In Omnicare, Inc. v. Laborers District Counsel Construction Industry Pension Fund, 13-435, the United States Supreme Court will address an important circuit split under the Securities Act of 1933 (the “Securities Act”). Specifically, the Court will address whether a plaintiff bringing a claim under Section 11 of the Securities Act based upon a defendant’s statement of belief or opinion must plead and prove that the statement was disbelieved when made—so-called, “subjective falsity”—or whether objective falsity alone is sufficient. Under an objective falsity standard, liability could be predicated on the mere fact that an opinion turned out to be mistaken, even if the speaker genuinely held the stated belief. Accordingly, the Court’s holding will have broad implications and is particularly likely to affect—and potentially curtail—the dissemination of opinions, beliefs, and other “soft” information in registration statements.
Section 11 of the Securities Act imposes liability on issuers and signatories of registration statements that “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.”1 Unlike claims under Section 10(b) of the Securities Exchange Act of 1934 (the “34 Act”)2 and Rule 10b-5, Section 11 does not require plaintiffs to prove scienter or reliance. However, a Section 11 plaintiff still must plead that the defendant made a material misstatement of fact. The question at issue in Omnicare is whether a defendant can be liable for inaccurate statements of belief or opinion and, if so, what the plaintiff must plead and prove to recover.
The Second and Ninth Circuits have consistently required a plaintiff to plead that statements of belief or opinion “were both objectively and subjectively false or misleading.”3 For instance, in Fait v. Regions Fin. Corp., 655 F.3d 105, 110 (2d Cir. 2011), the plaintiff alleged that the defendant made misstatements regarding the amount of goodwill on its books and its loan loss reserves. In affirming the dismissal of the plaintiff’s Securities Act claims, the court explained that the statements at issue were not statements of “fact.” For instance, with regard to goodwill, the court explained that “estimates of goodwill depend on management's determination of the ‘fair value’ of the assets acquired and liabilities assumed, which are not matters of objective fact.”4 As such, the plaintiff could not proceed absent proof that the statements were both objectively false and that the defendant did not believe the statements when they were made. This rule gave issuers certainty that they could provide investors with statements of belief or opinion without fear of liability so long as the statements were genuinely believed when made.
This certainty was recently thrown into question with the Sixth Circuit’s ruling in Indiana State District Council of Laborers and HOD Carriers Pension and Welfare Fund v. Omnicare, Inc., 719 F.3d 498 (6th Cir. 2013) [hereinafter Omnicare]. Omnicare is a major provider of pharmaceutical services for long-term care facilities. In a registration statement, Omnicare stated its belief that certain contracts “were legally and economically valid arrangements” and “in compliance with applicable federal and state laws.”5 The plaintiffs filed a Section 11 claim alleging that those statements were misleading because Omnicare was allegedly engaged in illegal activities including kickback arrangements. But the district court dismissed the complaint, finding that plaintiffs had not pleaded that the defendants subjectively knew the statements were false when made. The plaintiffs then appealed to the Sixth Circuit.
On appeal to the Sixth Circuit, plaintiffs argued that Section 11 is a strict liability statute, and therefore does not require a plaintiff to plead anything regarding the defendant’s state of mind. The Sixth Circuit agreed, holding that Section 11 “does not require a plaintiff to plead a defendant’s state of mind.”6 In so holding, the court relied upon Supreme Court precedent describing Section 11 as a “strict liability statute.”7 The court also distinguished several cases upon which the district court had relied, including cases holding that a plaintiff must plead subjective falsity for claims under Section 10(b) and Rule 10b-5 of the 34 Act. Specifically, the Sixth Circuit refused to rely upon cases involving Section 10(b) and Rule 10b-5 because Section 10(b) requires proof that the defendant acted with intent to defraud, while Section 11 is, pursuant to Supreme Court precedent, a “strict liability statute.” The court explained: “once a false statement has been made, a defendant’s knowledge is not relevant to a strict liability claim.”8
The Sixth Circuit also found the Second and Ninth Circuits’ reliance on the Supreme Court’s decision inVirginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991), to be misplaced. In Virginia Bankshares, the Supreme Court addressed a claim under Section 14(a) of the 34 Act and held that proof of subjective disbelief alone is insufficient; to recover, a plaintiff must plead and prove objective falsity. Both the Second and Ninth Circuits relied upon Virginia Bankshares to hold that proof of both subjective and objective falsity is required when a plaintiff brings a claim based upon the defendants’ stated beliefs or opinions under the Securities Act. The Omnicare court, however, held that Virginia Bankshares is not controlling because it did not involve claims under the Securities Act and, in any event, it did not expressly hold that proof of subjective falsity is required; rather, it merely held that proof of subjective falsity—absent proof of objective falsity—was insufficient. Accordingly, the Sixth Circuit found that Virginia Bankshares had only “limited application” to the Section 11 question at hand.9
On March 3, 2014, the Supreme Court granted certiorari to resolve this circuit split. Omnicare has filed a brief arguing that opinions are “inherently subjective assessments” and that the “only ‘fact’ conveyed by a statement of opinion or belief is the fact that the speaker held the stated belief.”10 Accordingly, “such a statement can be ‘untrue’ as to a ‘material fact’ only if the speaker did not actually hold the stated belief.”11 Omnicare further argues that the Sixth Circuit erred in failing to follow Virginia Bankshares, which construed analogous language under Section 14(a) of the 34 Act. Omnicare persuasively reasons that the Sixth Circuit’s approach “defies the fundamental principle of statutory interpretation that the same term or phrase should be given a consistent meaning across related provisions” by varying the meaning of the phrase “untrue statement of a material fact” depending on whether the provision at issue also contains a scienter requirement—a separate legal element from the issue of falsity.12
While the respondents have not yet filed their opposition, the United States has submitted an amicus brief to the Supreme Court. The United States has taken the position that the Sixth Circuit’s decision should be vacated because it “misconstrued the [Securities] Act by suggesting that a statement of opinion is actionable under Section 11 whenever the stated opinion is ultimately found to be incorrect.”13 Agreeing with Omnicare, the United States explained that the Sixth Circuit’s approach “would disserve the Act’s purposes by imposing ‘liability by hindsight’” and “would effectively treat the statement of opinion as a guarantee.”14 But in parting company with Omnicare, the United States further argues for a middle ground approach that would make a statement of opinion actionable where either: (1) the maker did not genuinely hold the stated belief, or (2) the opinion lacked a reasonable foundation when made.15
The Supreme Court will have the opportunity to address this important issue and will hopefully provide issuers with guidance that will enable them to provide soft information to the market without fear that they will be hauled into court if their opinions and beliefs turn out to be inaccurate. While Section 11 does not contain an explicit scienter requirement, the validity of an opinion turns on whether the opinion is genuinely held—not on whether the opinion turns out to be inaccurate or whether plaintiffs, with the benefit of hindsight, can come forward with a competing opinion. By allowing a defendant to face liability based upon its honestly held opinions, the Sixth Circuit’s Omnicare ruling has dramatically increased the field of potentially actionable statements under Section 11. This expansion of liability is likely to reduce severely issuer willingness to convey “soft information” in registration statements, and will therefore limit information flow to investors. Accordingly, the Court would be wise to affirm the reasoning of the Second and Ninth Circuits and reverse the Sixth Circuit’s decision in Omnicare.