© 2015 Paul, Weiss, Rifkind, Wharton & Garrison LLP. In some jurisdictions, this publication may be considered attorney advertising. Past representations are no guarantee of future outcomes. March 25, 2015 United States Supreme Court Limits Investor Suits for Misleading Statements of Opinion The United States Supreme Court issued a decision yesterday that resolves a split in the federal courts of appeals regarding when statements of opinion may give rise to liability under the federal securities laws. In Omnicare, Inc. v. Laborers’ District Council Construction Industry Pension Fund, No. 13-435, the Supreme Court addressed the pleading standard for claims alleging a false or misleading opinion in an issuer’s registration statement under Section 11 of the Securities Act. The Court voted 9-0 to vacate a decision by the Sixth Circuit Court of Appeals which had held that issuers and individuals who sign a registration statement may be held liable for statements of opinion that later turn out to be false, regardless of their subjective belief in those statements. In rejecting the Sixth Circuit’s conclusion, the Supreme Court emphasized that the federal securities laws do not create liability based merely on a statement of belief that “turned out to be wrong.” Rather, the Court held, a statement of opinion is actionable under Section 11 as an “untrue statement of material fact” only if the speaker did not honestly hold the opinion when it was expressed. The Court also held that, in certain circumstances, statements of opinion may be actionable based on an omission of material fact that renders the statements misleading to a reasonable investor. The Omnicare decision may help to limit the scope of liability faced by companies, as well as their officers and directors, for alleged misstatements of opinion. But the decision also leaves significant uncertainty as to the circumstances under which affirmative statements of opinion will give rise to omission claims. Background In December 2005, Omnicare, a leading provider of pharmacy services for residential nursing homes, filed a registration statement in connection with a public offering of common stock. The registration statement included two statements expressing the Company’s opinion that its contracts with pharmaceutical manufacturers complied with federal and state laws. The federal government subsequently sued Omnicare for allegedly receiving kickbacks, in the form of improper rebates, from pharmaceutical manufacturers. Pension funds that had purchased Omnicare stock in the public offering (the “Funds”) in turn filed suit against the Company for violating Section 11. The Funds alleged that Omnicare’s opinion statements concerning the legality of its contracts were materially false because none of the Company’s officers and directors “possessed reasonable grounds” to express those opinions, given the kickbacks and other illicit activities brought to light by the government’s case. In February 2012, the United States District Court for the Eastern District of Kentucky granted Omnicare’s motion to dismiss the Funds’ complaint on the ground that “statements regarding a company’s belief as to its legal compliance” are actionable only if those who made them “knew [they] were untrue at the time.” In this regard, the District Court followed the decision of the United States Court of Appeals for the Second Circuit in Fait v. Regions Financial Corp., which held that to state a claim under Section 11 based on a statement of opinion, plaintiffs must allege that the statement was both objectively false (i.e., it turned out to be incorrect) and subjectively false (i.e., the speaker did not genuinely believe the opinion at the time the statement was made). 655 F.3d 105, 112 (2d Cir. 2011); see also Rubke v. Capitol Bancorp Ltd., 551 F.3d 1156, 1162 (9th Cir. 2009) (fairness opinions “can give rise to a claim under [S]ection 11 only if the complaint alleges with particularity that the statements were both objectively and subjectively false and misleading”). The District Court found that the Funds could not meet that standard because they failed to allege that Omnicare’s officers and directors knew they were violating the anti-kickback laws at the time the challenged opinion statements were made. The Court of Appeals for the Sixth Circuit reversed. The Court of Appeals acknowledged that Omnicare’s statements expressed opinions, rather than facts. It held, however, that the Funds’ allegation that the statements were objectively false was sufficient to state a claim under Section 11, regardless of the Omnicare officers’ subjective belief in their opinions at the time they were expressed. In reaching this conclusion, the Sixth Circuit expressly disagreed with the holdings of Fait and Rubke, thereby creating a circuit split on the issue of whether, under Section 11, a plaintiff may plead that a statement of opinion was “untrue” merely by alleging that the opinion was objectively incorrect. The Supreme Court granted certiorari in Omnicare to address that question. The Supreme Court Majority Opinion In an opinion by Justice Kagan, the Supreme Court vacated the Sixth Circuit’s decision. Unlike the Court of Appeals, the Supreme Court analyzed the question of Section 11 liability in two steps—first addressing whether Omnicare’s opinion statements could be held to constitute affirmative misstatements of fact, and second addressing whether those statements could give rise to liability based on an “omissions” theory. The Supreme Court began its analysis by distinguishing statements of fact, which express “certainty about a thing,” from statements of opinion, which do not. (Slip op. at 6.) Applying this distinction to Omnicare’s statements that it “believe[d]” its contracts with pharmaceutical manufacturers to be in compliance with