Supreme Court Applies “Reasonable” Basis Standard in Clarifying Liability for Statements of Opinion

On March 24, 2015 the Supreme Court released its much-anticipated opinion in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund,¹ holding that statements of opinion in issuers’ registration statements filed with the Securities and Exchange Commission (SEC) can form the basis for liability under Section 11 of the Securities Act of 1933, only if the speaker lacked any reasonable basis in fact for the opinion. The Court’s decision resolves a split of authority between the circuit courts of appeal, and provides guidance on an issue that increasingly is an aspect of securities litigation. Beyond providing an answer to the circuit split, the Court’s discussion of what does not constitute a “reasonable basis” is useful as that concept frequently arises in securities litigation but seldom has been addressed by the Court. Thus, analysis of the Court’s Omnicare decision is useful for the guidance it offers companies and their executives when making statements of opinion in securities filings.

Background of the Case

Based in Cincinnati, Ohio, Omnicare is the top U.S. provider of pharmacy services to long-term care facilities in the U.S. and Canada. In December 2005, the company issued public stock totaling $765 million, which required it to file a registration statement with the SEC. The case stems from that registration statement, and the issue on appeal to the Supreme Court was whether the company could be liable for two opinion statements in that registration statement that turned out later to be incorrect:

• “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;” and
• “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.”²

Those statements were accompanied by additional disclosures: On the same page as the first statement above, Omnicare disclosed that several states had initiated “enforcement actions against pharmaceutical manufacturers” for offering payments to pharmacies that dispensed their products, and that the laws related to those payments might “be interpreted in the future in a manner inconsistent with our interpretation and application.”³ Next to the second statement above, Omnicare disclosed that the U.S. government had expressed “significant concerns” about some manufacturers’ rebates to pharmacies and that business might be adversely impacted “if these price concessions were no longer provided.”⁴

Omnicare later was sued in two qui tam (whistleblower) actions over alleged violations of federal anti-kickback laws, and reached a $124 million settlement of those claims with the U.S. Department of Justice.⁵ Following the settlement, the plaintiffs filed suit, asserting, among other claims, that Omnicare’s two statements opining about its legal compliance were actionable under Section 11 of the Securities Act of 1933, which imposes near strict liability for all issuers, directors, officers, underwriters, and experts for material misstatements or omissions in a registration statement.⁶ The plaintiffs alleged that Omnicare’s officers and directors lacked “reasonable grounds” for believing that the opinions offered were truthful and complete, and that one of Omnicare’s in-house lawyers had warned that a particular contract “carrie[d] a heightened risk” of violating federal anti-kickback laws.⁷

The federal district court dismissed the plaintiffs’ claims, holding that the statements at issue were opinions, or “soft information” in the court’s words, which were actionable “only if those who made them ‘knew [they] were untrue at the time’” the statements were made.⁸ The Sixth Circuit reversed, holding that a plaintiff could state a violation of Section 11 of the 1933 Act by alleging that a statement of opinion in a registration statement was objectively false, without regard for whether the speaker honestly held the opinion.⁹

In holding that plaintiffs need not allege opinion statements were “disbelieved at the time [they] were expressed,”¹⁰ the Sixth Circuit acknowledged it was creating a split of authority with other circuits to have considered the issue. Prior to the Sixth Circuit’s 2013 decision in Omnicare, the leading case in conflict with the Sixth Circuit’s Omnicare decision was the Second Circuit’s decision in Fait v. Regions Financial Corp., which held that when a plaintiff asserts a claim under Section 11 “based upon a belief or opinion ... liability lies only to the extent that the statement was both objectively and subjectively false and disbelieved by the defendant at the time it was expressed."¹¹ The Fourth, Fifth, and Ninth Circuits all appeared to agree with the Second Circuit’s Fait holding.¹²

The Supreme Court’s Opinion

The Court divided its consideration of liability for opinion statements under Section 11 into two parts: liability for Omnicare’s allegedly untrue statements of material fact in stating its opinion as to its compliance with the law, and liability for alleged omissions of material fact necessary to make Omnicare’s statements of opinion as to its compliance with the law not misleading.¹³

As to when statements of opinion are actionable as misstatements of material fact, the Court first rejected the plaintiffs argument, and the Sixth Circuit’s holding, that a statement of opinion “ultimately found incorrect—even if believed at the time made—may count as an untrue statement of a material fact.”¹⁴ The Court stated that that standard “conflate[d] facts and opinions,” went against the common sense understanding of statements prefaced by words such as “I believe” or “I think,” and improperly extended the statutory language of Section 11, which does not impose liability for “untrue statements full stop (which would have included one of opinion), but only for untrue statements of material … fact.”¹⁵

