On Tuesday, the Supreme Court issued its decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, No. 13-435 (U.S. Mar. 24, 2015), the most important federal securities case on the docket this Term. Resolving a circuit split created by the Sixth Circuit’s opinion in this case, the Court unanimously held that a statement of opinion or belief is not an “untrue statement of a material fact” for purposes of Section 11 of the Securities Act of 1933 simply because the statement turned out to be wrong. Rather, a statement of opinion cannot result in liability for a misrepresentation without pleading and proof not only that the statement ultimately proved incorrect, but also that the speaker did not subjectively believe the statement at the time it was made. The Court went on to hold (in a decision joined by seven Justices) that plaintiffs may plead and prove an actionable omission to the extent that a statement of opinion implies that the speaker had a reasonable basis for that opinion when the speaker did not in fact have such a basis. But, as described further below, the Court made clear that would-be plaintiffs must overcome a high bar to plead such a claim. The Court thus unanimously vacated the Sixth Circuit’s opinion, dismissed the affirmative misrepresentations claim, and remanded for further consideration of the omissions claim only. A team of Sidley lawyers in our Washington D.C. office, including Carter Phillips, Mike Warden, Eric McArthur, Jonathan Cohn and Joshua Fougere, filed an amicus brief in support of the defendants/petitioners. This client alert first will summarize and analyze the Omnicare decision, including aspects of Section 11 that the Court did not address. It then will discuss its potential application to other securities laws, including, most notably, claims brought under Section 10(b) and Rule 10b-5, the latter of which contains language identical to the Section 11 language analyzed by the Court. This alert also will address Omnicare’s potential implications for issuers, underwriters, auditors, and others who assist with or consent to being named in a registration statement. The Omnicare Decision
Section 11 of the Securities Act of 1933 provides a cause of action when a registration statement “contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.” 15 U.S.C. § 77k(a) (emphasis added). Omnicare arose from a series of regulatory issues faced by the defendant, a pharmacy-services company, regarding alleged illegal kickbacks from pharmaceutical manufacturers and false claims submitted to Medicare and Medicaid. The key allegation in the case is that Omnicare made material misrepresentations in the registration statement for a December 2005 stock offering regarding its compliance with law by stating:
“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.”
Slip op., at 3 (emphasis added; citations omitted). The Court also noted various caveats and disclaimers in the registration statement about ongoing enforcement actions against the company and concerns raised by the federal government. Id.
The Court, in an opinion by Justice Kagan, was tasked with deciding whether and how Section 11 applied to these statements of opinion. The Court did so in two parts, first by analyzing whether these opinions were actionable misrepresentations of fact and second by analyzing whether there were alleged material omissions regarding these opinions.
With respect to alleged misrepresentations, the Court held that an allegation that a statement of opinion is false must include an allegation that the speaker did not subjectively believe that statement.
As an initial matter, the Court applied the plain language of Section 11 regarding “an untrue statement of material fact,” and carefully distinguished between facts and opinions:
A fact is “a thing done or existing” or “[a]n actual happening.” Webster’s New International Dictionary 782 (1927). An opinion is “a belief[,] a view,” or a “sentiment which the mind forms of persons or things.” Id., at 1509. Most important, 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 . . . . Indeed, that difference between the two is so ingrained in our everyday ways of speaking and thinking as to make resort to old dictionaries seem a mite silly. And Congress effectively incorporated just that distinction in §11’s first part by exposing issuers to liabil-ity not for “untrue statement[s]” full stop (which would have included ones of opinion), but only for “untrue state¬ment[s] of . . . fact.” §77k(a) (emphasis added).
Slip op., at 6 (first emphasis added; second in original).
Then, the Court established the limits of liability for a misrepresentation of opinion, focusing on the only fact inherent in such a statement—the speaker’s actual belief. In particular, the Court noted that “every such statement explicitly affirms one fact: that the speaker actually holds the stated belief” and thus there could be liability where the plaintiff can prove that speaker did not actually believe the opinion. Id. at 7.1 In Omnicare, as plaintiffs frequently do in attempting to allege Section 11 claims, plaintiffs had disclaimed any effort to plead scienter or subjective disbelief, and “instead claim[ed] thatOmnicare’s belief turned out to be wrong—that whatever the company thought, it was in fact violating anti-kickback laws.” Id. at 9. In no uncertain terms, the Court continued:
[T]hat allegation alone will not give rise to liability under §11’s first clause because, as we have shown, a sincere statement of pure opinion is not an “untrue statement of material fact,” regardless whether an investor can ultimately prove the belief wrong. That clause, limited as it is to factual statements, does not allow investors to second-guess inherently subjective and uncertain assessments. In other words, the provision is not, as the Court of Appeals and the Funds would have it, an invitation to Monday morning quarterback an issuer’s opinions.
