Omnicare: Supreme Court Clarifies Application of Section 11 of the Securities Act to Statements of Opinion

Practical Law Legal Update 1-605-9593 (Approx. 8 pages)

Omnicare: Supreme Court Clarifies Application of Section 11 of the Securities Act to Statements of Opinion

by Practical Law Corporate & Securities

Background

In December 2005, petitioner Omnicare, Inc. (Omnicare) filed a registration statement in connection with a public offering of common stock. Omnicare, which is the nation's largest provider of pharmacy services for residents of nursing homes, included two sentences in its registration statement expressing its opinion that it was in 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."

The registration statement also contained cautionary statements related to the two statements of opinion:

On the same page as the first statement of opinion, Omnicare mentioned several state-initiated enforcement actions against pharmaceutical manufacturers for offering payments to pharmacies that dispensed their products. Omnicare cautioned that the laws relating to that practice might "be interpreted in the future in a manner inconsistent with our interpretation and application."
Adjacent to the second statement of opinion, Omnicare stated that the federal government had expressed significant concerns about some manufacturers' rebates to pharmacies. Omnicare warned that business might be negatively impacted "if these price concessions were no longer provided."

Certain pension funds that purchased Omnicare stock in the public offering (Funds) brought suit against Omnicare alleging that it was liable under Section 11 for the two opinion statements it made about its legal compliance. The Funds, citing lawsuits that the federal government had later brought against Omnicare, claimed that the company's receipt of payments from drug manufacturers violated anti-kickback laws. Therefore, the complaint asserted, Omnicare had made "materially false" representations about legal compliance in its registration statement. The Funds also claimed that Omnicare omitted to state material facts necessary to make its representations not misleading.

Further, the Funds claimed that none of Omnicare's officers or directors possessed reasonable grounds for thinking that the opinions offered were truthful and complete. The complaint noted that an attorney for Omnicare had warned that a particular contract carried a heightened risk of liability under anti-kickback laws. However, because of Section 11's strict liability standard, the Funds chose to exclude and disclaim any allegation that could be construed as alleging fraud or reckless misconduct.

The US District Court for the Eastern District of Kentucky granted Omnicare's motion to dismiss (No. 2006-26, (E.D. Ky., Feb. 13, 2012)). The court held that statements of a company's belief as to its legal compliance are considered "soft" information and are actionable only if those who made the statements knew that they were untrue at the time. Therefore, the court concluded, the Funds' complaint failed to meet the appropriate standard because it had not claimed that the company's officers knew they were violating the law.

The Court of Appeals for the Sixth Circuit reversed the district court's decision (719 F.3d 498 (6th Cir. 2013)). It held that, while the two statements were opinions and not hard facts, the Funds only needed to allege that the stated beliefs were objectively false and did not need to allege that anyone at Omnicare disbelieved the opinions at the time they were given.

The US Supreme Court granted certiorari to consider how Section 11 applies to statements of opinion.

Outcome

The Supreme Court vacated the Sixth Circuit's decision and remanded the case for further proceedings. Unlike the lower courts, the Supreme Court conducted its analysis in two steps, corresponding to the two parts of Section 11:

When does an opinion itself constitute a factual misstatement?
When may an opinion be rendered misleading by the omission of discrete factual representations?

When Does an Opinion Itself Constitute a Factual Misstatement?

The Supreme Court held that the Sixth Circuit had wrongly conflated facts and opinions in its ruling. A fact, the Court explained, is "a thing done or existing" or an "actual happening," whereas an opinion is a belief, view or "sentiment which the mind forms of persons or things." Congress, the Court stated, incorporated the distinction between facts and opinions into Section 11 by exposing issuers to liability only for untrue statements of fact, and not for all untrue statements.

The Court explained that every statement of opinion explicitly affirms one fact, which is that the speaker actually holds the stated belief. Therefore, a statement of opinion on legal compliance would be considered a factual misstatement if the maker of the statement actually thought that the company had broken the law. If that were the case, the first part of Section 11 would subject the issuer to liability (assuming the misrepresentation were material).

The Court also noted that some sentences that begin with opinion words like "I believe" can also contain embedded facts, such as in the example "I believe our TVs have the highest resolution available because we use a patented technology to which our competitors do not have access." This example may be read to affirm not only the speaker's state of mind but also the underlying fact that the company uses a patented technology. In a case like this, liability under the first part of Section 11 would follow (assuming materiality) not only if the speaker did not hold the stated belief but also if the supporting fact was untrue.

The Supreme Court concluded that the two statements in question were pure statements of opinion that did not contain any embedded facts. Therefore, the only way for them to be considered material misstatements would be if the issuer did not believe them to be true at the time it made the statements. The Funds had not contested in their complaint that Omnicare's opinions were honestly held. Rather, they had simply claimed that Omnicare's beliefs turned out to be wrong. Because a sincere statement of pure opinion is not an untrue statement of material fact, regardless of whether an investor can ultimately prove that the belief was wrong, the Court held that Omnicare's two opinion statements were not factual misstatements under the first part of Section 11.

When May an Opinion Be Rendered Misleading By The Omission of Discrete Factual Representations?

The Supreme Court next turned to the question of when, if ever, the omission of a fact can make a statement of opinion like Omnicare's, even if literally accurate (because it was honestly believed at the time made), misleading. The Court stated that neither of the lower courts had considered the omissions theory with the correct standard in mind or even recognized the distinct statutory questions that the theory raises. Therefore, the Court remanded for determination of whether the Funds stated a viable omissions claim or, if not, whether they should have a chance to replead.