But, the Court held that some types of opinion statements could subject issuers and executives to Section 11 liability. The Court noted that every statement of opinion expresses a statement of fact that the speaker actually holds the opinion being expressed. Thus, if a plaintiff could demonstrate the speaker did not actually believe the opinion expressed, then Section 11 would impose liability if the statement of opinion was false and material under the securities laws.¹⁶ The Court also recognized a situation in which a statement of opinion also supplied a statement of supporting fact for the opinion; in that situation, the speaker has stated both the fact of belief in the opinion and the underlying fact, and could be liable under Section 11 not only if the belief professed was not honestly held but also if the supporting fact supplied was untrue.¹⁷

As to the two statements by Omnicare, the Court held neither could be the basis for Section 11 liability as misstatements of material fact because they were “pure statements of opinion” and plaintiffs “[did] not contest that Omnicare’s opinion was honestly held.”¹⁸

As to when statements of opinion may be actionable for omitting material facts necessary to make the opinion statements not misleading—the other prong of potential liability under Section 11—the Court scoffed at the idea that “no reasonable person, in any context, can understand a pure statement of opinion to convey anything more than a speaker’s own mindset ….[and thus that] as long as an opinion is sincerely held … it cannot mislead as to any matter[.]”¹⁹ The Court held that such a reading is incorrect 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.”²⁰ The Court held that taking the view that statements of opinion could never be actionable would allow companies to immunize any statement from Section 11 liability simply by prefacing it with words such as “we think” or “we believe.”²¹

The Court held that liability for opinions based on alleged omissions of material fact arises only “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.”²² In other words, courts must consider “the foundation [an investor] would expect an issuer to have before making the [opinion] statement.”²³ The Court recognized that companies form business opinions based on a weighing of competing facts, and that the presence of competing facts may be the very reason a company frames a statement as an opinion rather than as a certainty.²⁴ “A reasonable investor does not expect that every fact known to an issuer supports its opinion statements.”²⁵

As to the two statements by Omnicare, the Court held further analysis by the lower courts was necessary to determine whether the plaintiffs sufficiently alleged facts in support of a theory that Omnicare failed to state facts that, because omitted, rendered Omnicare’s opinion statements misleading because the omitted fact would “show that Omnicare lacked the basis for making those statements that a reasonable investor would expect.”²⁶

Omnicare in Broader Context

Though the Court sent the case back to the lower courts for further consideration, and thus did not rule in Omnicare’s favor outright, the Court’s decision limits the scope of liability companies can face from investors in similar suits. Moreover, from a close reading of the Court’s discussion of the need to consider alleged statements of opinion in the full context of the “surrounding text, including hedges, disclaimers, and apparently conflicting information” in the registration statement, as well as consideration of “the customs and practices of the relevant industry,” it is not clear that the plaintiffs’ suit against Omnicare will survive re-consideration by the lower courts. The Court noted more than once in its opinion that Omnicare made additional disclosures in close proximity to both of the alleged misstatements of opinion and that those additional disclosures presented facts providing a contrary view to Omnicare’s expression of confidence in its legal compliance.²⁷

Notably, the Court’s examples of what would not constitute a reasonable basis for a company’s opinion statements provides some insight into what companies can and should do to ensure its opinions are not open to easy attack in securities litigation. In the context of statements by a company opining about its legal compliance—at issue in Omnicare—the Court suggested that potential pitfalls include offering an opinion without consulting a lawyer or contrary to the advice of a lawyer of sufficient experience and expertise, or with knowledge that regulators take an opposite view on the issue about which the company is opining.²⁸ On the other hand, the Court suggested that in some situations, reliance on advice from regulators or consistent industry practice in an area might provide the kind of basis for an opinion a reasonable investor would expect.²⁹ In the context of statements of opinion about the relative value of a company’s products compared with its competition, the Court suggested potential pitfalls include a failure to review competitors’ product specifications or information by industry analysts indicating that a competitor’s product, in particular a new one, was better than the speaker’s product.³⁰ Ultimately, the Court noted, “to avoid exposure for omissions under [Section 11], an issuer need only divulge an opinion’s basis, or else make clear the real tentativeness of its belief.”³¹