Id. (emphasis added).2
The Court then turned to Section 11’s omissions provision and remanded the case for further consideration of plaintiffs’ theory that the opinion regarding legal compliance was made misleading by omission of material facts. As noted above, Section 11 creates liability where a registration statement “omitted to state a material fact . . . necessary to make the statements therein not misleading.” 15 U.S.C. § 77k(a).
The Court made clear that omission liability may still arise when the statement is in the form of an opinion and there is no allegation that the speaker in fact did not believe that opinion. In part, the Court adopted an argument advanced by the Solicitor General, and concluded that “a reasonable investor may 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.” Slip op., at 11. Thus, the Court adopted a test for omissions that focuses on the basis that the speaker had for the statement and the inquiry a reasonable investor would expect to have been made before the offering of the opinion, particularly given the context in which it is made and the precise words used to offer it. The Court elaborated by way of example:
Consider an unadorned statement of opinion about legal compliance: “We believe our conduct is lawful.” If the issuer makes that statement without having consulted a lawyer, it could be misleadingly incomplete. 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 to rest on some meaningful legal inquiry—rather than, say, on mere intuition, however sincere. Similarly, if the issuer made the statement in the face of its lawyers’ contrary advice, or with knowledge that the Federal Government was taking the opposite view, the investor again has cause to complain: He expects not just that the issuer believes the opinion (however irrationally), but that it fairly aligns with the information in the issuer’s possession at the time.Thus, 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.
Id. at 11-12 (emphasis added; footnotes omitted). Moreover, “a reasonable investor generally considers the specificity of an opinion statement in making inferences about its basis,” and thus, the more specific a statement of opinion is, “[a]ll else equal, a reasonable person would think that a more detailed investigation lay behind” it. Id. at 13-14 n.8. Elsewhere, the Court noted that the implication of a reasonable basis may arise “where—as in a registration statement—a speaker ‘holds himself out or is understood as having special knowledge of the matter which is not available to the plaintiff’ and that ‘an issuer has special knowledge of its business—including the legal issues the company faces—not available to an ordinary investor.’” Id. at 15-16 & n.11 (citation omitted). And the Court included some strong language to justify its rule, about how “literal accuracy is not enough” and how Congress did not give issuers “virtual carte blanche to assert opinions in registration statements free from worry” about liability. Id. at 16-17. For all that, however, the Court still concluded by saying what had to that point been implicit: pleading a viable section 11 claim “is no small task for an investor.” Id. at 18.
Other Aspects of Section 11 Liability
On its face, Section 11(a) subjects several classes of persons to potential liability. The Supreme Court’s opinion focused exclusively on the liability of the “issuer,” and not any of the others. These persons include those who sign a registration statement, an issuer’s directors, accountants and other experts who consent to the use of audit opinions on financial statements and other opinions in a registration statement, and underwriters. And Section 11(b) establishes various defenses for these classes of persons, other than the “issuer,” including a so-called “due diligence” defense that the person had a reasonable basis for his or her statement based on a reasonable investigation. The parties and various amici before the Court devoted significant attention to the potential interaction between (1) a plaintiff’s affirmative obligations to plead and prove a violation of Section 11(a) and (2) a defendant’s ability to assert a defense under Section 11(b). But the Court found all that it needed in subsection (a) and remained silent as to potential Section 11 defendants other than the “issuer” and available defenses under subsection (b). The entire focus of the decision is on a plaintiff’s obligation to plead and prove a claim under Section 11(a).
Potential Implications of the Case
The Omnicare decision may have several immediate implications, a few of which we will mention here.
