United States: Second Circuit's First Published Opinion Applying Omnicare Adopts Strong Contextual Approach To Opinion Statement Liability

In Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S.Ct. 1318 (2015) ("Omnicare"), the Supreme Court pronounced the standard for determining whether a statement of opinion is actionable under Section 11 of the Securities Act of 1933 (the "Securities Act"). The Second Circuit's first published opinion applying Omnicare, In re Sanofi Securities Litigation, AG Funds, L.P. v. Sanofi, Nos. 15-588-cv, 15-623-cv (2d Cir. Mar. 4, 2016) ("Sanofi"), applies Omnicare to claims challenging statements of opinion under Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and reflects a rigorous, context-focused application of Omnicare that underscores the hurdles to pleading federal securities law claims based on omissions in connection with a statement of opinion. Concluding that the omitted facts did not, in context, render defendants' statements of opinion materially misleading, the Second Circuit affirmed the dismissal of claims under Sections 11 and 12 of the Securities Act and Section 10(b) of the Exchange Act.

Background

In Omnicare, the Supreme Court held that even a sincerely held opinion could be actionable under Section 11's "omissions rendering an affirmative statement materially misleading" prong if the investor could identify "particular (and material) facts going to the basis for the issuer's opinion ... whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context."1 This holding modified the standard for opinion liability in the Second Circuit, which previously had required proof of subjective falsity for all forms of opinion liability.2

Sanofi is the first published opinion from the Second Circuit addressing Omnicare's newly recognized form of opinion liability. The Sanofi case concerns defendants' multiple sclerosis treatment drug Lemtrada. In April 2011, Sanofi acquired Genzyme, the biotechnology company that owned Lemtrada. As part of that acquisition, Sanofi issued contingent value rights ("CVRs") to Genzyme shareholders. The CVRs, which were publicly traded, entitled the holder to cash payouts if certain milestones, such as FDA approval of Lemtrada, were met. Between 2011 and 2013, Sanofi made statements in the offering materials for the CVRs, and subsequently to the market as a whole, to the effect that it expected the FDA to approve Lemtrada and that the clinical trials were progressing well.

Privately, the FDA had repeatedly expressed to Sanofi and Genzyme a "major concern" about the lack of double-blind studies in the Lemtrada clinical trials. The FDA had noted, however, that if the single-blind studies "reveal[ed] an extremely large effect, then the FDA [might] potentially accept" the results of such studies.3 In November 2013, in connection with the upcoming hearing on Lemtrada's application, the FDA released briefing materials that included physicians' concerns about the failure to use double-blind studies. Upon the release of those materials, the value of the CVRs dropped more than 62%. In December 2013, Sanofi announced that the FDA had formally rejected Lemtrada, resulting in a further drop in the CVRs' value. Although the FDA eventually approved Lemtrada without further clinical trials, by then the deadline for CVR milestone payments based on that approval had passed.

Two categories of CVR holders filed suit: (1) a putative class of those who had purchased CVRs between March 6, 2012 and November 7, 2013, who alleged violations of Section 10(b) of the Exchange Act and SEC Rule 10b-5; and (2) corporations that had either opted out of the class or had acquired CVRs outside of the class period, who asserted Exchange Act claims and also alleged violations of Sections 11 and 12(a)(2) of the Securities Act. Both categories of plaintiffs alleged that defendants' failure to disclose the FDA's concerns about the lack of double-blind studies rendered statements regarding the likelihood of meeting the approval milestone, upon which the CVRs' value partially depended, materially misleading.

The district court, in an opinion pre-dating Omnicare, dismissed both complaints for failure to state a claim.4  With regard to defendants' allegedly false or misleading statements of opinion, the district court held that there had been no showing of objective falsity and, invoking the pre-Omnicare standard from Fait v. Regions Financial Corp., 655 F.3d 105 (2d Cir. 2011), held that plaintiffs had failed to allege any facts suggesting that defendants "did not genuinely believe what they were saying at the time they said it."5 The Second Circuit affirmed, and wrote "principally to examine the impact of the Supreme Court's decision in Omnicare,"6 which "altered the standard announced [by the Second Circuit previously] in Fait."7

The Sanofi Decision

The Sanofi opinion addressed (1) statements in the CVR offering materials that the FDA would approve Lemtrada before the approval milestone, and (2) defendants' subsequent statements to the market about the FDA approval process, including statements that defendants were "very satisfied with where the progress is going" and "pretty relaxed." The Second Circuit held that plaintiffs had not adequately alleged that either category of opinion statements was materially misleading.

As to the first category of challenged opinions, the Second Circuit found that there was "no plausible allegation that the FDA's interim feedback conflicted with any reasonable interpretation of Defendants' statements about FDA approval."8 This was so because, although the FDA had expressed concerns about the lack of double-blind studies, it also had stated that those concerns could be overcome if the results showed an "extremely large effect," and it was undisputed that Lemtrada's treatment effect was large.9

The more interesting aspects of the Sanofi decision concern the Court's approach to assessing whether the challenged omissions could nevertheless be considered materially misleading. First, the Second Circuit emphasized "the need to examine the context of an allegedly misleading opinion."10 In this regard, the Sanofi court stressed plaintiffs' sophistication—something apparently not considered by the district court or argued in the parties' appellate briefs. Specifically, the Sanofi court concluded that, as sophisticated investors, plaintiffs were (i) aware that issuers' projections are synthesized from a wide variety of information, some of which may be in tension with the ultimate projection set forth by the issuer; and (ii) familiar with the customs and practices of the relevant industry, including that defendants and the FDA were engaged in a dialogue—necessarily including differing views—about the sufficiency of various aspects of the clinical trials.11 Moreover, the Court added, the offering materials "made numerous caveats to the reliability of the projections."12 Thus, "[w]hile a layperson, unaccustomed to the subtleties and intricacies of the pharmaceutical industry and registration statements, may have misinterpreted Defendants' statements as evincing assurance of success, Plaintiffs here can claim no such ignorance."13

