Today, March 24, 2015, in its decision in Omnicare Inc. v. Laborers District Council Construction Industry Pensions Fund, No. 13-435, the Supreme Court gave short shrift to the Sixth Circuit’s expansion of liability under section 11 of the Securities Act of 1933 for statements of opinion in registration statements. At the same time, the Court approved a dangerously amorphous theory of possible omissions liability for incomplete opinions — the failure to disclose facts related to those opinions — which gives little guidance to lower courts facing future such claims. A copy of the Supreme Court decision is available here: Supreme Court Decision in Omnicare v. Laborers District Council Construction Industry Pensions Fund. We previously discussed the flawed Sixth Circuit opinion here: Sixth Circuit Improperly Expanded Section 11 Liability for Non-Factual Statements in Omnicare.
The Sixth Circuit ruled that a section 11 action could be founded on allegations that the defendant’s statement in a registration statement that it believed it’s business activities were in compliance with the law was inaccurate, because aspects of those activities were alleged to be unlawful, even without allegations that company management did not genuinely believe the stated view. The justices unanimously rejected this ruling, but they disagreed on a different theory: how to treat possible failures to disclose information about the factual underpinning for management’s opinion statements. Although the lower courts never addressed that issue, Justice Kagan spent most of her opinion discussing the standard for considering such allegations, and remanded the case for consideration of that theory. Justice Scalia disagreed with Kagan’s analysis of that issue in a concurring opinion. Justice Thomas thought the issue should not have been addressed by the Court because it was not properly presented for review.
The unanimous Court quickly dealt with the error in the Sixth Circuit’s approach, effectively reiterating the standard in Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991), for pleading a claim based on a falsely stated opinion: that an opinion is not a fact, and there is no such claim based on allegations that the stated view was wrong, only on allegations that the opinion was not an accurate statement of the speaker’s actual views.
Justice Kagan described the two statements in the Omnicare registration statement alleged to be inaccurate as follows:
“[T]wo sentences in the registration statement expressed Omnicare’s view of its compliance with legal requirements:
- ‘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.’”
Slip op. at 2-3.
She then noted that these were not statements of “hard facts,” but of “opinions.” The Sixth Circuit concluded nonetheless that a claim could be stated based on allegations “that the stated belief was ‘objectively false’; they did not need to contend that anyone at Omnicare ‘disbelieved [the opinion] at the time it was expressed.’” Slip op. at 4 (quoting 719 F.3d at 506). In other words, “The Sixth Circuit held, and the Funds now urge, that a statement of opinion that is ultimately found incorrect—even if believed at the time made—may count as an ‘un-true statement of a material fact.’” Slip op. at 6. She then exlained that was fundamentally wrong:
But that argument wrongly conflates facts and opinions. A fact is “a thing done or existing” or “[a]n actual happening.” Webster’s New International Dictionary 782 (1927). An opinion is “a belief[,] a view,” or a “sentiment which the mind forms of persons or things.” Id., at 1509. Most important, a statement of fact (“the coffee is hot”) expresses certainty about a thing, whereas a statement of opinion (“I think the coffee is hot”) does not. See ibid. (“An opinion, in ordinary usage . . . does not imply . . . definiteness . . . or certainty”); 7 Oxford English Dictionary 151 (1933) (an opinion “rests[s] on grounds insufficient for complete demonstration”). Indeed, that difference between the two is so ingrained in our everyday ways of speaking and thinking as to make resort to old dictionaries seem a mite silly. And Congress effectively incorporated just that distinction in §11’s first part by exposing issuers to liability not for “untrue statement[s]” full stop (which would have included ones of opinion), but only for “untrue statement[s] of . . . fact.” §77k(a) (emphasis added).
Slip op. at 6.
She explained that section 11’s false-statement provision could still apply to expressions of opinion because “every such statement explicitly affirms one fact: that the speaker actually holds the stated belief.” But the Omnicare plaintiffs “do not contest that Omnicare’s opinion was honestly held.” They expressly stated they are not alleging “fraud or deception” (presumably in order to avoid strict pleading requirements for fraud). Instead, they claim “that Omnicare’s belief turned out to be wrong—that whatever the company thought, it was in fact violating” the laws. That allegation does not give rise to liability under §11 because “a sincere statement of pure opinion is not an ‘untrue statement of material fact,’ regardless whether an investor can ultimately prove the belief wrong.” Slip op. at 9. “In other words, the provision is not . . . an invitation to Monday morning quarterback an issuer’s opinions.” Id.
Having straightforwardly rejected the theory accepted below, Justice Kagan went on to address another potential theory not discussed below – possible liability based on omissions of material facts from the registration statement related to the basis for the statements of opinion that were themselves unactionable: “the Funds also rely on §11’s omissions provision, alleging that Omnicare ‘omitted to state facts necessary’ to make its opinion on legal compliance ‘not misleading’.” Slip op. at 10. She rejected Omnicare’s argument that the statement of an opinion could not give rise to liability for omitting facts related to the opinions, “because a reasonable investor may, depending on the circumstances, understand an opinion statement to convey facts about how the speaker has formed the opinion—or, otherwise put, about the speaker’s basis for holding that view. And if the real facts are otherwise, but not provided, the opinion statement will mislead its audience.” Slip op. at 11.
