This week, the U.S. Supreme Court issued its highly anticipated decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, which addressed the circumstances under which statements of opinions can be actionable under Section 11 of the Securities Act of 1933.
In Omnicare, the company issued a registration statement that contained two statements expressing the company’s opinion that it was in compliance with federal and state laws. Pension funds that sued the company asserted that these “legal-compliance” statements were untrue statements of material fact and failed to state material facts necessary to make the opinions not misleading. The trial court found that the opinions were not actionable because the plaintiffs did not allege that Omnicare’s officers knew the company was violating the law. The Sixth Circuit reversed, holding that a plaintiff need only plead that the allegedly untrue opinions were objectively false.
In an opinion authored by Associate Justice Elena Kagan, the Supreme Court initially noted that Section 11, which covers registration statements issuing companies must file with the Securities and Exchange Commission, employs two bases for liability. Following this logic, Justice Kagan engaged in separate analyses of both bases – liability based on an untrue statement of material fact and liability based on an omission of material fact to make statements not misleading.
The Court first found that an opinion does not constitute an untrue statement of material fact under Section 11 simply because the opinion is ultimately disproven. This is because an opinion (by its very nature) expresses a view which contemplates that it may be incorrect. An opinion, therefore, cannot be an untrue statement of fact unless (i) the opinion expressed was not sincerely held or (ii) the opinion contains embedded statements of untrue facts. The Court explained that the following example contained not only an opinion but also embedded statement of fact (in italics): “I believe our TVs have the highest resolution available because we use a patented technology to which our competitors do not have access.” Unsurprisingly, the Court noted that the embedded statement of fact was actionable if untrue despite the fact that the statement was also couched as an opinion.
In addition to circumstances where an opinion can be an “untrue statement” liability, the Court held that opinions can implicate “omission” liability. Section 11 imposes liability when a registration statement omits material facts about the issuer’s inquiry into, or knowledge concerning, an opinion, and if those facts conflict with what a reasonable investor would otherwise take from the opinion. In determining whether an omission makes an expression of opinion misleading, a trial court should apply an objective inquiry that depends on a reasonable investor’s perspective. Accordingly, an “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 vacated the Sixth Circuit’s reversal of the trial court decision and remanded the case to be decided in light of this newly articulated standard. Six other Supreme Court Justices joined Justice Kagan’s decision. Justices Antonin Scalia and Clarence Thomas each issued separate opinions concurring with the judgment.
The Supreme Court’s decision can be seen as a win for investors as Omnicare had vigorously argued that no reasonable person could understand a statement of opinion to convey anything other than the speaker’s own mindset. Indeed, the Court noted that “literal accuracy is not enough” under Section 11 and that Omnicare’s view would “punch a hole in the statute for half-truths in the form of opinion statements.”