Following yesterday’s oral argument, there is not much doubt that the Supreme Court is inclined to affirm the decision of the Sixth Circuit in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, holding that the pension fund stated a cause of action under Section 11 of the 1933 Act by alleging that a registration statement for a public offering by defendant Omnicare contained a false statement of material fact, even though that statement was framed as a belief or opinion that the Omnicare “was in compliance with applicable federal and state laws.” To be precise, the case was before the Sixth Circuit following the district court’s grant of Omnicare’s motion to dismiss. The Sixth Circuit reversed, holding that the fund was not required to plead and prove both that (1) the statement was wrong as a matter of fact; and (2) Omnicare did not believe it to be true at the time the registration statement was filed. Omnicare argued that the Supreme Court’s 1991 decision in Virginia Bankshares, Inc. v. Sandberg required both elements. But there was no apparent support for that position among the Justices today.
Virginia Bankshares involved a merger challenged by target stockholders on grounds of proxy fraud under the 1934 Act. In essence, the plaintiffs in the case argued that statements by the target board of directors that the price offered in the merger was a “high price” constituted actionable misrepresentations. The jury in that case found that the statements were objectively false and that the board of directors did not in fact believe that the offered price was a high price. On appeal, the Supreme Court agreed that this statement of opinion was an actionable misrepresentation because “such conclusory terms in a commercial context are reasonably understood to rest on a factual basis that justifies them as accurate, the absence of which renders them misleading.” In his concurrence, Justice Antonin Scalia stated: “As I understand the Court’s opinion, the statement ‘In the opinion of the Directors, this is a high value for the shares’ would produce liability if in fact it was not a high value and the directors knew that. It would not produce liability if in fact it was not a high value but the directors honestly believed otherwise.” Thereafter, the Second and Ninth Circuits ruled that the same standard should apply under Section 11 of the 1933 Act.
The Sixth Circuit disagreed, thus setting up a conflict between the circuits. It noted that Justice Scalia’s concurring opinion in a case arising under a non-strict-liability statute is not much authority for a case arising under Section 11, which imposes strict (if not absolute) liability for any investor loss if there is a false statement of fact in a registration statement.
The Sixth Circuit chose wisely. Today, not one Justice seemed inclined to agree with Omnicare’s position that a statement of opinion must be disbelieved by the speaker to be actionable. Interestingly, Justice Scalia – whose concurrence launched the whole debate – was the second-most silent of the nine today, asking just one question.
The most memorable passage of the day came following a question posed by Chief Justice John Roberts as to whether an issuer could avoid liability simply by adding “in our opinion” at the beginning of any statement of fact. Kannon Shanmugam, representing Omnicare, tried to strike a distinction between statements of opinion intended to express uncertainty versus those intended to express a judgment – referring for the first of several times to the Restatements of Torts and Contracts by both parties. Ever the wit, Justice Breyer followed up:
But suppose it is actually disputed. . . . A museum expert on an archaeological mission says, “It is my opinion that those bones in that mountain are of a Diplodocus and not a Trisopterus.” Now wouldn’t you have thought that at least he’d looked into it, that at least he’d seen the bones? You see, it’s absolutely open – it is a matter of opinion – but there are some things implied. If you had learned later that he’d been in a bar all night and had never even seen or heard one word about what the bones were like, wouldn’t you think he has issued a misrepresentation?
That question set the tone for the remainder of the argument. Every Justice who joined in the questioning seemed to focus on the idea that an opinion which summarizes objective facts must have a reasonable basis in fact even if believed in all good faith. Some seemed to see a lurking omission for cases in which the speaker believes himself to be innocent of any violation of law but knows that the authorities think otherwise. The one exception was Justice Samuel Alito, who seemed concerned about the practicalities of how the parties would prove or disprove reasonable basis.
On the other hand, Shanmugam argued during rebuttal that if the Court affirmed the decision below, it would permit plaintiffs to state a cause of action under Section 11 by mere incantation of lack of reasonable basis, which would have a chilling effect on efforts to raise capital. Moreover, he argued that as a matter of statutory construction, such a decision would amount to bootstrapping the due diligence defense into a presumption in favor of plaintiffs.
But these arguments seem to have been more than met with doubts from the Justices as to how plaintiffs could ever prove the negative that an issuer had no reasonable basis for a stated opinion. (And although no one noted the point, there is no due diligence defense for issuers.) All this could easily have led to a more robust discussion of the need to plead fraud with particularity. But the lack thereof suggests that the Justices do not see strict liability under Section 11 as being about fraud as traditionally understood. Indeed, Justice Elena Kagan was quite forceful in characterizing the 1933 Act as providing simply for a mechanical rescission remedy based on the presence of a material falsehood in a registration statement. (Never mind that technically Section 11 provides for damages while Section 12 provides for rescission.)
To his credit, Shanmugam was able later to refer to the Diplodocus by name. But he was swimming against the tide at that point. Despite statements by assistant to the Solicitor General Nicole Saharsky that the federal government occupied some middle ground between the positions taken by Omnicare and the pension fund, and from Omnicare that no one really agreed with the position taken by the Sixth Circuit, the Court seemed largely to think that the Sixth Circuit got it mostly right. Indeed, I would predict a nine-to-zero decision essentially affirming the decision of the Sixth Circuit but with plenty of guidance – or at least verbiage – as to what constitutes reasonable basis. And that would be useful, because the concept of reasonable basis – which arises often in securities cases – has seldom been addressed by the Court.
The only real question is whether the Court will affirm the decision of the Sixth Circuit (as is) or will remand for repleading and require the pension fund to state with more particularity the basis for its claim that the statement by Omnicare that it was in legal compliance was in fact false. In other words, the Court could require plaintiff to allege with particularity why the statement was false and without a reasonable basis in fact. But, based on the colloquy, there would seem to be enough in the pleadings as is, including references to statements by Omnicare’s lawyers that certain contracts could be construed as kickbacks. It is not clear that it matters much because the Omnicare matter was before the Court on appeal from a motion to dismiss: The case remains to be tried, and the falsity of the opinions remains to be established as a matter of fact.
[Disclosure: Goldstein & Russell, P.C., whose attorneys contribute to this blog in various capacities, is among the counsel to the respondents in this case. However, the author of this post is not affiliated with the firm.]
CLICK HERE FOR FULL VERSION OF THIS STORY