In 2015, in Omnicare, Inc v Laborers District Council Construction Industry Pension Fund, the US Supreme Court articulated ostensibly heightened standards for pleading an actionable mis-statement or omission under the federal securities laws when the statement at issue is an "opinion" – a belief, view or sentiment – as opposed to a statement of "fact". For opinion statements, the Supreme Court held, it is not enough to allege that the opinion was "wrong"; rather, the plaintiff must demonstrate that the speaker did not actually hold the stated belief, that the opinion contained an untrue "embedded" fact, or that it omitted facts, calling into question the "basis" of the opinion.
The courts have struggled to apply this consistently, in some cases allowing claims to proceed past the motion-to-dismiss stage where, contrary to the Supreme Court's admonition, plaintiffs pointed only to "facts cutting the other way". Greater clarity in the standards for omissions is needed to avoid an uncertain legal landscape for issuers.
The Omnicare Framework for Opinions
The Omnicare case concerned the standard for pleading a violation of Section 11 of the Securities Act of 1933 based on a statement of opinion – that the issuer "believe[d]" its contracts were "in compliance with applicable federal and state laws" and "legally and economically valid". The district court granted the issuer's motion to dismiss, but the Sixth Circuit reversed, holding that plaintiffs' allegations that the issuer's stated belief was "objectively false" sufficed to state a Section 11 claim. In remanding the case for further consideration, the Supreme Court explained that an "opinion" – a "belief", "view" or "sentiment which the mind forms" – differs from a "statement of fact". While a statement of fact "expresses certainty about a thing", an opinion does not. Therefore, a plaintiff cannot state a claim under Section 11 – which requires an untrue statement or misleading omission of "material fact" – by alleging only that the opinion was "wrong".
"...the Supreme Court explained that an 'opinion' – a 'belief', 'view' or 'sentiment which the mind forms' – differs from a 'statement of fact'."
Nonetheless, the Supreme Court recognised three circumstances in which an opinion may be actionable. The first is where the speaker does not "actually hold... the stated belief", as every opinion affirms the "fact" that "the speaker actually holds the stated belief". The second is where the opinion contains an "embedded statement... of fact", such as "I believe our TVs have the highest resolution available because we use a patented technology". And the third is where omitted facts "call into question the issuer's basis for offering the opinion". As the court explained, a reasonable investor may understand an opinion "to convey facts about how the speaker has formed the opinion" – that is, the "basis for holding that view". If the facts are otherwise, "the opinion statement will mislead its audience".
"Reasonable investors understand that opinions sometimes rest on a weighing of competing facts."
The court cautioned, however, that it is not enough to allege that the issuer knew but failed to disclose "some fact cutting the other way". "Reasonable investors understand that opinions sometimes rest on a weighing of competing facts." Rather, a plaintiff 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" – the omission of which makes the opinion materially misleading. That is "no small task".
Inconsistent Application of the Omnicare Framework
The courts have applied Omnicare in various contexts, including to securities fraud claims under Section 10(b) of the Securities Exchange Act of 1934. They have struggled, however, to do so consistently or predictably.
The nub of the issue is prong three of Omnicare's liability framework – omissions as to an opinion's "basis". While most courts readily reject claims asserting an opinion is not "actually held" on the grounds that the allegations do not support such a conclusion, there is far less uniformity in whether a claim challenging an opinion as lacking a reasonable basis will survive a motion to dismiss. Some courts have dismissed such claims even though the complainants pleaded facts that called into question the basis for the opinion. The Third Circuit, for example, recently rejected claims based on statements touting the adequacy of reserves held for death-benefit claims, despite allegations of a known negative mortality rate that led to a significant reserves adjustment. The Fourth Circuit has rejected claims based on a biopharmaceutical company's characterisations of clinical trial results as "positive" and demonstrating a "superior outcome", despite opposing interpretations of the same data.
"The nub of the issue is prong three of Omnicare's liability framework – omissions as to an opinion's 'basis'."
Other courts have been more willing to give plaintiffs the benefit of the doubt. In recent years, the First Circuit denied a motion to dismiss claims based on an issuer's statement that it "thinks" its data back-up product "is just completely competitive and just a super strong product", where plaintiffs alleged the product "never worked". Moreover, the Second Circuit allowed claims based on a pharmaceutical company's assertion that "all of the major studies" demonstrated that its clinical trial results were "remarkable", notwithstanding allegations that the company failed to identify certain "major" studies that concluded otherwise. This year, the Ninth Circuit allowed claims based on an issuer's statements that its sales pipeline was "strong" and "healthy" where plaintiffs alleged "slipped" sales and "deteriorating conditions". (The dissent in that case deemed the same statements to reflect non-actionable "business judgements" and "differences of opinion".) Where does one draw the line?
While the Omnicare case limits the avenues by which an issuer may face liability for statements of opinion, the degree of protection is not clear cut. If an opinion rests on a solid factual foundation, and a reasonable inquiry has been conducted, Omnicare should offer strong protections for issuers' opinion statements, at least in terms of ultimate liability. The risk remains, however, that at the motion-to-dismiss stage, a court could conclude that a complainant has pleaded a misleading opinion based on allegations of undisclosed contrary facts even if those facts do not wholly undermine the opinion, subjecting the issuer to time-consuming and costly discovery. The ease with which some courts do so arguably conflicts with the rationale of the Omnicare case, that opinion statements (unlike fact statements) inherently broadcast uncertainty and so do not mislead simply by omitting facts "cutting the other way".
"...opinion statements (unlike fact statements) inherently broadcast uncertainty and so do not mislead simply by omitting facts 'cutting the other way'."
To provide a more predictable framework, and not discourage the expression of opinions, courts should strive to develop more consistent standards faithful to Omnicare's recognition that pleading an opinion-based claim is "no small task". For example, the courts could consider the specificity of the alleged omission, the extent of the issuer's alleged knowledge, and the degree to which the omitted fact not only weighs against the opinion but renders it wholly unreasonable. An opinion that a product is "super strong" when it "never worked" differs from an opinion that a sales pipeline is "strong" amid allegations of indeterminate "deteriorating" conditions. Until greater clarity and consensus are achieved, issuers should tread with caution in relying on the Omnicare case to immunise their opinion statements when certain facts arguably suggest otherwise.
Originally published in Chambers and Partners
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