On Monday, the U.S. Supreme Court heard oral argument in the Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund case, which addresses the pleading standard for a claim under Section 11 of the Securities Act alleging a false or misleading opinion in a registration statement. While the Second, Third, and Ninth Circuits have held that the plaintiff must allege the statement was both objectively and subjectively false – requiring allegations that the speaker’s actual opinion was different from the one expressed – in Omnicare the Sixth Circuit held that if a defendant “discloses information that includes a material misstatement [even if it is an opinion], that is sufficient and a complaint may survive a motion to dismiss without pleading knowledge of falsity.”
At oral argument, the focus was on what role the speaker’s basis, or lack thereof, for the opinion should play in evaluating falsity. Omnicare argued that the “ultimate legal inquiry is whether the speaker did not possess the stated belief,” but “if it’s a case where the speaker truly has no basis for the opinions, we believe it will be quite possible for a plaintiff to include all of these underlying allegations about the basis as a way of showing subjective disbelief.” The Court appeared concerned, however, about situations where a defendant could avoid liability even though the speaker either (a) had not done any due diligence to support the stated opinion (Justice Breyer), or (b) knew, but failed to disclose, that the basis for the opinion was weak (Justice Kagan). Justice Kagan, in particular, suggested that if a registration statement contained an opinion that a transaction was legal, “a reasonable reader would look at that statement and say two things actually: Both, he’s done something to try to check as to whether the transaction is legal, and he doesn’t know anything that’s very dispositive going the other way.”
At the same time, the Court did not appear noticeably more sympathetic to the position taken by the plaintiffs (and the Sixth Circuit), who argued that even if an opinion had a reasonable basis, it could be actionable if it turned out to be objectively false. Justice Ginsburg noted that the effect of that position is “there is no such thing as an opinion versus a fact, that it’s just the same as if they left out ‘we believe.'”
Ultimately, the Court spent most of the argument discussing the government’s proposed “middle ground,” which is that an opinion should be actionable if “[e]ither they didn’t believe what they were saying, or there was no reasonable basis for what they were saying.” Justice Alito expressed concern that the Court needed “some more concrete guidance as to what is reasonable.” For example, if a CEO plans to state his opinion that nobody in the company was paying bribes, “[d]oes he have to hire an outside firm to do an investigation to see if maybe somebody is paying bribes?” Both plaintiffs and the government suggested that reasonableness is a “context-specific inquiry,” but Justice Alito countered that if the opinion turned out to be inaccurate, “it’s not going to be very hard” for the plaintiff to assert that a “reasonable investigation” would have revealed that the opinion was false or misleading. Omnicare, for its part, argued that “an amorphous liability standard like the reasonable basis standard will really have a chilling effect” by encouraging companies not to offer their opinions about the company’s prospects.
The Court will issue its opinion by next June.