On October 10, 2014, in Ansfield v. Omnicare, the US Court of Appeals for the Sixth Circuit clarified the standard to determine whether a misrepresentation made by a corporation was made with the scienter required by Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) (No. 13-5597, (6th Cir. Oct. 10, 2014)). In doing so, the court clarified its own precedent, and departed from precedent set by other circuits.

The plaintiffs brought this action against the defendants alleging securities fraud in violation of Section 10(b) of the Exchange Act and the Securities and Exchange Commission Rule 10b-5 (15 U.S.C. § 78j(b); 15 U.S.C. § 78t(a); 17 C.F.R. § 240.10b-5). They asserted that the defendants made material misrepresentations and omissions both in public and in SEC filings. Omnicare moved to dismiss the suit for failure to state a claim, and the district court granted its motion. The plaintiffs appealed.

In considering whether the plaintiffs had properly pled their claims under the Private Securities Litigation Reform Act of 1995 (PSLRA), the Sixth Circuit had to determine, among other things, whether they had adequately alleged scienter. The court noted that plaintiffs must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind" (15 U.S.C. § 78u-4(b)(2)). However, when the defendant is a corporation, this question is complicated by the fact that a court must consider whose knowledge and state of mind matters. The Sixth Circuit had not yet established a clear test to answer this question, so it surveyed the existing law in the circuit courts and adopted a standard for determining scienter in its own jurisdiction.

The US Courts of Appeals for the Fifth and Eleventh Circuits adopted a narrow view, only finding corporate scienter when it could be imputed to the corporation under a theory of respondeat superior. Those courts looked only to the state of mind of the official or officials who made or issued the statement (or ordered or approved its making or issuance) (Southland Sec. Corp. v. Inspire Ins. Solutions, Inc., 365 F.3d 353, 366 (5th Cir. 2004); Phillips v. Scientific Atlanta, Inc., 374 F.3d 1015, 1018-19 (11th Cir. 2004)). In a previous case, the Sixth Circuit had taken a more expansive approach, allowing the knowledge of a corporate officer to be imputed to the corporation, even when that officer did not make or issue the false or misleading statement (City of Monroe Emps. Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 669–70 (6th Cir.2005)). Other circuits, including the US Courts of Appeal for the Second, Seventh and Ninth Circuits, each adopted their own approach to the question.

In this action, the Sixth Circuit expressed concern that an overly narrow interpretation of scienter could allow corporations to escape liability for offenses they committed if there was no single identifiable culpable actor. The court also reasoned that an overly broad view of scienter could subject corporations to liability beyond what was authorized by Congress. To balance such concerns, the court held that it would consider the states of mind of the following people when determining whether a misrepresentation made by a corporation was made with the requisite scienter under Section 10(b):

Here, the court upheld the dismissal of the plaintiffs' complaint because, among other things, the complaint failed to sufficiently allege scienter.

Counsel should be aware that there is a split among the circuit courts on this issue. Practitioners in the Sixth Circuit should familiarize themselves with the court's new guidance on how to establish scienter when the alleged misrepresentation was made by a corporation.