Consider the following two statements:

“The company’s business practices are legal.”

“We believe the company’s business practices are legal.”

From an investor’s perspective, do both statements have the same meaning? The United States Supreme Court thinks not. The former expresses a fact, the latter an opinion.

As the Supreme Court recently explained in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015), that distinction is significant when it comes to liability under Section 11 of the Securities Act of 1933. With Justice Kagan writing for the majority, the Court narrowed the circumstances where Section 11 liability may attach to an opinion. While the Court rejected the Sixth Circuit’s expansive view of Section 11 liability, it stopped short of allowing issuers of securities to immunize themselves from Section 11 liability by simply prefacing every statement with “I believe” or “I think.”

Section 11 of the Securities Act

Before any company can offer securities to the public, it must file a registration statement with the Securities and Exchange Commission. 15 U.S.C. §§ 77e, 77f. Federal law prescribes minimum disclosure requirements for registration statements.See id. §§ 77g, 77aa. On top of the required disclosures, an issuer may choose to include additional information in its registration statement. See Omnicare, 135 S. Ct. at 1323.

Section 11 governs the contents of a registration statement, whether required or additional. It creates liability for both misstatements and omissions, giving the acquirer of a security a private right of action where “any part of the registration statement, when such part became effective, 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). As the Supreme Court has explained, “Section 11 thus creates two ways to hold issuers liable for the contents of a registration statement—one focusing on what the statement says and the other on what it leaves out.” Omnicare, 135 S. Ct. at 1323.

Unlike Section 10(b), which imposes liability for securities fraud, Section 11 has been interpreted as a strict liability statute.See, e.g.Herman & MacLean v. Huddleston, 459 U.S. 375, 382 (1983) (“If a plaintiff purchased a security pursuant to a registration statement, he need only show a material misstatement or omission to establish his prima facie case. Liability against the issuer of a security is virtually absolute, even for innocent misstatements.”). No showing of scienter is required. Id. at 383.

The Omnicare Case

The Omnicare litigation arises out of a December 2005 public stock offering by pharmacy services provider Omnicare, Inc. In connection with the offering, Omnicare filed a registration statement. In addition to the required disclosures, Omnicare included two statements of legal compliance:

  • “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.”

Omnicare, 135 S. Ct. at 1323.

The federal government later brought lawsuits against Omnicare for taking payments from drug manufacturers in violation of anti-kickback laws. Id. at 1324.

A group of pension funds that purchased Omnicare stock in the December 2005 offering filed a putative class action in the United States District Court for the Eastern District of Kentucky. The funds alleged, among other claims, that Omnicare made material misstatements and omissions in its registration statement in violation of Section 11, and pointed specifically to the statements of legal compliance. See Ind. State Dist. Council of Laborers & HOD Carriers Pension & Welfare Fund v. Omnicare, Inc., No. 2006-26(WOB), 2012 WL 462551, at *1-2, *4-5 (E.D. Ky. Feb. 13, 2012).

The District Court’s Dismissal

The district court granted the defendants’ motion to dismiss the Section 11 claims. According to the district court, Omnicare’s statements of legal compliance were “soft information,” actionable only if the issuer knew the statements were false when made. Id. at *4-5. Because the funds did not allege knowledge of falsity—and in fact disclaimed any allegation sounding in fraud or deception—they failed to state a claim under Section 11. Id. at *5 & n.3.

The Sixth Circuit’s Reversal

The funds appealed to the United States Court of Appeals for the Sixth Circuit. The Sixth Circuit reversed, reasoning that, because Section 11 provides for strict liability, a Section 11 plaintiff need not allege a defendant’s state of mind. Ind. State Dist. Council of Laborers & HOD Carriers Pension & Welfare Fund v. Omnicare, Inc., 719 F.3d 498, 503 (6th Cir. 2013). The court distinguished Section 10(b) and Rule 10b-5 cases, where a plaintiff must prove scienter, from Section 11 cases, where a plaintiff need only show that a registration statement contains “an untrue statement of a material fact.” Id. at 505 (quoting § 77k(a)).

The Sixth Circuit rejected the defendants’ argument that, where a Section 11 claim is founded on a statement of belief or opinion, there can be no liability unless the statement was objectively false, and the defendant disbelieved the statement at the time it was made. Id. at 505-06. The court equated knowledge of falsity to scienter—because scienter is not an element of a Section 11 claim, knowledge of falsity is not required. Id. at 506-07.

Applying that standard to the complaint, the Sixth Circuit held that the funds did state a Section 11 claim based on the statements of legal compliance, and reversed the decision of the district court. Id. at 507-08.