1. Omnicare confirms the high burden that plaintiffs must meet to plead opinion liability.
The most obvious result of Omnicare is what it means for prospective plaintiffs looking to plead a claim based on a statement of opinion. As to alleged “untrue statements of a material fact,” it is not sufficient for plaintiffs to plead and prove that an opinion turned out to be wrong; rather, they must plead and prove subjective falsity – i.e., that the speaker did not honestly hold that opinion — as some but not all Circuits previously required. See, e.g., Fait v. Regions Financial Corp., 655 F. 3d 105 (2d Cir. 2011).
As to omission allegations, too, the pleading bar is high. In some examples, the Court suggested that the specific receipt of contrary information, or the failure to conduct particular investigations, must be pleaded in order to state a claim under this standard. It expressly acknowledged, for instance, that “[i]n some circumstances . . . reliance on advice from regulators or consistent industry practice might accord with a reasonable investor’s expectations,” slip op., at 12 n.5, but that liability could arise if a CEO “had failed to review any of her competitors’ product specifications [o]r . . . had recently received information from industry analysts indicating that a new product had surpassed her company’s on this metric,” id. at 12 n.6. In other words, the Court elaborated, “[a]n opinion statement . . . is not necessarily misleading when an issuer knows, but fails to disclose, some fact cutting the other way,” because “[r]easonable investors understand that opinions sometimes rest on a weighing of competing facts; indeed, the presence of such facts is one reason why an issuer may frame a statement as an opinion, thus conveying uncertainty.” Id. at 13.
The Court reiterated the implications of its holding by emphasizing at some length the pleading burden:
[A]n investor cannot state a claim by alleging only that an opinion was wrong; the complaint must as well call into question the issuer’s basis for offering the opinion. And to do so, the investor cannot just say that the issuer failed to reveal its basis. Section 11’s omissions clause . . . affords a cause of action only when an issuer’s failure to include a material fact has rendered a published statement misleading. To press such a claim, an investor must allege that kind of omission—and not merely by means of conclusory assertions. To be specific:The 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. That is no small task for an investor.
Id. at 17-18 (emphasis added; citations omitted). This framing of the motion to dismiss inquiry is particularly helpful to defendants seeking to place isolated statements in the full context of an issuer’s risk disclosures.
2. Omnicare focuses on the perspective of the “reasonable investor.”
A second important takeaway is Omnicare’s explanation of objective reasonableness in the context of what makes a statement misleading. The Court noted that “whether a statement is ‘misleading’ depends on the perspective of a reasonable investor: The inquiry (like the one into materiality) is objective” but “depends on context.” Id. at 10, 14 (emphasis added). Of course, this also means that the evaluation of whether a statement is objectively misleading ordinarily should be ripe for a decision at the pleading stage, as the Court implied. More than that, the Court’s description makes clear that there is, from the perspective of a reasonable investor, a high standard for showing that a statement of opinion was misleading:
A reasonable person understands, and takes into account, the difference we have discussed above between a statement of fact and one of opinion. She recognizes the import of words like “I think” or “I believe,” and grasps that they convey some lack of certainty as to the statement’s content. And that may be especially so when the phrases appear in a registration statement, which the reasonable investor expects has been carefully wordsmithed 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.” And because she does so, the omission of a fact that merely rebuts the latter statement fails to render the former misleading. In other words, a statement of opinion is not misleading just because external facts show the opinion to be incorrect. Reasonable investors do not understand such statements as guarantees, and §11’s omissions clause therefore does not treat them that way.
Id. at 11 (emphasis added; citation omitted). The reasonable investor is a sophisticated listener and understands the context of the statements she receives.
3. Omnicare’s holding should apply to other securities claims, including those under other provisions of the ’33 Act and the ’34 Act.
Although Omnicare came to the Court as a Section 11 case, its holdings and reasoning can be applied much more broadly. The language the Court analyzed — “an untrue statement of material fact or omitted to state a material fact . . . necessary to make the statements therein not misleading” — is either identical or closely analogous to language in, for example, Section 12(a)(2) of the ’33 Act and in Rule 10b-5(b) promulgated under Section 10(b) (and in Section 18) of the Securities Exchange Act of 1934. Thus, to the extent that the Supreme Court has established a high pleading bar for statements of opinions, that should extend to other claims under the ’33 Act and the ’34 Act.
