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6th Circ. Took A Wrong Turn In Omnicare Case
Law360, New York (August 21, 2013, 11:46 AM ET) -- When is an opinion a false or misleading
statement? If a company official says “I think the deal is fair,” is it a false statement just because the
deal is objectively unfair? Or only if the official also did not subjectively believe the deal was fair when
he voiced that opinion?
With the Sixth Circuit’s opinion in Indiana State District Council of Laborers v. Omnicare, 719 F.3d 498
(6th Cir. 2013), a circuit split has developed around the question of what is required to demonstrate that
a statement of opinion is false or misleading. This issue is key to many securities class actions, which
often hinge upon the truth or falsity of opinions, not facts.
People routinely express opinions that may be incorrect, or about which they may later change their
minds. But those opinions are not lies if they accurately reflect what the speaker thinks. Thus, even if a
deal is not fair by objective standards, the statement “I think the deal is fair” is not false unless the
speaker did not actually think that the deal was fair. An opinion is thus “true” if it reflects what the
speaker actually thought at the time that he spoke — regardless of whether it is objectively mistaken,
differs from the opinions of others, appears to be unreasonable, or is later changed. So, the truth or
falsity of any statement of opinion necessarily turns on the speaker’s actual belief.
This analysis of what makes an opinion a false or misleading statement seems self-evident. Thus, when
the Supreme Court considered the issue of whether and when a fairness opinion can be an actionable
false statement, it assumed that an opinion was not false unless the speaker did not hold the belief
stated. Va. Bankshares Inc. v. Sandberg, 501 U.S. 1083, 1095-96 (1991) (“Because such a statement by
definition purports to express what is consciously on the speaker’s mind, we interpret the jury verdict as
finding that the directors’ statements of belief and opinion were made with knowledge that the
directors did not hold the beliefs or opinions expressed”).
The threshold question faced by the Virginia Bankshares court was whether or not a statement of belief
or opinion could ever be actionable under the federal securities laws, or was instead per se immaterial.
The court found that “knowingly false” statements of opinion could be challenged because they can be
material and factual “as statements that the [speakers] do act for the reasons given or hold the belief
stated and as statements about the subject matter of the reason or belief expressed.” Id. at 1092.
Making an assumption that the jury had found that the statement was subjectively false, the court
concluded that objective falsity was also necessary for the plaintiff to prove a false or misleading
statement under Section 14(a). Id.
Summarizing the Virginia Bankshares holding in a concurring opinion, Justice Antonin Scalia emphasized
that both subjective and objective falsity were required for liability: “[T]he statement ‘In the opinion of
the Directors, this is a high value for the shares’ would produce liability if in fact it was not a high value
and the directors knew that. It would not produce liability if in fact it was not a high value but the
directors honestly believed otherwise.” Id. at 1108-09 (Scalia, concurring).
Yet Virginia Bankshares is anything but a paragon of clarity. It focused on the question of whether or not
an opinion can ever be an actionable statement, and then backed into the question of subjective falsity
by assuming that it existed in that case. As a result, the circuit courts were slow to apply its holding.
Although the decision was rendered more than 20 years ago, its analysis of the standard for evaluating
statements of opinion was not widely used until the last decade.
After Virginia Bankshares had been discussed and digested, however, most circuit courts began to cite to
it for the rule that a statement of opinion is only actionable if it is both subjectively and objectively false
or misleading. See, e.g., In re Credit Suisse First Boston Corp., 431 F.3d 36, 47 (1st Cir. 2005) (citing
Virginia Bankshares and holding that in order to challenge a statement of opinion plaintiffs must plead
“facts sufficient to indicate that the speaker did not actually hold the opinion expressed,” or in other
words, “subjective falsity”); Shields v. Citytrust Bancorp Inc., 25 F.3d 1124, 1131 (2d Cir. 1994) (citing
Virginia Bankshares to hold that “a statement of reasons, opinion or belief by such a person when
recommending a course of action to stockholders can be actionable under the securities laws if the
speaker knows the statement to be false.”); Nolte v. Capital One Fin. Corp., 390 F.3d 311, 315 (4th Cir.
2004) (“In order to plead that an opinion is a false factual statement under Virginia Bankshares, the
complaint must allege that the opinion expressed was different from the opinion actually held by the
speaker.”); Greenburg v. Crossroads Sys. Inc., 364 F.3d 657, 670 (5th Cir. 2004) (citing Virginia
Bankshares for the proposition that a “statement of belief is only open to objection where the evidence
shows that the speaker did not in fact hold that belief and the statement made asserted something false
or misleading about the subject matter”); Helwig v. Vencor Inc., 251 F.3d 540, 562 (6th Cir. 2001)
(“‘Material statements which contain the speaker’s opinion are actionable under Section 10(b) of the
Securities Exchange Act if the speaker does not believe the opinion and the opinion is not factually wellgrounded.’”); Rubke v. Capitol Bancorp Ltd., 551 F.3d 1156, 1162 (9th Cir.2009) (fairness opinions “can
give rise to a claim under Section 11 only if the complaint alleges with particularity that the statements
were both objectively and subjectively false or misleading”).