applicable laws, the Court concluded that such statements expressed only opinions, not facts. Such “pure statements of opinion,” the Court held, could give rise to liability under Section 11’s falsestatement provision only where the speaker did not honestly hold the opinions being expressed. (Id. at 9.) In this regard, the Supreme Court agreed with the standards set forth in the Second Circuit’s Fait decision (though the Court did not address Fait directly). Because the plaintiffs in Omnicare did “not contest that Omnicare’s opinion was honestly held,” their claims that the Company’s opinion statements amounted to untrue statements of fact failed. The Court then considered when, if ever, the omission of a material fact can render a statement of opinion misleading under Section 11. Drawing on principles based in tort law, the Court reasoned that issuers may be liable for material omissions from statements of opinion in certain circumstances because a reasonable investor might understand such statements to convey an implied assertion that the speaker knows of facts “sufficient to justify” the opinion being expressed. (Id. at 14.) Thus, the Court held that 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, the omission may give rise to Section 11 liability. (Id. at 12.) Because the court below had not addressed the question of whether the Omnicare plaintiffs’ allegations were sufficient to satisfy this standard, the Supreme Court remanded for further proceedings. Concurring Opinions In an opinion concurring in part and concurring in the judgment, Justice Scalia agreed with the Court’s holding as to alleged misstatements under Section 11’s first provision. (Scalia Concurrence at 1.) However, he advocated for a significantly narrower understanding of when statements of opinion may be considered misleading due to the omission of material facts. In his view, Section 11 should give rise to liability for omissions from statements of opinion only when the speaker subjectively believes he lacks a reasonable basis for the statement. (Id. at 6.) Justice Scalia observed that such an inference would be unwarranted in Omnicare, where corporate management simply opined on the Company’s compliance with the law, an area in which management concededly is not expert. (Id. at 3.) By adopting a test that requires consideration of what a “reasonable investor”—as opposed to the speaker himself—would consider a sufficient basis for a statement of opinion, Justice Scalia predicted that the Court’s decision will lead to “roundabout attacks upon expressions of opinion” by investors “seeking recompense for a corporation’s expression of belief that turned out, after the fact, to be incorrect.” (Id. at 6–7.) Justice Thomas separately filed a short opinion concurring in the judgment only. He argued that the Court was right to vacate the Sixth Circuit’s decision, but that it should not have addressed the issue of whether Omnicare omitted a material fact necessary to make its statements not misleading because that question was not addressed by the courts below. Implications of the Decision With all nine justices voting to vacate the Sixth Circuit’s decision, Omnicare provides a clear, if somewhat narrow, limitation on the scope of Section 11 liability for statements of opinion. The decision also leaves open a number of questions that will require further development in the lower courts. First, the Supreme Court’s ruling underscores the significance of distinguishing between statements of opinion and statements of fact in the context of Section 11 claims and, potentially, other types of claims under the federal securities laws. Among other things, the decision confirms that whether a statement is considered one of fact or opinion may be dispositive of claims under Section 11 when the plaintiff has not alleged that the speaker disbelieved the statement at the time it was made. The Omnicare opinion does not provide any bright-line rule as to how to draw this distinction. The opinion does strongly suggest that the presence of words like “I believe” may indicate a statement of opinion, rather than one of fact, because they can, in themselves, signal the speaker’s uncertainty about a statement and indicate the possibility that an opinion may later turn out to be erroneous. (Id. at 7.) As a result, issuers may be more likely—and well advised—to use such “opinion” language in their registration statements and other disclosures going forward. The Court’s ruling, however, also leaves considerable room for lower courts to develop more precise rules about what types of statements do and do not constitute opinions. It held that the inclusion of phrases such as “we believe” or “we think” does not automatically make the statement that follows one of opinion. (Id. at 16.) And conversely, lower courts have held that statements unaccompanied by these phrases may constitute statements of opinion. 1 Second, the Supreme Court’s ruling that a statement of opinion may be actionable under Section 11 under an omissions theory is likely open to a new avenue of litigation. Plaintiffs who cannot allege that an opinion was not honestly held may instead allege that it was based on inadequate inquiry or that there 1 In the Second Circuit, there have already been several decisions, post-Fait, on this issue. See, e.g., City of Omaha v. CBS Corp., 679 F.3d 64, 67–68 (2d Cir. 2012) (estimates of goodwill are statements of opinion); Kaess v. Deutsche Bank AG, No. 13-2364- cv, 2014 WL 3445468, at *1 (2d Cir. July 16, 2014) (summary order) (statements about “estimation of the extent of its investment in and exposure to residential mortgage-backed securities, as well as its statements about its Value-at-Risk (‘VaR’) metrics” are statements of opinion); Freeman Grp. v. Royal Bank of Scotland Grp. PLC, 540 F. App’x 33, 