Only subsequent decisions by lower federal courts will tell what impact the Supreme Court’s decision will have on the securities litigation landscape. In the end, close examination of the Court’s opinion provides good reason for companies and their executives to be hopeful that the Omnicare opinion will in fact limit the scope of liability for opinion statements, and will provide plenty of room for companies to sell securities without filling their registration statements with immaterial information presenting conflicting views from inside or outside their company. The Court reaffirmed the longstanding principle that a reasonable investor reads statements of opinion in SEC filings not “in a vacuum” but “in a broader frame” that includes all of the disclosures made in the filing, as well as publicly known industry practice.³² And the Court reiterated the stringent standard plaintiffs will be required to meet in alleging that a company or its executives should be liable for statements of opinion that, according to the plaintiffs, omit material facts: the plaintiff cannot simply allege that an opinion was wrong, but must call into question the speaker’s basis for offering the opinion; the plaintiff cannot simply allege that the speaker failed to reveal the basis for the opinion; and the plaintiff cannot rely on conclusory assertions that the issuer omitted material facts. Rather, the Court held, the plaintiff must “identify particular (and material) facts going to the basis for the issuer’s opinion … whose 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.”³³

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1}No. 13-435, 575 U.S. ____ (2015), available at http://www.supremecourt.gov/opinions/slipopinion/14.
²Omnicare, Slip Op. at 3. Because Omnicare was already publicly traded, the registration statement it filed was a streamlined version called a Form S-3, which permitted it to offer additional stock to the public by relying on the disclosures it already had made in its annual and periodic SEC reports. The two statements at issue in the case were contained in Omnicare’s pre-December 2005 SEC filings, and only incorporated by reference in the streamlined S-3 registration statement the company filed in connection with the December 2005 offering. The fact that the two statements were contained in earlier filings and incorporated by reference into Omnicare’s registration statement makes no difference for liability under the Securities Act of 1933.
³Omnicare, Slip Op. at 3.
⁴Id.
⁵Id. at 3–4.
⁶15 U.S.C. § 77k(a); Herman & MacLean v. Huddleston, 459 U.S. 375, 381–82 (1983); J&R Marketing, SEP v. General Motors Corp., 549 F.3d 384, 390 (6th Cir. 2008).
⁷Omnicare, Slip Op. at 3–4.
⁸Omnicare, Slip Op. at 4; Ind. State Dist. Council v. Omnicare, Inc., No. 2006-CV-26, 2012 U.S. Dist. Lexis 17526, at *14–16 (E.D. Ky. Feb. 13, 2012).
⁹Ind. State Dist. Council v. Omnicare, Inc., 719 F.3d at 503, 506–07 (6th Cir. 2013).
¹⁰Id. at 506.
¹¹655 F.3d 105, 110 (2d Cir. 2011).
¹²See Rubke v. Capital Bancorp Ltd., 551 F.3d 1156, 1162 (9th Cir. 2009) (holding allegedly misleading opinions “can give rise to a claim under Section 11 only if the complaint alleges with particularity that the statements were both objectively and subjectively false or misleading.”); Nolte v. Capital One Fin. Corp., 390 F.3d 311, 315 (4th Cir. 2004) (“[A] statement of opinion may be a false factual statement if the statement is false, disbelieved by its maker, and related to matters of fact which can be verified by objective evidence.”); Greenberg v. Crossroads Sys., 364 F.3d 657, 670 (5th Cir. 2004) (“A statement of belief is only open to objection where the evidence shows that the speaker did not in fact hold that belief and that statement made asserted something false or misleading about the subject matter.”). Many securities lawyers also believed the Third Circuit sided with the reasoning in Fait, based on a 1993 decision in which the Third Circuit stated that “opinions, predictions and other forward-looking statements of ‘soft information’ may be actionable misrepresentations if the speaker does not genuinely and reasonably believe them.” In re Donald Trump Casino Sec. Litig., 7 F.3d 357 (3d Cir. 1993). The Tenth Circuit considered the issue last year, but declined to adopt a specific position, holding in the case before it that the plaintiffs’ allegations failed under any approach. MHC Mut. Conversion Fund, L.P. v. Sandler O'Neill & Partners, L.P., 761 F.3d 1109, 1110 (10th Cir. 2014).
¹³Omnicare, Slip Op. at 4–5.
¹⁴Id. at 6 (internal quotations omitted).
¹⁵Id. at 6–7 (internal quotations and citations omitted) (emphasis in original).
¹⁶Id. at 7–8. The Court observed in a footnotes that statements of opinion not honestly believed by the speaker, but that ultimately turned out to be true, would not be actionable under Section 11. Id. at Slip Op. 8 n.2.
¹⁷Id. at 8–9.
¹⁸Id. at 9.
¹⁹Id. at 10.
²⁰Id. at 11.
²¹Id. at 16.
²²Id. at 12.
²³Id. at 17.
²⁴Id. at 13.
²⁵Id. (emphasis in original).
²⁶Id. at 19–20.
²⁷Id. at 3 & 20.
²⁸Id. at 12 & 20.
²⁹Id. at 12 n.5.
³⁰Id. at 12 n.6.
³¹Id. at 19.
³²Id. at 14.
³³Id. at 18.