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Subjective or Objective Truth? Supreme Court to Decide What Is an "Untrue" Statement of Opinion

On Monday, the U.S. Supreme Court granted certiorari in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund (13-435), an appeal in which Omnicare has asked the Court to clarify the meaning of “untrue” in Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k, in cases involving statements about matters of opinion.

Omnicare, the country’s largest provider of pharmaceutical care services to the elderly, stated in a 2005 SEC registration statement for a stock offering that it was in material compliance with applicable laws.  Shareholders who purchased stock in the offering subsequently challenged that statement as "untrue" in a Section 11 claim against Omnicare and certain of its directors and officers. The plaintiff shareholders alleged that the company had engaged in various illegal activities, including kickback arrangements with pharmaceutical manufacturers and submission of false claims to Medicare and Medicaid, and cited related government investigations to support their claim.   But significantly, the plaintiffs did not allege that the defendants believed that the statement about the company's legal compliance was false.

The question presented by Omnicare in its certiorari petition is whether, for purposes of a Section 11 claim, a plaintiff may plead that a statement of opinion or belief is "untrue" merely by alleging that the statement was objectively false, or whether the plaintiff must also allege that the statement was subjectively false (i.e., that the speaker knew the statement was false at the time it was made).   As we have discussed previously, the outcome of this case will be especially significant for companies in heavily regulated industries such as health care and biotechnology, where legal compliance can be complex and difficult to monitor.

Section 11 of the ’33 Act provides a private remedy for shareholders who purchase stock in a public company's offering if the company’s registration statement “contained an untrue statement of material fact or omitted to state a material fact required to be stated therein or necessary to make the statement therein not misleading.”  Section 11 does not require proof of scienter, that is, knowing or extremely reckless wrongdoing; rather, Section 11 provides for the issuer's strict liability to the stock purchaser in the event of a material misstatement.  So when the U.S. Court of Appeals for the Sixth Circuit considered the Omnicare case, it held that a defendant’s knowledge is not relevant to Section 11 claim.

But Omnicare has cogently argued that in cases involving matters of opinion, such as a statement about legal compliance, more is required. The crux of Omnicare’s argument is based on the Supreme Court's earlier decision in Virginia Bankshares v. Sandberg, 501 U.S. 1083 (1991), which held that establishing a material misstatement of opinion under Section 14(a) of the Securities Exchange Act of 1934 requires both objective and subjective falsity.  As Omnicare argues in its certiorari petition, “a statement of opinion cannot constitute a material misstatement unless the speaker’s actual opinion was different from the one expressed.” Omnicare quotes the U.S. Court of Appeals for the Second Circuit for the point that “requiring subjective falsity with respect to statements of opinion or belief ‘does not amount to a requirement of scienter,’ but rather is simply a function of the nature of the particular misstatement that the plaintiff chose to allege.” Omnicare argues that holding otherwise, as the Sixth Circuit did, will have serious consequences, such as making officers, directors, auditors, lawyers, and underwriters liable in hindsight for statements of opinion or belief, resulting in more class actions disrupting the capital markets.

Oral argument in Omnicare will be scheduled during the Supreme Court’s next term, between October 2014 and June 2015.

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Chip Phinney