The Supreme Court’s Opinion

The Supreme Court granted certiorari, 134 S. Ct. 1490 (2014), and, in an opinion joined in full by the entire Court save for Justices Scalia and Thomas, disagreed with both lower courts.

The Court clarified that the funds’ Section 11 allegations presented two separate questions: The funds claimed that the statements of legal compliance were actionable both as misstatements and omissions. Omnicare, 135 S. Ct. at 1324-25.

The Court first took up the misstatements theory, considering when a statement of opinion constitutes an “untrue statement of a material fact.” The funds contended that a statement of belief—“we believe X is true”—may convey a statement of material fact—that “X is in fact true.” Id. at 1325. If X is not true, regardless of the issuer’s belief, there is a misstatement. The Court rejected that analysis as “wrongly conflat[ing] facts and opinions.” Id.

Under Section 11, the Court reasoned, a statement of belief “explicitly affirms one fact: that the speaker actually holds the stated belief.” Id. at 1326. In some circumstances, a statement that begins with an opinion may also contain an embedded statement of fact—“we believe X is true because Y.” In that statement, the issuer affirms that Y is a true fact. An issuer can be liable under the misstatements clause based on a statement of belief only when she does not, in fact, hold that belief, or when she offers a supporting fact that is untrue. Id. at 1327.

Because there was no supporting fact embedded in Omnicare’s statements of legal compliance, and the funds did not dispute that Omnicare’s opinion was honestly held, the funds could not state a Section 11 claim under the misstatements clause. Id.

Turning to the omissions theory, the Court noted that the omissions clause is broader than the misstatements clause: While the misstatements clause applies only to “fact[s],” the omissions clause applies to “statements,” asking “whether an omitted fact is necessary to make ‘statements’” not misleading. Id. at 1328 n.4. The Court read “statements” to include “both fact and opinion.” Id.

The funds contended that Omnicare’s opinion on legal compliance was misleadingly incomplete. Id. at 1327. However, the Court held that an opinion is not actionable under the omissions clause of Section 11 just because it eventually proves incorrect. A reasonable investor, the Court explained, understands the difference between an expression of opinion and an unqualified fact. Id. at 1328.

That does not mean a reasonable investor assumes an issuer’s opinion is baseless. To the contrary, “[h]e 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.” Id. at 1329. If an issuer says, “I believe our business practices comply with the law,” but fails to mention that the company has never even consulted a lawyer, that omission might make the opinion misleading. Id. at 1328. If the issuer makes the same statement, and “d[oes] not disclose that a single junior attorney expressed doubts about a practice’s legality, when six of his more senior colleagues gave a stamp of approval,” that omission does not make the opinion misleading, even if the junior attorney’s position turns out to be correct. Id. at 1329.

While the Court warned that the funds could not state a claim “without identifying one or more facts left out of Omnicare’s registration statement,” id. at 1333, the Court did not apply that analysis to the funds’ complaint. Because neither court below properly analyzed the funds’ omissions theory, the Supreme Court remanded the case for further proceedings to determine whether the funds stated an omissions claim, and if not, whether they should be allowed an opportunity to amend their complaint. Id. at 1332-33.

The Aftermath of Omnicare

After Omnicare, it is clear that Section 11 liability may attach to statements of opinion in registration statements in at least these situations:

  • when the issuer does not believe its own opinion;
  • when a statement of opinion includes an embedded statement of fact that is not correct; and
  • when the opinion, although sincerely believed, is “formed on the basis of an omitted fact, not disclosed by the speaker, that would likely conflict with a reasonable investor’s own understanding of the facts conveyed by that statement.” In re BioScrip, Inc. Sec. Litig., No. 13-CV-6922 AJN, 2015 WL 1501620, at *11 (S.D.N.Y. Mar. 31, 2015).

Particularly with respect to that third point, commentators have complained that Omnicare raises more questions than it answers. Lower federal courts apparently disagree. Multiple federal district courts have already looked to Omnicare for guidance, and, although Omnicare was confined to Section 11, imported the Court’s analysis into other areas of securities law. See, e.g.Fed. Hous. Fin. Agency v. Nomura Holding Am., Inc., -- F. Supp. 3d --, 2015 WL 2183875, at *103 (S.D.N.Y. 2015) (Section 12(a)(2)); In re Merck & Co., Inc. Sec., Derivative & ERISA Litig., No. CIV.A. 05-1151 SRC, 2015 WL 2250472, at *20-21 (D.N.J. May 13, 2015) (Section 10(b)). Practitioners should be aware that, when an opinion of legal compliance arises in the context of any securities law claim, Omnicare may inform the analysis.

*This article was originally published in the Summer 2015 Issue of the NCBA Antitrust & Complex Business Disputes Section Newsletter