Second, the Sanofi court rejected out-of-hand the suggestion that Omnicare required defendants to disclose the FDA's feedback merely because it tended to undermine their optimistic projections. Thus, even though plaintiffs "[c]ertainly ... would have been interested in knowing about the FDA feedback, and perhaps would have acted otherwise had the feedback been disclosed," Omnicare "does not impose liability merely because an issuer failed to disclose information that ran counter to an opinion expressed in the registration statement."14 In further support of this conclusion, the Sanofi court noted that the FDA had long made public its preference for double-blind trials, while defendants had publicly stated that they were relying on single-blind studies, adding: "[e]specially where a complex financial instrument whose value is tied to FDA approval is involved, investors may be expected to keep themselves apprised of the FDA's public positions on testing methodology."15

As to the next category of challenged opinions about the FDA approval process—those that post-dated the CVR offering materials—the Second Circuit concluded that they failed to support a claim "for many of the same reasons" that the statements about FDA approval that were in the offering materials failed to support a claim.16 Specifically, the Court stated that, "whatever the implication" of defendants' statements that they were feeling "relaxed" or "satisfied" with the process, "no reasonable investor would have inferred that mere statements of confidence suggested that the FDA had not engaged in industry-standard dialogue with Defendants about potential deficiencies in either the testing methodology or the drug itself."17

The Significance of Sanofi

Sanofi is important by virtue of its being the Second Circuit's first published opinion applying Omnicare, and potentially even more so to issuers given its strict adherence to the Supreme Court's admonition that pleading viable opinion omission claims should be "no small task for an investor."18 Sanofi holds that Omnicare requires only that statements of opinion "fairly align with the information in the issuer's possession at the time," and does not require that all information conflicting with that opinion be disclosed.19

Also noteworthy is the Sanofi court's consideration of the sophistication of CVR investors in analyzing whether omitted information could be considered to have rendered an opinion materially misleading. In order to guard against an "overly expansive" application of the Omnicare standard,20 the Sanofi court charged the initial CVR holders, as sophisticated investors, with responsibility for taking into consideration caveats to defendants' opinions that the court concluded should fairly have been understood or implied in light of the industry and circumstances involved. Even more interesting, perhaps, was the court's apparent application of similar reasoning to those investors who acquired CVRs later, on the public market, and might not necessarily have been "sophisticated." In this regard, the court appears to have held those investors to a similar standard as the initial CVR holders.21 How this particular aspect of Sanofi may be developed or applied in future cases will be interesting to observe, but, regardless, issuers should be heartened by the fact that the Second Circuit's first published opinion discussing Omnicare suggests that the Second Circuit will continue to narrowly limit potential opinion liability based on omissions and expect investors to understand that opinion statements are not misleading for failing to disclose allegedly contradictory facts that are not "out of the ordinary, or . . . of the kind normally confronted by pharmaceutical companies seeking FDA approval."22

Finally, Sanofi is also significant because the Second Circuit applied Omnicare to claims challenging statements of opinion under Section 10(b) of the Exchange Act, employing the same analysis it used for plaintiffs' claims under Section 11 of the Securities Act. Omnicare addressed only the Securities Act, so applying it to Section 10(b) claims reflects an extension of the Supreme Court's reasoning beyond the statute in question in Omnicare. Many courts have taken Omnicare into account in connection with Section 10(b) claims, however—with some courts holding that Omnicare actually applies to Section 10(b) claims and others holding that it can provide instructive or persuasive authority for such claims. The question whether, after Omnicare, subjective falsity continues to be required to challenge statements of opinion under Section 10(b) in light of the statute's scienter requirement remains live, and was not definitively resolved by the Second Circuit in Sanofi. The Sanofi court did not expressly address the issue—finding that no material omission had been pleaded under either the Securities Act or the Exchange Act, and not referring to scienter.

Footnotes

1 Omnicare, 135 S. Ct. at 1331.

2 See Fait v. Regions Fin. Corp., 655 F.3d 105 (2d Cir. 2011). The Ninth Circuit too had required proof of subjective falsity. See Rubke v. Capitol Bancorp Ltd., 551 F.3d 1156 (9th Cir. 2009).

3 Sanofi, No. 15-588-cv, slip op. at 6.

4 In re Sanofi Sec. Litig., 87 F. Supp. 3d 510 (S.D.N.Y. 2015).

5 See id. at 531-33.

6 Sanofi, No. 15-588-cv, slip op. at 5.

7 Id. at 17.

8 Id. at 19-20.

9 Id. at 20.

10 Id.

11 Id.

12 Id.

13 Id. at 21.

14 Id.

15 Id. at 22. 

16 Id. at 23.

17 Id. The Court also rejected plaintiffs' challenge to defendants' positive statements regarding Lemtrada's clinical trial results, noting that there was (i) no relationship between the FDA's critical feedback and defendants' statements touting the results of Lemtrada's trials and, moreover (ii) no conflict between the two. See id. at 23-25.

18 Omnicare, 135 S. Ct. at 1332.

19 Sanofi, No. 15-588-cv, slip op. at 18.

20 Id.

21 The Court did not explain its reasoning in this regard. It may be by virtue of plaintiffs' having decided to invest in what the court termed a "complex financial instrument," id. at 22, or, perhaps, because they must be charged with implicit knowledge in light of the presence of sophisticated investors in an allegedly efficient marketplace. 

22 Sanofi at 21-22

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.