By Douglas W. Greene and Claire Loebs Davis, Shareholders with Lane Powell PC in Seattle, Washington. They co-authored WLF’s amicus brief pro bono in Omnicare.
In the opinion issued on March 24 in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund (“Omnicare”), the Supreme Court rejected the two extremes advocated by the parties regarding how the truth or falsity of statements of opinion should be considered under the securities laws. Instead, it adopted the middle path advocated in the amicus brief filed by Lane Powell on behalf of Washington Legal Foundation (“WLF”).
In doing so, the Court also laid out a blueprint for examining claims of falsity under the securities laws, which we believe will do for falsity analysis what Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007), did for scienter analysis. Hence, Omnicare will help defense counsel defeat claims that opinions were false or misleading in § 11 cases, as well as in cases brought under § 10(b) of the Securities Exchange Act.
From the tenor of oral argument, it seemed inevitable that the Court would reject the Sixth Circuit’s erroneous position—that a genuinely believed opinion may nonetheless be considered “false” under § 11 of the Securities Act if it is later determined that the opinion was incorrect. But the Court also expressed discomfort with the potential loopholes that could be created by Omnicare’s position at the other extreme—that if a statement is phrased as an opinion, it can never be found to be either false or misleading under the securities laws, as long as the opinion was honestly held by the speaker.
The Court could have taken many wrong turns in rejecting these two opposing viewpoints, running the risk of further confusing the law not only regarding the truth or falsity of opinions, but also muddling the law of scienter and materiality. However, the Court successfully navigated these potential pitfalls, and it adopted an analytically sound approach that is consistent with its previous securities rulings, holding that: 1) a statement of opinion is only “false” under the securities laws if it is not genuinely believed by the speaker; and 2) like any other kind of statement, a statement of opinion may be “misleading” if, when considered in context, it creates a false impression in the mind of a reasonable investor.
Notably, the Court did not—contrary to some media reports—seize upon the so-called “reasonable basis” approach advocated by the Solicitor General, namely, that a statement of opinion would be false or misleading, even if it is genuinely believed, as long as plaintiffs can show that the opinion did not have a “reasonable basis.” As we have previously written, this test is deeply flawed, because this kind of “reasonableness” inquiry is, in and of itself, entirely subjective, meaning that whether an opinion was true or false would hinge on someone else’s later opinion as to its “reasonableness.”
Instead of a “reasonable basis” test, the Omnicare ruling affirms and clarifies the Court’s previous decision in Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1095 (1991), which held statements of opinion are only false if they are subjectively false. The Omnicare Court held unequivocally that “a sincere statement of pure opinion is not an ‘untrue statement of material fact,’ regardless of whether an investor can ultimately prove the belief wrong.” Omnicare, No. 13-435, slip op. at 9. Rather, the Court reasoned, statements of opinion are only false if the speaker does not actually hold the stated belief, or if there are objective facts embedded within the opinion that are themselves false. Id. at 7-8.
Having settled the question of what makes an opinion “false” under the securities laws, the Court next turned to the question of when a statement of opinion can be literally true (because it accurately reflects a speaker’s belief), but nonetheless “misleading.” The Court flatly rejected Omnicare’s preferred position that this is “not possible.” Id. at 10, 16 (“Omnicare’s view would punch a hole in the statute for half-truths in the form of opinion statements. And the difficulty of showing that such statements are literally false—which requires proving an issuer did not believe them … —would make that opening yet more consequential”).
Yet the Court emphasized that an opinion is not misleading just because “external facts show the opinion to be incorrect,” or if a company fails to disclose “some fact cutting the other way,” or if the company does not disclose that some disagree with its opinion. Id. at 11, 13. Rather, the Court seized upon the approach that WLF (alone among the parties and amici) had urged in its brief (see pp. 23-29), finding that an opinion is misleading if it omits information that is necessary to avoid creating a false impression of the “real facts” in a reasonable investor, when the statement is taken as a whole and considered in its full context. Omnicare, No. 13-435, slip op. at 11. Unlike the “reasonable basis test” urged by the Solicitor General, the Court emphasized that this inquiry “is objective.” Id. at 10.
The Court’s holding thus fits statements of opinion into the approach already taken by many circuits to analyze whether any statement is misleading due to an omission. See, e.g., Brody v. Transitional Hosps. Corp., 280 F.3d 997, 1006 (9th Cir. 2002) (a statement is misleading due to omissions if it “affirmatively create[s] an impression of a state of affairs that differs in a material way from the one that actually exists”).
In so doing, the Court explained in detail, using hypothetical examples, how this standard applies to statements of opinion, emphasizing that whether a statement is misleading “always depends on context.” Omnicare, No. 13-435, slip op. at 14. A statement of opinion alleged to be misleading due to omissions must thus be understood in its “broader frame,” including “in light of all its surrounding text, including hedges, disclaimers, and apparently conflicting information,” and the “customs and practices of the relevant industry.” Id.
The Court applied this standard specifically to the Omnicare case, which concerned an opinion that Omnicare had expressed in its registration statement that its conduct had been lawful. The Court reasoned that such an opinion creates the impression in a reasonable investor that it has some basis—such as that the company had spoken to lawyers and conducted some meaningful legal inquiry. Id. at 12.
But the Court’s holding diverged significantly from the Solicitor General’s proposed “reasonable basis” test, in that whether a statement is “misleading” is entirely dependent upon the context of each statement, and what that context would convey to a reasonable investor. Because registration statements are “formal documents, filed with the SEC as a legal prerequisite for selling securities to the public,” the Court found that investors would reasonably assume that such statements do not “reflect baseless, off-the-cuff judgments.” Id. at 14.
In his concurring opinion, Justice Scalia worries that the Court’s opinion leaves the door open too wide: “Litigants seeking recompense for a corporation’s expression of belief that turned out, after the fact, to be incorrect can always charge that even though the belief rested upon an investigation the corporation thought to be adequate, the investigation was not ‘objectively adequate.’” Id. (Scalia, J., concurring) at 7.
In our view, however, the Court took great pains to narrow this window of liability. Contrary to Scalia’s assertion, the Court did not rest liability on whether an opinion turned out to be “incorrect,” or whether or not an investigation was “objectively adequate,” nor would its opinion allow plaintiffs to survive a motion to dismiss simply by alleging that an opinion did not have an adequate basis. Rather, the Court set an appropriately high standard for plaintiffs to allege that an opinion is either false or misleading, making clear that plaintiffs cannot survive a motion to dismiss by simply alleging that an opinion was wrong or that an issuer failed to reveal the basis for an opinion, or by making a conclusory allegation that an opinion did not have a reasonable basis:
To be specific: 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. … That is no small task for an investor.
Id. (majority opinion) at 18.
The Omnicare ruling has thus armed defense counsel with ample ammunition to battle claims that opinions were false or lacked a “reasonable basis”—not only in § 11 cases, but also in cases brought under § 10(b). In fact, much of the Court’s reasoning will assist defendants in battling inadequate allegations that factual statements are false or misleading. Similar to how Tellabs laid a definitive groundwork for the consideration of scienter allegations after the Private Securities Litigation Reform Act, Omnicare has thus laid out a clear blueprint for how courts must consider allegations that statements of fact or opinion were false or misleading.