On November 3, 2014, the U.S. Supreme Court will hear oral argument in Laborers District Counsel Construction Industry Pension Fund v. Omnicare, Inc., which concerns the standard for judging the falsity of an opinion challenged in an action under Section 11 of the Securities Act of 1933. In the Sixth Circuit decision under review (“2013 Omnicare decision”), the court held that a statement of opinion can be “false” even if the speaker genuinely believed the stated opinion. This holding is contrary to the U.S. Supreme Court’s decision in Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1095 (1991), which held that a statement of opinion is a factual statement as to what the speaker believes – meaning a statement of opinion is “true” as long as the speaker genuinely believes the opinion expressed, i.e., if it is “subjectively” true.
On behalf of Washington Legal Foundation (“WLF”), my partner Claire Davis and I filed an amicus brief in Omnicare to emphasize the importance of clarifying the standard for challenging “false” statements of opinion under all the federal securities laws, not just Section 11. WLF’s view that such clarification is needed was reinforced by an October 10, 2014 decision in a subsequently filed securities class action against Omnicare under Section 10(b) of the Securities Exchange Act of 1934. In re Omnicare, Inc. Sec. Litig., — F. 3d —-, 2014 WL 5066826 (6th Cir. Oct. 10, 2014) (“2014 Omnicare decision”). In the 2014 Omnicare decision, the Sixth Circuit appeared to embrace the proposition that a statement of opinion is not actionable if it is subjectively true – at least under Section 10(b) – but then held that the subjective falsity inquiry should be analyzed within the element of scienter. The opinion shows the continued confusion that pervades analysis of this issue, jumbling subjective falsity with other concepts, and conflating the separate elements of falsity and scienter.
As part of its scienter analysis, the Sixth Circuit also grappled with another important question: whose state of mind counts for purposes of determining a corporation’s scienter? Although the Sixth Circuit believes the standard it enunciated constitutes a “middle ground” between restrictive and liberal tests among the federal circuit courts, its ruling misunderstands the nature of the scienter inquiry and conflicts with the Supreme Court’s ruling in Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), and thus risks expanding corporate liability beyond the proper reach of Section 10(b).