But in Omnicare the Sixth Circuit reversed course, departing not only from numerous decisions by other
circuits, but also from its own precedent, in holding that plaintiffs did not need to prove that defendants
knew their opinion was false in an action brought under Section 11. 719 F.3d at 505-07. The Omnicare
court recognized its departure from holdings by the Second Circuit and the Ninth Circuit, which had
specifically found that proof of subjective falsity was necessary in cases brought under Section 11. See
Fait v. Regions Financial Corp., 655 F.3d 105 (2011); Rubke, 551 F.3d at 1162. But the court distinguished
all the cases that required proof of the subjective falsity of opinions in a Section 10(b) context, including
its own holding in Helwig v. Vencor — arguing that those decisions were only applicable in the context of
a Section 10(b) action, in which proof of scienter was required.
In regard to Virginia Bankshares, the Omnicare court reasoned that the Supreme Court had not been
squarely faced with whether a plaintiff must plead the subjective falsity of an opinion, contending that
the court’s comments regarding subjective falsity were both dicta and tied to the question of scienter.
“The Virginia Bankshares discussion, therefore, has very limited application to § 11; a provision which
the Court has already held to create strict liability.” Id. at 507. Extending the “dicta” of Virginia
Bankshares to a Section 11 case would be “most dangerous,” the court ruled: “it would be most unwise
for this Court to add an element to § 11 claims based on little more than a tea-leaf reading in a § 14(a)
case.” Id.
The Omnicare court was not the first court to observe that subjective falsity feels like a scienter
requirement. Other courts have noted that the question of subjective falsity in a Section 10(b) case may
“essentially merge” with the scienter requirement, such that if a complaint demonstrates subjective
falsity, it will also have adequately shown scienter. See, e.g., Credit Suisse, 431 F.3d at 47. But the
Omnicare court missed the point when it held that proof of subjective falsity is only necessary in a case
where there is a requirement that scienter be shown.
Like Section 11, Section 14(a) does not require proof that a speaker knew the statement was false. In
Virginia Bankshares, the court explicitly declined to address the question of scienter — so its discussion
was necessarily centered around the element of falsity. And the subsequent cases that have examined
subjective falsity in the context of Section 10(b) have discussed it in terms of falsity, not scienter. Simply
put, an opinion is not false if it is genuinely believed by the speaker. This question is separate from the
inquiry as to the speakers’ intent in making the statement. To conflate the two elements is an analytic
mistake and legal error.
This distinction is most vital in cases such as Omnicare, brought under statutes for which proof of
scienter is not required. But it is also important in Section 10(b) cases, where scienter can be established
by showing either actual knowledge or some form of recklessness, while subjective falsity requires
plaintiffs to show a speaker knew his opinion was false. Preserving this focused inquiry is especially
important when plaintiffs seek to prove scienter “holistically” or through doctrines such the core
operations inference or corporate scienter, which cause the scienter analysis to be more and more
removed from a showing that a speaker had actual knowledge of fraud as to a particular statement.
Analysis of the hypothetical statement “I think the deal is fair” illustrates these points. Assume the deal
was not objectively fair, but the speaker genuinely believed it was. In that case, the statement was true
and is not actionable — a scienter analysis is not even required. If the falsity analysis got it wrong,
however, we would then delve into a scienter analysis with a looser recklessness test, which would look
at a variety of factors other than the speaker’s actual belief in his statement.
The error is worsened when the recklessness analysis is performed with analytic tools like the core
operations inference and corporate scienter theory, which have the capacity to devolve into
assumptions about the speaker’s intent based on company-wide factors, and under a holistic analysis
that tends to look at scienter generally, rather than focusing on the speaker’s state of mind as to a
particular challenged statement. As a result, a speaker could be held liable for saying that he thought
the deal was fair, even though that is what he actually thought, because of a judgment that the general
factors present at the company suggest overall recklessness. The result is not just analytic impurity, but
injustice — such that some cases that should be dismissed would not be.
It took the better part of two decades for the crucial holding of Virginia Bankshares to be well
understood and widely applied by the circuit courts. The Omnicare case represents a step backward in
this analysis. Hopefully, other circuit courts will decline to follow the Sixth Circuit in its abrupt wrong
turn, and the Supreme Court will eventually clarify its Virginia Bankshares decision.
—By Claire Loebs Davis, Lane Powell PC
Claire Loebs Davis is a shareholder in Lane Powell's Seattle office.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its
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