37–38 (2d Cir. 2013) (summary order) (“[D]etermining the amount of capital necessary to balance certain risks . . . reflects management’s opinion or judgment about what, if any, effect certain risks may have on assets’ values.” (quotations omitted)); In re Puda Coal Sec. Litig., No. 11 Civ. 2598 (KBF), 2014 WL 2915880, at *25 (S.D.N.Y. June 26, 2014) (“Audit statements . . . are statements of opinion as to which the subjective falsity requirement applies.”); In re Am. Int’l Grp. 2008 Sec. Litig., No. 08 Civ. 4772 (LTS), 2013 WL 1787567, at *4–5 (S.D.N.Y. Apr. 26, 2013) (disclosure obligations “triggered where the concentration of credit risk is ‘significant’” or where “a contract qualifies as a guarantee” constituted opinions). was contrary information available to the speaker. The extent to which such allegations are sufficient to avoid a motion to dismiss will require further judicial development. The Supreme Court emphasized, for example, that not all contrary facts need to be disclosed in connection with an opinion statement. To the contrary, “[a]n opinion statement . . . is not necessarily misleading when an issuer knows, but fails to disclose, some fact cutting the other way. Reasonable 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.) Thus, to state a viable 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.” (Id. at 18.) As the Supreme Court observed, “[t]hat is no small task for an investor”—particularly on a pre-discovery complaint. (Id.) The Court also observed that “whether an omission makes an expression of opinion misleading always depends on context.” (Id. at 14.) In this regard, lower courts weighing Section 11 claims of material omissions will need to consider the opinion statement and the alleged omission of fact “in light of all its surrounding text, including hedges, disclaimers, and apparently conflicting information.” (Id.) Also relevant are “the customs and practices of the relevant industry.” (Id.) Here, too, it will be up to lower courts to develop case law distinguishing actionable omissions from non-actionable ones, and those distinctions may depend on industry practice and other factors that the Supreme Court’s opinion references but does not conclusively determine. Moreover, given the Court’s statement that “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” (Id. at 19), issuers will need to consider what additional factual information—and what qualifying language—should accompany the opinions they express in registration statements and other disclosures. The Court’s opinion does not specify the level of factual detail necessary to “divulge an opinion’s basis,” nor does it prescribe the content of the disclaimers that would be sufficient to “make clear the real tentativeness” of an issuer’s belief. Finally, the Supreme Court’s opinion does not address the application of the standards it sets forth to claims based on statements of opinion that are asserted under provisions of the federal securities laws other than Section 11. The Second Circuit Court of Appeals, for example, has held that the same standards for pleading an actionable misstatement of opinion that apply under Section 11—including subjective falsity—also apply to claims asserted under Section 10(b) (in addition to the other distinctive elements of a Section 10(b) claim, such as scienter). See City of Omaha v. CBS Corp., 679 F.3d 64, 67–68 (2d Cir. 2012). The Supreme Court’s opinion in Omnicare appears to leave such lower court decisions intact—at least insofar as they concern alleged misstatements. But, to the extent that lower courts have not drawn the same distinction as the Supreme Court did between affirmative misstatements of opinion and statements of opinion that omit material facts, the decision also raises certain unanswered questions. These include, for example, whether plaintiffs alleging that a statement of opinion is materially misleading under Section 10(b) because the defendant omits that he failed to conduct an investigation supporting his opinion would be entitled to a presumption of reliance under Affiliated Ute Citizens v. United States, 406 U.S. 128 (1972), or whether such plaintiffs would be required to demonstrate reliance through one of the means applicable to a claim of alleged misrepresentation. Conclusion Omnicare resolves a significant split in the federal courts of appeals regarding when a statement of opinion may give rise to liability under Section 11 of the federal securities laws. The Supreme Court’s decision thus provides some measure of clarity for issuers of publicly-traded securities regarding the risks associated with expressing opinions in registration statements as well as in other types of disclosures. The decision also places important limits on investors’ ability to bring federal securities claims based on such opinion statements. At the same time, Omnicare leaves open several important questions for lower courts to determine. The precise scope of potential liability for statements of opinion under the securities laws will depend on how broadly or narrowly the lower courts apply Omnicare’s holdings. * * * This memorandum is not intended to provide legal advice, and no legal or business decision should be based on its content. Questions concerning issues addressed in this memorandum should be directed to: Charles E. Davidow (202) 223-7380 firstname.lastname@example.org Andrew J. Ehrlich (212) 373-3166 email@example.com Brad S. Karp (212) 373-3316 firstname.lastname@example.org Daniel J. Kramer (212) 373-3020 email@example.com William Michael (212) 373-3648 firstname.lastname@example.org Richard A. Rosen (212) 373-3305 email@example.com Audra J. Soloway (212) 373-3289 firstname.lastname@example.org Alexandra M. Walsh (202) 223-7317 email@example.com Associate Brette Tannenbaum contributed to this client alert.