The U.S. Supreme Court today said securities issuers can’t be sued over expressions of pure opinion in a securities registration statement, with an important caveat: Unless, the court said, they leave out material facts that would lead an investor to conclude the opinion was false.
The unanimous decision in Omnicare vs. Laborers District Council eliminates a troublesome ruling by the Sixth Circuit Court of Appeals that could have unleashed new waves of litigation against companies over anything they said in offering statements to investors that subsequently turned out to be false.
The court left plaintiffs an out, however. If they can plead specific facts suggesting company officers and directors knew their statement of opinion was false when they made it, they can still proceed with their suit. Section 11 of the Securities Act of 1933 “creates two ways to hold issuers liable for the contents of a registration statement—one focusing on what the statement says and the other on what it leaves out,” the court said, in an opinion penned by Justice Elena Kagan.
The decision works a “modest change” in the law, said John Donovan, a partner with Ropes & Gray in Boston, from the previous understanding by many companies that opinions were immune from suit.
“Since disclosure documents are loaded with `opinions’ the risk of them posing liability was great if Omnicare was affirmed,” Donovan told me. “The effect is to narrow the entrance to the safe harbor for expressions of opinion.”
While the court left the door ajar for plaintiffs to claim the company left out facts that would have undermined those opinions, that will be hard to accomplish since they must state specific, material facts that would be hard to obtain at the pleading stage, before the court-ordered process of evidence collection known as discovery. The main goal for defendants in securities lawsuits is to get a case dismissed before discovery, since the costs of discovery and risk of a catastrophic jury verdict lead companies to settle all but a handful of cases once they survive a motion to dismiss.
Omnicare was accused of lying when it said in a registration statement for its initial public stock offering that it believed its practice of giving rebates to pharmacies and its contracts with manufacturers was legal. It was later sued by state and federal agencies for allegedly violating anti-kickback laws. The Securities Act sets up a strict liability regime, where investors can sue over any false statement, whether or not executives intended to lie.
A district court dismissed the case, saying Omnicare couldn’t be sued for expressing its opinion about the legality of its policies, especially when it warned investors the law might be interpreted “in a manner inconsistent with” Omnicare’s opinion in the future. The plaintiffs never claimed anyone at Omnicare knew they were breaking the law when the statements were made. The Sixth Circuit overturned, ruling that plaintiffs only had to allege the opinion was “objectively false,” not that the people who said it knew it was false at the time.
The Supreme Court reversed, saying both courts got it wrong. The case needs to be split into two separate questions, the court said: First, whether an opinion can be a “factual misstatement,” and second, whether an opinion can be misleading because of information that was left out.
The Sixth Circuit opinion “wrongly conflates facts and opinions,” the Supreme Court ruled, with the result that a company’s opinion it was operating within the law could later be proven “false” when it a court disagrees. Congress specified the difference by making issuers liable not for “untrue statements,” but “untrue statements of fact.”
Justice Kagan offered an example of the difference: If a television manufacturing executive said “our TVs are the highest resolution on the market,” that would be a statement of fact. But if she said “I believe our TVs are the highest resolution,” that would not be untrue even if a competitor sold a better unit. Today's decision added another layer to the inquiry. The second statement could be untrue, the court held, if the executive knew somebody sold a higher-resolution TV. Or if the executive said her TVs were the best because of special patented technology nobody else had.
(The court, in a footnote, dismissed the interesting 1991 decision Virginia Bankshares, Inc. v. Sandberg, in which the justices held that company wouldn’t be liable if an executive thought he was lying but accidentally told the truth, as an unlikely scenario.)
The plaintiffs in Omnicare didn’t allege claims that would survive under either scenario, the court ruled. The two statements they sued over are a simple expression of opinion that the company obeys the law, and they disclaimed any allegations that the executives lied or committed fraud. So the investors – or really, the lawyers advancing this theory in hopes of expanding liability in future cases – were really just claiming the company said something that turned out later to be false. That goes beyond the liability Section 11 imposes for an “untrue statement of material fact,” the court ruled:
That clause, limited as it is to factual statements, does not allow investors to second-guess inherently subjective and uncertain assessments. In other words, the provision is not, as the Court of Appeals and the Funds would have it, an invitation to Monday morning quarterback an issuer’s opinions.
The court refused to dismiss the case outright, however, since the plaintiffs also accuse Omnicare of omitting information that would clue investors in to the fact the opinion was not likely to be true. Omnicare argued nobody could ever take an opinion to be literally true or false, or to convey anything more than what the speaker thinks. The court rejected that argument.
Omnicare takes its point too far, 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.
If a company says “we believe we comply with the law,” for example, without also telling investors it never consulted with a lawyer, or its lawyers said the exact opposite, that might be misleading. On the other hand, it might not be misleading to leave out the fact a junior attorney expressed doubts about the company’s conduct if six senior attorneys disagreed.
“A reasonable investor does not expect that every fact known to an issuer supports its opinion statement,” the court said.
Omnicare also argued it would be bad policy to allow plaintiffs to inquire into whether executives really believed what they were saying, but the court said “Congress gets to make policy, not the courts.”
The most important holding in the case, Donovan said, is that plaintiffs must have a detailed basis for their claim a company's officers knew their opinion was false. The court said:
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—whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.
The court remanded the case but said the plaintiffs “cannot proceed without identifying one or more facts left out of Omnicare’s registration statement,” such as the claim made in oral arguments that an attorney had warned Omnicare its rebate practices might be illegal. Even then, the reviewing court must consider the attorney’s status and expertise, and other legal information Omnicare possessed at the time.
"After today, we can expect additional Court and litigant focus on the allegations purporting to assert facts about the inquiry the issuer did or did not conduct or the knowledge it did or did not have," said Matthew Matule, a partner in Skadden's Boston office.
Justice Antonin Scalia concurred in the judgment but thought the court went too far by sweeping in opinions by non-lawyers about the law. He said that was “incompatible with common sense” and “invites roundabout attacks upon expressions of opinion.” Under the common law “the ordinary man has a reasonable competence to form his own opinion,” Scalia said, and thus isn’t justified in claiming he relied on someone else’s. The few exceptions to that rule come where there is an unusual bond of trust, such as between doctor and patient, or a jeweler’s assessment of a diamond’s value. But while an executive or director might be liable for an “opinion” about something they have expertise in, such as whether the firm has enough cash to survive the year, it is too much to hold them liable for opinions on the law that they base on industry practice or the advice of attorneys.
Justice Thomas also concurred, but said the court should have stopped at determining the statements in this case weren’t an untrue statement of fact. He wouldn’t have gone on to decide, as the majority did, how plaintiffs can salvage such a case by pleading the company omitted material facts, since the plaintiffs in this case didn’t make that argument themselves.