Additionally, much of the law on what constitutes a reasonable basis for opinions, especially as to auditors’ opinions, has developed in the context of 10b-5 litigation, where plaintiffs need to allege scienter. Section 11 plaintiffs frequently disclaim any reliance on fraud, as the Omnicare plaintiffs did, in an attempt to move away from the more exacting pleading standards that would apply to a Rule 10b-5 claim. But the Supreme Court’s discussion of what constitutes a reasonable basis for an opinion brings the 10b-5 analogy back into play and provides a clear path for defendants to cite those helpful 10b-5 cases.
4. Omnicare should make it easier for auditors and other experts to prevail on motions to dismiss.
As noted above, the Court did not explicitly address the important consequences of its decision on certain “experts,” who issue opinions—including auditors and others like underwriters—but we believe that these categories of potential defendants have good reason to be encouraged. By holding that statements of opinion are not “untrue statement[s] of a material fact” within the meaning of Section 11, the Court clearly separates statements of “fact” from those of “opinion.” Pure opinion statements, so long as they are honestly held, are not statements of untrue fact even if that opinion is proven wrong. This tenet should apply powerfully, for example, to audit opinions, as numerous lower courts have already held.3
Untrue statements of opinion do remain actionable if the opinion was not honestly held when made, but that is very difficult to allege. Indeed, a fair reading of Omnicare is that, in the context of affirmative misstatement claims, plaintiffs must allege actual knowledge that an opinion is false.
It is true that material omissions also may remain actionable if they render a statement of opinion misleading to a reasonable investor, even if the statement is literally true, because a reasonable investor may understand a statement of opinion to convey facts about the underlying basis of the opinion. Yet in the context of expert liability cases, like auditors, the complaint presumably would have to allege, for example, that an auditor omitted material facts about its own failure to conduct a reasonable inquiry to support its audit opinion. And even such a bare, conclusory allegation will not be enough. Rather, under Omnicare, plaintiffs should have to identify actual and material steps not taken in the audit, rather than merely claiming that any reasonable audit would have uncovered a material fact or, of course, that that the audit opinion turned out to be wrong because the financial statements did not comply with GAAP. Slip op., at 18. This holding parallels the powerful “no audit at all” standard that has developed as the standard for recklessness in a scienter inquiry under 10b-5—only here in the context of the requirement to allege an actionable statement or omission.
5. Omnicare may change how issuers make disclosures.
The Court’s opinion is rich with hypothetical examples to help illustrate the otherwise abstract parameters of its holding. A few such examples demonstrate just how much the exact phrasing of a statement can affect how it is categorized and, accordingly, whether or not liability may arise:
A company’s CEO states: “The TVs we manufacture have the highest resolution available on the market.” Or, alternatively, the CEO transforms that factual statement into one of opinion: “I believe” (or “I think”) “the TVs we manufacture have the highest resolution available on the market.” The first version would be an untrue statement of fact if a competitor had introduced a higher resolution TV a month before—even assuming the CEO had not yet learned of the new product. The CEO’s assertion, after all, is not mere puffery, but a determinate, verifiable statement about her company’s TVs; and the CEO, however innocently, got the facts wrong. But in the same set of circumstances, the second version would remain true. Just as she said, the CEO really did believe, when she made the statement, that her company’s TVs had the sharpest picture around. And although a plaintiff could later prove that opinion erroneous, the words “I believe” themselves admitted that possibility, thus precluding liability for an untrue statement of fact. That remains the case if the CEO’s opinion, as here, concerned legal compliance. If, for example, she said, “I believe our marketing practices are lawful,” and actually did think that, she could not be liable for a false statement of fact—even if she afterward discovered a longtime violation of law. Once again, the statement would have been true, because all she expressed was a view, not a certainty, about legal compliance.
Id. at 7. The upshot is that a careful review of the exact language used—and, in particular, signals used to convey a particular level of confidence in a stated opinion—should prove useful in assessing how a “reasonable investor” and therefore courts will assess disclosures moving forward. 6. Omnicare continues the trend of reference to the Restatements of Torts and Contracts in securities cases. One concluding note for future cases debating the meaning of the securities laws’ causes of action: the Court relied extensively on the Restatements of Torts and Contracts and other general, traditional common law sources, despite Justice Scalia’s recent opinion criticizing more recent Restatements. For statutes formulated against a common-law backdrop, therefore, the Court continues to draw on that tradition as an important tool of statutory construction.