She expands on that theory, explaining that a statement of legal opinion could carry with it the implication that there is some underlying legal analysis to support it. If there was no such analysis, or if the statement is made with knowledge of reliable contrary positions taken by the government, a reasonable investor could be misled by the failure to include those facts. “Thus, if a registration statement omits material facts about the issuer’s inquiry into or knowledge concerning a statement of opinion, and if those facts conflict with what a reasonable investor would take from the statement itself, then §11’s omissions clause creates liability.” Slip op. at 12. Thus, even if a CEO gives a genuine opinion on an issue, if that opinion is held without having considered matters a reasonable investor would expect to be considered, and that fact is not disclosed, there might be liability: “The CEO may still honestly believe in her [opinion]. But under §11’s omissions provision, that subjective belief, in the absence of the expected inquiry or in the face of known contradictory evidence, would not insulate her from liability.” Slip op. at 12 n.6.
Realizing that she had just crafted a huge hole in the rule that there is no liability for opinion statements, Justice Kagan went on to explain that there have to be really strong allegations to support the contention that important facts about the basis for the opinion were misleadingly omitted:
An opinion statement, however, is not necessarily misleading when an issuer knows, but fails to disclose, some fact cutting the other way. Reasonable investors understand that opinions sometimes rest on a weighing of competing facts; indeed, the presence of such facts is one reason why an issuer may frame a statement as an opinion, thus conveying uncertainty…. Suppose, for example, that in stating an opinion about legal compliance, the issuer did not disclose that a single junior attorney expressed doubt s about a practice’s legality, when six of his more senior colleagues gave a stamp of approval. That omission would not make the statement of opinion misleading, even if the minority position ultimately proved correct: A reasonable investor does not expect that every fact known to an issuer supports its opinion statement.
Slip op. at 13.
Whether “an omission makes an expression of opinion misleading always depends on context.” Id. at 14. For example, in the context of a formal registration statement filed with the SEC, reasonable investors “do not, and are right not to, expect opinions contained in those statements to reflect baseless, off the-cuff judgments, of the kind that an individual might communicate in daily life. At the same time, an investor reads each statement within such a document, whether of fact or of opinion, in light of all its surrounding text, including hedges, disclaimers, and apparently conflicting information.” Id.
Having just invoked a standard based on amorphous and uncertain assumptions about what a “reasonable investor” would “expect” or “understand” in a particular context (and not explaining in any way how a lower court is supposed to divine such things), the opinion swings back in the other direction, purporting to explain how difficult it would be to meet that standard:
As we have explained, an investor cannot state a claim by alleging only that an opinion was wrong; the complaint must as well call into question the issuer’s basis for offering the opinion…. And to do so, the investor cannot just say that the issuer failed to reveal its basis. Section 11’s omissions clause, after all, is not a general disclosure requirement; it affords a cause of action only when an issuer’s failure to include a material fact has rendered a published statement misleading. To press such a claim, an investor must allege that kind of omission—and not merely by means of conclusory assertions.… T o be specific: The investor must identify particular (and material) facts going to the basis for the issuer’s opinion—facts about the inquiry the issuer did or did not conduct or the knowledge it did or did not have—those omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context…. That is no small task for an investor.
Slip op. at 17-18.
The opinion concludes with unusually explicit instructions on how the lower Omnicare courts should apply the omissions theory in the context of the claim against Omnicare. That may suffice to provide guidance in this case, but one wonders how it helps courts in other cases faced with inevitable efforts by plaintiffs’ lawyers to plead section 11 cases founded on Justice Kagan’s somewhat inscrutable “incomplete opinions” omissions theory.
Justice Scalia’s concurring opinion explains in some detail why he believes Justice Kagan’s approach misstates and misapplies the law of liability for opinion statements, and is worth reading for that. The Kagan opinion stating liability for what might be called “incomplete opinions” is, however, now the law of the land.
So where does the Kagan opinion leave us in these cases? It certainly rejects theories of section 11 liability based on allegations that opinion statements were objectively wrong. But at the same time it opens the door for claims based on “incomplete opinions” — allegations that opinion statements were misleadingly incomplete because they failed to discuss underlying facts that reasonable investors would expect, which might alter how they interpret those opinions.
Despite Justice Kagan’s efforts to explain that the bar for such claims is high enough to make it “no small task for an investor,” lower courts are left largely adrift on how to apply this standard in real future cases. How are they to decide on motions to dismiss what investors would expect in the particular context alleged? How demanding should the courts be to have complaints that lay out strong factual grounds supporting the contention that there were undisclosed related facts that seriously limit the value or meaning of stated opinions? To what extent will liability be created for statements now considered to be unactionable “soft information,” including future predictions, based on allegations that undisclosed facts about the basis for those opinions would alter investor interpretations of those statements? To what extent will Justice Kagan’s exhortations for “particular (and material) facts going to the basis for the issuer’s opinion—facts about the inquiry the issuer did or did not conduct or the knowledge it did or did not have” be treated by lower courts as trumping the normal pleading standards for section 11 claims?
Until these questions are answered in district court and appellate court decisions, issuers and management would be wise to limit opinion statements to the bare minimum, and to have reliable analysis in hand to support the ones that are given. The scope of potential liability for “incomplete opinions” may remain unclear for some time into the future.
March 24, 2015
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