"Securities Litigation Developments Largely Expected to Shift From SCOTUS to District and Circuit Courts in 2015"

As observed in the 2014 edition of Insights, the Supreme Court stood poised last term to resolve a number of noteworthy issues with the potential to affect the securities litigation landscape. In Chadbourne & Parke, LLP v. Troice, 134 S. Ct. 1058 (2014), the Supreme Court clarified that the Securities Litigation Uniform Standards Act applies only “where the misrepresentation makes a significant difference to someone’s decision to purchase or to sell a covered security,” and in Lawson v. FMR, LLC, 134 S. Ct. 1158 (2014), it held that the whistleblower protections under Sarbanes-Oxley apply to employees of a public company’s private contractors and subcontractors. In its much-anticipated opinion in Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014), and as explored further below, the Supreme Court reaffirmed the applicability of the fraud-on-the-market presumption of reliance, but also definitively confirmed a defendant’s right to rebut the presumption at the class certification stage by presenting evidence that the alleged misrepresentations did not affect the stock’s price.

Although the number of settlements remained at a nearly 20-year low, the number of new federal securities class action filing remained essentially unchanged last year as compared to the average over the previous five years. Despite such apparent stability, the landscape and potential strategic responses to federal class action securities litigation continue to evolve, and important ever-present considerations remain for all publicly traded companies. Recent developments notwithstanding, many uncertainties in the law remain, and we anticipate further evolution in several areas in 2015.

The U.S. Supreme Court likely will decide in the next few months whether opinion statements that later prove false, regardless of whether the speaker believed them to be true when made, are actionable under Section 11 of the 1933 Securities Act, 15 U.S.C. § 77k.

The Second, Third and Ninth Circuits have held that an opinion statement is actionable under Section 11 only if (1) the statement later turned out to be incorrect (the "objective falsity" requirement) and (2) the speaker did not actually believe the statement to be true at the time it was made (the "subjective falsity" requirement). Conversely, the Sixth Circuit recently held in Indiana State District Council of Laborers Pension & Welfare Fund v. Omnicare, Inc., 719 F.3d 498 (6th Cir. 2013), that Section 11 claims are predicated upon strict liability and thus can proceed solely on the basis of allegations of objective falsity (i.e., rejecting any subjective falsity requirement).

The Supreme Court heard oral argument on November 3, 2014. The petitioner, Omnicare, argued that Section 11 imposes liability only if both the objective and subjective falsity predicates are met, contending that an opinion statement cannot be false if the speaker genuinely believed in the truth of the statement at the time it was made. The respondents — investors who purchased Omnicare securities in a 2005 public offering — argued that Section 11 is a strict liability statute and thus consideration of a speaker's state of mind concerning a challenged opinion statement is not relevant and issuers should be held liable for opinions that turn out to be incorrect.

Neither view appeared to move the Supreme Court as much as the government's proffered "reasonable basis" approach to assessing Section 11 opinion liability. This "middle ground" test is essentially an attempt to harmonize the circuit court split and focuses the inquiry on whether (1) the speaker genuinely believed the opinion at the time it was made and (2) there was a reasonable basis for believing that opinion to be true. Speculation abounds, but a consensus is growing that the Court will move toward this type of composite formulation rather than picking among the current poles.

To be sure, the seeming ambiguity of what might constitute a "reasonable basis" underlying the belief required to satisfy the government's proposed standard is a legitimate concern (as noted in questions posed by Justice Samuel Alito at oral argument). Additionally, adopting a "reasonable basis" standard could unfairly disadvantage issuers seeking resolution at the pleading stage, because what constitutes a “reasonable basis” likely would be argued by the plaintiffs' bar to involve a fact-intensive inquiry that only should be resolved at the summary judgment stage after discovery.

However, adoption of a "reasonable basis" inquiry would repudiate in an important way the Sixth Circuit's approach to opinion statements — which untethered opinions from their judgmental basis despite the fact that such statements of belief are by definition uncertain and, in some instances, may later turn out to be incorrect. Indeed, opinions that often are at issue in Section 11 cases — loan loss and other similar reserve determinations, litigation outcome estimates, goodwill and other judgmental assessments — could become more problematic to defend if plaintiffs are only required to plead objective falsity. Rather, by requiring plaintiffs to plead nonconclusory facts from which to infer that the speaker lacked an appropriate basis for the opinion or belief, the Court would preserve an important minimum pleading baseline that plaintiffs must meet to survive dismissal.