Omnicare And The 'Reasonable Investor' Standard For Statements Of Opinion

On March 24, 2015, the U.S. Supreme Court unanimously decided the closely followed case of Omnicare v. Laborers District Council Construction Industry Pension Fund concerning liability for false statements of opinion made in registration statements under Section 11 of the Securities Act of 1933 (Section 11).1

The Supreme Court's majority opinion, authored by Justice Kagan with Justices Scalia and Thomas concurring in two separate opinions, is significant because it:

Holds that issuers are not liable for a statement of opinion in a registration statement so long as (i) the opinion in fact was believed by the issuer at the time it was disclosed, (ii) the issuer had a reasonable basis for the opinion at the time it was disclosed, and (iii) the registration statement did not omit other material facts that are inconsistent with the opinion; Clarifies the facts and circumstances in which a statement of opinion may be actionable under Section 11, which prohibits a securities issuer from filing a registration statement that "contain[s] an untrue statement of a material fact" or "omit[s] to state a material fact ... necessary to make the statement therein not misleading";2 and Explains how a "reasonable investor" generally understands statements of opinion. Nevertheless, as the concurring opinions point out, the majority opinion may broaden the applicability of Section 11 liability with respect to statements of opinion by requiring that issuers have an objectively reasonable basis for the opinion. Indeed, nearly a week after this decision, the Supreme Court vacated the U.S. Court of Appeals for the Second Circuit's dismissal of Section 11 claims in Freidus v. ING Groep, N.V.3 and remanded the case to the Second Circuit for further consideration in light of Omnicare.

Background

As we outlined in our 2014 Year-End Report, the U.S. Court of Appeals for the Sixth Circuit previously held that the pension fund plaintiffs in Omnicare properly stated a claim by alleging that Omnicare's registration statement contained false statements of material fact regarding its compliance with the law, specifically:

"We believe our contract arrangements with other healthcare providers, our pharmaceutical suppliers and our pharmacy practices are in compliance with applicable federal and state laws"; and "We believe that our contracts with pharmaceutical manufacturers are legally and economically valid arrangements that bring value to the healthcare system and the...