The U.S. Supreme Court unanimously reversed the Sixth Circuit yesterday in a securities fraud action brought against Omnicare, Inc., a Cincinnati pharmaceuticals services company, under Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k. See Omnicare Inc. v Laborers District Council Construction Industry Pension Fund, Case No. 13-435 (2015) (PDF). In siding with Omnicare, the Supreme Court has afforded public companies leeway in making public statements that turn out to be untrue.
Back in 2005, in connection with a public offering of common stock, Omnicare filed a registration statement containing two statements expressing the company’s view that it was in compliance with federal and state law. Pension funds that had purchased Omnicare stock in the public offering sued Omnicare under Section 11 claiming that the company’s receipt of payments from drug manufacturers violated anti-kickback laws. The pension funds thus claimed that Omnicare’s legal compliance statements constituted “untrue statements[s] of . . . material fact” and that Omnicare “omitted to state [material] facts necessary” to make those statements not misleading.
The district court dismissed all claims against Omnicare, ruling that the pension funds failed to allege that Omnicare knew the statements at issue were false. A three-judge panel of the Sixth Circuit disagreed and unanimously reversed. The Sixth Circuit acknowledged that the statements at issue expressed Omnicare’s “opinion” of legal compliance, rather than “hard facts.” The panel concluded, however, that the pension funds only had to allege that the stated belief was objectively false; they did not need to assert that anyone at Omnicare disbelieved the opinion at the time it was expressed.
The Supreme Court disagreed with the Sixth Circuit’s ruling. In a unanimous opinion written by Justice Kagan, the High Court held that a statement of opinion does not constitute an “untrue statement of . . . fact” merely because the stated opinion turns out to be incorrect. The Court stated that the Sixth Circuit’s contrary ruling “wrongly conflates facts and opinions.” As Justice Kagan explained, “a statement of fact (‘the coffee is hot’) expresses certainty about a thing, whereas a statement of opinion (‘I think the coffee is hot’) does not.” This distinction, the Court held, is incorporated in Section 11 “by exposing issuers to liability not for ‘untrue statement[s]’ full stop (which would have included ones of opinion), but only for ‘untrue statement[s] of . . . fact.’” The Supreme Court ultimately remanded the case for a determination whether the pension funds sufficiently had alleged that Omnicare omitted facts from its registration statement that would render its opinion misleading in light of the entire context.
In clarifying the standard of liability under Section 11 for statements of opinions in registration statements, the Supreme Court’s Omnicare decision resolves a Circuit split created by the Sixth Circuit when it declined to follow the Second and Ninth Circuits, both of which had held that allegations of knowledge of falsity are required in Section 11 cases.