One year ago today, in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S.Ct. 1318 (2015), the Supreme Court created a new test for opinion liability under Section 11 of the Securities Act, a strict liability statute that applies to material misrepresentations and omissions in a registration statement. The Court stated that under the misrepresentation prong of Section 11, even if an opinion is objectively wrong, a statement of opinion is misleading only if the defendant did not believe it or if it contained other embedded factual statements that were untrue. To hold otherwise, the Court wrote, is to ignore that a statement of opinion merely affirms “that the speaker actually holds the stated belief,” not that the belief is correct.
The Court, however, did not stop there. Section 11 also makes it unlawful to omit material facts necessary to prevent the statements made from being misleading. The Court held that under the omission prong in Section 11, “depending on the circumstances,” a reasonable investor may “understand an opinion statement to convey facts about how the speaker has formed the opinion—or, otherwise put, about the speaker’s basis for holding that view.” Under that standard, the Court stated, “if the real facts are otherwise, but not provided, the opinion statement will mislead its audience.” Thus, “if a registration statement omits material facts about the issuer’s inquiry into or knowledge concerning a statement of opinion, and if those facts conflict with what a reasonable investor would take from the statement itself, then § 11’s omissions clause creates liability.”
Omnicare was a departure from existing law. Prior to Omnicare, the Second and Ninth Circuits, the most influential circuits for securities cases, held that opinions are only misleading if the speakers did not believe them. The Sixth Circuit, however, in the decision that the Supreme Court reversed in Omnicare, held that under Section 11 an opinion is misleading if it is objectively incorrect even if the speaker believed it.[1] Thus, while Omnicare reversed the Sixth Circuit pro-plaintiff standard, it also departed from the more influential, defendant-friendly standards in the Second and Ninth Circuits. Below, we consider how courts have applied Omnicare in the year since it was decided.
The Second Circuit’s Narrow Application of Omnicare
Earlier this month, the Second Circuit revisited its prior holding in Fait v. Regions Financial Corp.[2] that only subjectively-disbelieved opinions are misleading under the securities laws. In Tongue v. Sanofi, slip op. No 15-588-cv (2d Cir. Mar. 4, 2016), defendant and its predecessor had conducted “single-blind” clinical drug studies (studies in which either the researcher or the patient does not know which drug was administered) of a drug designed to treat multiple sclerosis, but, according to the complaint, the FDA had repeatedly expressed strong concern to the company and its predecessor that, without “double-blind” clinical studies (studies in which both the researcher and the patient do not know which drug was administered), the results might not support approval of the drug.[3] Plaintiffs alleged that without disclosure of the FDA’s repeated warnings that a single-blind study might not be adequate, various opinion statements were misleading. The opinions included defendants’ estimate that there was a 90% likelihood of achieving certain milestones within the cut-off date for those milestones, the projection that the FDA would approve the drug in late 2012, expressions of confidence about the anticipated launch date of the drug, a statement that the results of the clinical trials were “unprecedented,” and that they were “nothing short of stunning.” In November 2013, the FDA rejected the application based primarily on the failure to use double-blind studies. One year later, however, it approved the drug without double-blind studies.
The district court dismissed the claims based on multiple grounds: 1) they were not misleading under the Second Circuit’s subjective-belief standard in Fait, 2) they were protected by the securities law safe harbors for forward-looking statements, and 3) with respect to the claims under Section 10(b) of the Securities Exchange Act (which, unlike Section 11, requires proof of scienter), plaintiffs had failed to plead facts creating a strong inference of scienter.[4] The Second Circuit stated that it “saw no reason to disturb the conclusions of the district court,” but wrote to clarify the impact of Omnicare, which was decided after the district court issued its opinion, on prior Second Circuit law addressing whether a statement of opinion is materially misleading.
Expressions of Even Exceptional Optimism Do Not Create an Obligation to Disclose Conflicting Facts
The Second Circuit acknowledged that Omnicare changed the standard in Fait for what constitutes a materially misleading opinion under Section 11 because subjective disbelief is no longer required for a statement of opinion to be misleading. It held, however, that even under Omnicare the fact that the FDA expressed significant reservations about the company’s methodology “did not prevent Defendants from expressing optimism, even exceptional optimism, about the likelihood of drug approval.”
The court focused on the Supreme Court’s statement in Omnicare that a statement of opinion “is not necessarily misleading when an issuer knows, but fails to disclose, some fact cutting the other way.” It stated that Omnicare imposes no obligation to disclose facts merely because they would have undermined defendants’ optimistic projections. In particular,
Defendants need not have disclosed the FDA feedback merely because it tended to cut against their projections—Plaintiffs were not entitled to so much information as might have been desired to make their own determination about the likelihood of FDA approval by a particular date….
Certainly, Plaintiffs would have been interested in knowing about the FDA feedback, and perhaps would have acted otherwise had the feedback been disclosed, but Omnicare does not impose liability merely because an issuer failed to disclose information that ran counter to an opinion expressed in a registration statement….
[D]efendants’ statements about the effectiveness of [the drug] cannot be misleading merely because the FDA disagreed with the conclusion—so long as Defendants conducted a “meaningful” inquiry and in fact held that view, the statements did not mislead in a manner that is actionable.
The “no meaningful inquiry” is a difficult standard for plaintiffs to meet, but it is based on a recognition that reasonable investors know that when a company offers an opinion, it is not stating that it is aware of no facts that cut against it, or that the company has disclosed the facts that cut the other way, or that no reasonable person could hold a different opinion based on the same facts. As the Supreme Court stated in Omnicare and the Second Circuit stated in Sanofi, the standard for opinion liability presents “no small task for an investor” seeking to plead that an opinion is misleading.
Hedges and Disclaimers Limit an Investor’s Ability to Allege that an Opinion Is Misleading
The Second Circuit also focused on the Supreme Court’s statement in Omnicare that investors read...