The Court stated that whether a statement is misleading requires an objective inquiry from the perspective of a reasonable investor. Omnicare claimed that:

No reasonable person, in any context, could understand a pure statement of opinion to convey anything more than the speaker's own mindset.
As long as an opinion is sincerely held, it cannot mislead as to any matter, regardless of any related facts that the speaker has omitted.

The Supreme Court disagreed, stating that a reasonable investor may, depending on the circumstances, understand a statement of opinion to convey facts about how the speaker has formed its opinion or the speaker's basis for holding that view. If the real facts are otherwise, but not provided, the statement of opinion will mislead its audience. The Court used the example of the statement "We believe our conduct is lawful" to illustrate that:

If the issuer made this statement without consulting a lawyer, the statement could be misleadingly incomplete because, in the context of the securities market, an investor likely expects this kind of assertion to rest on some meaningful legal inquiry, rather than on intuition, no matter how sincere.
If the issuer made this statement despite its lawyers' contrary advice, or with knowledge that the federal government was taking the opposite view, the statement could be misleadingly incomplete because an investor expects an opinion to fairly align with the information in the issuer's possession at the time.

Therefore, 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 the issuer will be liable under the second part of Section 11.

The Court also noted that a statement of opinion is not necessarily misleading just because an issuer knows, but fails to disclose, a fact that cuts the other way. This is because a reasonable investor:

Understands that opinions sometimes rest on a weighing of competing facts.
Does not expect that every fact known to an issuer must support its statement of opinion.

If Omnicare were correct that opinions can never be misleading, the Court continued, issuers would be able to assert any and all opinions in registration statements without ever having to worry about liability under Section 11. This result would conflict with the intent of Congress, which decided to extend Section 11 liability to all statements rendered misleading by omission, not just factual statements, to promote full and fair disclosure. Therefore, for expressions of opinion, one must consider the foundation a reasonable investor would expect an issuer to have before making the statement.

The Court further explained that whether an omission makes an expression of opinion misleading also depends on the context. Registration statements are formal documents filed with the SEC, and investors do not expect opinions contained in them to reflect baseless judgments. However, investors also read statements within registration statements, whether fact or opinion, in light of the surrounding text, including hedges, disclaimers and apparently conflicting information. Investors also take into account the customs and practices of the relevant industry. The reasonable investor understands a statement of opinion in its full context and Section 11 only creates liability when the omission of material facts cannot be squared with the statement taken in context.

An investor asserting an omissions claim under Section 11 based on a statement of opinion cannot allege only that an opinion was wrong or just say that the issuer failed to reveal the basis for its opinion. This is because the omissions clause is not a general disclosure requirement. Rather, Section 11 affords a cause of action only when an issuer's failure to include a material fact has rendered a published statement misleading. To assert a claim, an investor must identify particular and material facts that go 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) whose omission makes the statement of opinion misleading to a reasonable person reading the statement clearly and in context. The Court noted that this would not be an easy task for a plaintiff. In addition, the Court stated that to avoid exposure for omissions under Section 11, an issuer only needs to divulge an opinion's basis, or else make clear the real tentativeness of its belief.

Instructions for Remand

The Supreme Court instructed that on remand:

The Funds would first need to identify one or more facts left out of Omnicare's registration statement to be able to proceed with their claim. Recitation of the statutory language or conclusory allegations that Omnicare lacked reasonable grounds for its belief are not sufficient. The Court noted that the Funds raised in oral argument a specific allegation in the complaint that an attorney had warned Omnicare that a particular contract carried a heightened risk of legal exposure under anti-kickback laws. The Court stated that the Sixth Circuit must review the complaint to determine whether it adequately alleged that Omnicare had omitted that fact, or any other like it, from the registration statement. If so, the court would then need to determine whether the omitted fact would have been material to a reasonable investor.
Assuming it found the Funds had sufficiently alleged a specific material omission, the Sixth Circuit would need to ask whether the alleged omission rendered Omnicare's legal compliance opinions misleading because the excluded fact shows that Omnicare lacked the basis for making those statements that a reasonable investor would expect. If the omitted fact at issue is the attorney's warning, then the inquiry would entail consideration of matters such as the attorney's status and expertise and other legal information available to Omnicare at the time.
The analysis of whether Omnicare's opinion is misleading would also need to address the statement's context. The Sixth Circuit would need to take account of whatever facts Omnicare did provide about legal compliance, as well as any other hedges, disclaimers or qualifications it included in the registration statement. The Sixth Circuit should consider, for example, the information in the registration statement that certain states had initiated enforcement actions against drug manufacturers for giving rebates to pharmacies, that the federal government had expressed concerns about the practice and that the relevant laws could be interpreted in the future in a manner that would harm Omnicare's business.

Practical Implications

While the Supreme Court ruled that a statement of opinion in a registration statement cannot be considered a factual misstatement under Section 11 if the speaker genuinely believed it at the time it was made, issuers should be aware that they could still be found liable under Section 11 for material omissions relating to an opinion. Issuers that regularly report "soft" financial information, such as forecasts and estimates, should take particular note.

To minimize the risk of liability under Section 11, when stating an opinion in a registration statement, issuers should:

Make clear that the statement is a belief.
Consider identifying facts forming the basis for the belief (keeping in mind that not every fact need be disclosed).
Conduct due diligence on the facts underlying the belief.
Consider including hedges, disclaimers and information that may cut against the opinion.

To learn more about Section 11 and other liability provisions applicable to securities offerings, see Practice Note, Liability Provisions: Securities Offerings.

Omnicare: Supreme Court Clarifies Application of Section 11 of the Securities Act to Statements of Opinion | Practical Law