On Monday, November 3, 2014, the U.S. Supreme Court held oral argument in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, No. 13-435. As noted in our previous client alert regarding this case, on March 3, 2014, the Court granted certiorari to review the Sixth Circuit’s decision in Omnicare to determine whether an issuer of securities, its directors, and signatories of a registration statement can be held liable under Section 11 of the Securities Act for a false or misleading statement of opinion or belief, irrespective of whether the defendants actually believed the statement was true at the time it was made.
The Supreme Court’s decision on certiorari will resolve a split between the courts of appeals interpreting Section 11, including the Sixth Circuit, which held in Omnicare that Section 11 defendants may be liable for false opinions or beliefs expressed in registration statements regardless of whether the defendants knew that the statement was false at the time it was made (the “Objective Falsity” standard), and the Second and Ninth Circuits, which have recently held that a defendant may be liable under Section 11 only to the extent that the statement was bothobjectively false and subjectively false (i.e., the defendant knew it was untrue) at the time it was expressed (the “Subjective Belief” standard).
In addition to the positions taken in Omnicare by the plaintiffs, who urged the Court to adopt the Objective Falsity standard, and the defendants, who advocated in favor of the Subjective Belief standard, an Assistant to the Solicitor General, appearing on behalf of the United States, as amicus curiae, proposed a third formulation – a so-called “Reasonable Basis” standard. Under this “middle-ground” standard, a defendant may be liable under Section 11 for a false or misleading statement of opinion or belief to the extent that the statement was both (a) objectively false and (b) either subjectively false or made by the defendant without a reasonable factual basis at the time it was expressed.
At oral argument, many of the Justices seemed to favor the Reasonable Basis standard over the Subjective Belief standard, expressing skepticism that a statement of opinion or belief would be actionable only if the person offering the statement did not subjectively believe that it was true.
Indeed, in questioning the “Subjective Belief” standard, some of the Justices indicated that by making a statement of opinion or belief in a registration statement, the defendant correspondingly implies that he or she has a factual basis for that opinion or belief, and that if the defendant did not have a factual basis to support that opinion or belief, he or she would be making a misrepresentation of fact.
Justice Stephen G. Breyer posed the following hypothetical to illustrate that point:
But suppose . . . a museum expert on an archaeological mission says, it is my opinion that those bones in that mountain are of a diplodocus and not a Trisopterus. Now, wouldn’t you have thought that at least he’d looked into it, that at least he’d seen the bones? . . . If you had learned later he’d been in a bar all night and had never even seen or heard one word about what the bones were like, wouldn’t you think he had issued a misrepresentation?
Similarly, Justice Ruth Bader Ginsburg asked “Why isn’t it, as Justice Breyer suggested, implicit that when . . . an issuer puts something in a registration statement, that the issuer has acted with diligence in making that statement?”
A number of Justices also appeared concerned that adopting the Subjective Belief standard would effectively immunize defendants against liability for omissions of material fact in a registration statement. Justice Elena Kagan offered the following hypothetical to demonstrate that concern:
[S]uppose that in a particular registration statement there was a statement that said a particular kind of transaction was lawful, all right, and the person who makes that statement, whoever it is, really believes it. But, in fact, that person knows that the Government is breathing down his neck, that the Government seems to have a different view. That person knows that its competitors have a different view. And that person has also consulted three lawyers, and two of them have given a different view. But he still believes what he believes. He believes that the Supreme Court is going to vindicate his legal position. But the only thing he says is, I think this is lawful. Now, why isn’t that . . . an omission that makes the statements misleading?
While the Justices generally seemed to favor the Reasonable Basis standard as a sensible alternative, Justice Samuel Alito and Justice Breyer expressed concern over adopting such a standard. Justice Alito stated that he “would like some more concrete guidance as to what is reasonable” under that standard, and both Justices pointed out that such a standard may make it too easy for plaintiffs to survive a motion to dismiss and result in meritless Section 11 lawsuits.
In sum, gauging from the Justices’ questions at oral argument, it appears that the Supreme Court will not adopt the Subjective Belief standard in Omnicare. It is unclear, however, whether the Court will adopt the United States’ proposed Reasonable Basis standard, adopt the Objective Falsity standard favored by the plaintiffs, or create its own standard.