a reasonable person takes into account the difference between a statement of fact and a statement of opinion, the Court maintained that a reasonable person may also,
“depending on the circumstances, understand an opinion statement to convey facts about how the speaker has 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….In the context of the securities market, an investor, though recognizing that legal opinions can prove wrong in the end, still likely expects such an assertion [regarding the lawfulness of the issuer’s conduct] to rest on some meaningful legal inquiry—rather than, say, on mere intuition, however sincere…”
Accordingly, the Court held, the appropriate standard with respect to omissions in connection with statements of opinion is “if a registration statement omits material facts about the issuer’s inquiry into or knowledge concerning a statement of opinion, and if those facts conflict with what a reasonable investor would take from the statement itself, then §11’s omissions clause creates liability.” Because investors recognize that opinions often rest on weighing and balancing competing facts, this does not mean that every single fact “cutting the other way” must be disclosed. The Court notes also that “a reasonable investor generally considers the specificity of an opinion statement in making inferences about its basis,” inferring from a more specific statement that a more detailed investigation occurred.
Whether an opinion is misleading also depends on the context and the surrounding language. In the context of registration statements, the Court stated:
“Investors do not, and are right not to, expect opinions contained in those statements to reflect baseless, off the-cuff judgments, of the kind that an individual might communicate in daily life. At the same time, an investor reads each statement within such a document, whether of fact or of opinion, in light of all its surrounding text, including hedges, disclaimers, and apparently conflicting information. And the investor takes into account the customs and practices of the relevant industry. So an omission that renders misleading a statement of opinion when viewed in a vacuum may not do so once that statement is considered, as is appropriate, in a broader frame. The reasonable investor understands a statement of opinion in its full context, and §11 creates liability only for the omission of material facts that cannot be squared with such a fair reading.”
This concept, the Court contends, is also inherent in common law tort principles of misrepresentation, quoting Prosser for the assertion that “’it has been recognized very often that the expression of an opinion may carry with it an implied assertion, not only that the speaker knows no facts which would preclude such an opinion, but that he does know facts which justify it.’”
If companies were free to escape liability simply by adding “we believe” to any opinion, that position, “would punch a hole in the statute for half-truths in the form of opinion statements.” Rather, “Section 11’s omissions clause, as applied to statements of both opinion and fact, necessarily brings the reasonable person into the analysis, and asks what she would naturally understand a statement to convey beyond its literal meaning. And for expressions of opinion, that means considering the foundation she would expect an issuer to have before making the statement.”
To bring a claim, an “investor 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….And to avoid exposure for omissions under §11, an issuer need only divulge an opinion’s basis, or else make clear the real tentativeness of its belief. Such ways of conveying opinions so that they do not mislead will keep valuable information flowing.”
In remanding the case back to the lower court to apply the correct omissions standard, the Court emphasized that the Funds need to specifically identify one or more omitted material facts, and the lower court must consider whether the excluded fact shows that Omnicare lacked the basis for making the statement of opinion that a reasonable investor would expect. Moreover, this assessment must be made in context of the registration statement as a whole, including “whatever facts Omnicare did provide about legal compliance, as well as any other hedges, disclaimers, or qualifications it included in its registration statement,” such as the various cautionary statements described above.
In his concurring opinion, Justice Scalia agreed with the discussion “of what it means for an expression of opinion to state an untrue material fact.” But he thought the Court went too far in inferring facts from statements of opinion: citing a dueling Prosser excerpt and other resources of common law, he argued that “an expression of opinion implies facts (beyond the fact that the speaker believes his opinion) only where a reasonable listener would understand it to do so. And it is only when expressions of opinion do imply these other facts that they can be ‘misleading’ without the addition of other ‘material facts.’ The Court’s view would count far more expressions of opinion to convey collateral facts than I—or the common law—would, and I therefore concur only in part.” Under common law, he contends, the inference of facts from expressions of opinion was available only in narrow circumstances, such as in the context of a relationship of trust or in opinions by an expert in his capacity as an expert. By contrast, the “effect of the Court’s rule is to adopt a presumption of expertise on all topics volunteered within a registration statement.” Moreover, he argues, even when there is an implied statement of a reasonable investigation, it is the speaker’s belief that a reasonable investigation has been conducted that controls. Justice Thomas also concurred with the Courts opinion, agreeing with the result that “the statements of opinion at issue in this case do not contain an untrue statement of a material fact.” However, he did not believe that the theory of liability regarding material omissions was properly before the Court and, therefore, did not think it advisable to opine about it.