Supreme Court Carves out Middle Ground in Determining Liability for Statements of Opinion under the Federal Securities Laws

The unanimous judgment and opinions in Omnicare addressed liability for statements of opinion under the federal securities laws. Writing for the Court, Justice Kagan emphasized that the securities laws are not “an invitation to Monday morning quarterback,” and cannot be used to create liability merely when a defendant’s opinion turns out to be wrong. While the Court’s ruling may encourage issuers and others to couch statements in the form of opinions, the Court made clear that no “magic words” would preclude liability for statements of opinions.

The Court answered two questions:

  1. When is a statement of opinion actionable as a factual misrepresentation; and
  2. When is a speaker liable for omitting certain facts that make a stated opinion misleading?

The Court addressed these questions in the context of Section 11 of the Securities Act. But its reasoning applies to claims arising under Section 10(b) of the Exchange Act. Both sections make unlawful material misleading statements of fact (as opposed to statements of opinion). Likewise, under both sections, it is unlawful to omit facts necessary to make statements, including opinions, not misleading.

The Court drew a bright line between statements of fact, which “express[] certainty about a thing,” and statements of opinion, which do not. Merely appending the words “I believe” to a factual assertion transforms the statement into one of opinion. For example, with the addition of “I believe,” the statement “our TVs have the highest resolution available on the market” becomes an opinion. Under Omnicare, statements of opinion such as this one do not, except in narrow circumstances, give rise to liability for making a misleading statement of fact.

Accordingly, potential securities laws defendants should condition statements with opinion language whenever conveying a belief or a view, as opposed to a fact. Omnicare, however, cannot be read as providing an escape hatch for liability whenever the words “I believe” are added to a statement.

Rejecting Omnicare’s attempt to “nullify [the] statutory requirement[s] for all sentences starting with the phrases ‘we believe’ or ‘we think,’” the Court clarified the circumstances in which a defendant may be liable under the securities laws for expressing opinions.

  • First, the Court reasoned that all statements of opinion expressly affirm that the speaker actually holds the stated belief. Thus, if a speaker does not actually hold a stated belief, she can be liable for a misstatement of fact.
  • Second, some statements of opinion contain embedded statements of fact. Take, for example, the opinion, “I believe our TVs have the highest resolution available because we use a patented technology to which our competitors do not have access.” The embedded statement of fact about use of patented technology could give rise to liability if it were false or misleading.
  • Third, the Court held that “the omission of a fact can make a statement of opinion . . . misleading to an ordinary investor.” This is true even when the statement is “literally accurate” because the speaker honestly holds the claimed opinion. The Court emphasized “literal accuracy is not enough: an issuer must as well desist from misleading investors by saying one thing and holding back another.”

Issuers and others subject to the securities laws should carefully review the Court’s discussion of omission liability. Under Omnicare, whether an omission of fact renders an opinion misleading depends on what a “reasonable investor expects” about the speaker’s “basis for holding that view.”

The Court recognized that “[r]easonable investors understand that opinions sometimes rest on a weighing of competing facts” and do “not expect that every fact known to an issuer supports its opinion statements.” Additionally, reasonable investors consider an opinion in “its full context” and in light of surrounding “hedges, disclaimers, [and] qualifications.” Thus, an opinion is “not necessarily misleading when an issuer knows, but fails to disclose, some fact cutting the other way.”

However, a reasonable investor expects a speaker to be aware of facts justifying the opinion. If a speaker “omits material facts about the [speaker’s] inquiry into or knowledge concerning the statement of opinion, and if those facts conflict with what a reasonable investor would take from the statement itself,” then the speaker can be liable for omitting the facts. For example, if a statement of opinion fails to disclose the lack of any investigation or inquiry supporting the opinion, or fails to disclose contrary facts that, in context, make the opinion misleading, these omissions could render the opinion misleading to a reasonable investor and give rise to liability.

The Court was clear that pleading and proving that an omission renders an opinion misleading “is no small task for an investor.” To survive a motion to dismiss, a plaintiff “must identify particular (and material) facts going to the basis for the [speaker’s] opinion” that were omitted.

Justices Scalia and Thomas wrote concurring opinions joining in the Court’s judgment, but disagreeing with its holding as it relates to omissions—Justice Scalia because he believed the Court’s “expansive application of § 11’s omissions clause to expressions of opinion” was unsupported, and Justice Thomas because he believed the issue of omissions was not properly before the Court.