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Securities Defense Bar Has High Hopes Riding On Omnicare
By Brian Mahoney
Law360, Washington (March 03, 2014, 8:09 PM ET) -- In agreeing to review a Sixth Circuit decision that
effectively lowered the bar for class action plaintiffs to pursue fraud claims against executives, the U.S.
Supreme Court now has the opportunity to clarify high court precedent while curtailing a lower court
decision that experts say would have a “chilling effect” on executive speech if applied nationwide.
The high court on Monday granted cert in Omnicare Inc. v. Laborers District Council Construction
Industry Pension Fund, taking up a challenge to the Sixth Circuit's May 2013 decision that found a
defendant didn't need to know that false statements were being made for plaintiffs to pursue fraud
actions under Section 11 of the Securities Act of 1933.
The decision drew the ire of the securities defense bar, which argued that the Sixth Circuit decision
would incorrectly allow plaintiffs to sue executives over statements of opinion that, even though
believed to be true, actually turn out to be misleading or false.
With Monday’s cert grant, the Supreme Court has a chance to issue a corrective to the Sixth Circuit and
re-raise the bar for securities plaintiffs alleging Section 11 violations, experts told Law360.
“Nothing’s a no-brainer when the Supreme Court grants cert, but I would be surprised if the court
granted cert to affirm the Sixth Circuit on this,” said Charles F. Smith, a partner at Skadden Arps Slate
Meagher & Flom LLP.
Indeed, securities defense lawyers are cautiously optimistic that the court granted cert to clarify and
affirm its guidance in the 1991 opinion in Virginia Bankshares Inc. v. Sandberg, which both the Ninth
Circuit and the Second Circuit have cited in adopting stricter standards for shareholders suing executives
over allegedly false statements.
While Smith was careful not to count out the Supreme Court’s potential affirmance of the Sixth Circuit
decision, he said that a more likely outcome is a reversal based on Virginia Bankshares, or new guidance
on Section 11 pleading requirements.
“The Supreme Court could develop a completely different rule than the circuit courts have been
developing,” he told Law360.
Richard Bernstein, the co-chair of Willkie Farr & Gallagher LLP’s securities practice, told Law360 that the
Supreme Court’s grant of cert in the case was a significant development toward clarifying the case law
surrounding Section 11 liability.
“I think the Supreme Court is likely to reverse based on Virginia Bankshares and based on the reality that
a statement of opinion is not itself a statement of fact except about the state of mind of a person,”
Bernstein said.
But if history is any guide, interpreting Virginia Bankshares is far from a simple task, said Claire Loebs
Davis, a shareholder in Lane Powell PC’s Seattle office who wrote for Law360 in August an exclusive
analysis critical of the Sixth Circuit decision.
“I think Virginia Bankshares is a difficult decision to interpret and it took a long time for it to trickle down
and be understood by the circuit courts and the district courts as a result,” Davis told Law360 on
Monday.
According to Davis, circuit courts were slow to apply the complicated opinion in Virginia Bankshares until
the early 2000s, when a slew of them began citing the case for a general rule: that a statement of
opinion is actionable only if it is both subjectively and objectively false or misleading. In other words,
executives are only liable for false statements if those statements are objectively false and are known by
the executives to be objectively false.
If the court were to reverse the Sixth Circuit and clarify Virginia Bankshares, it may take a cue from the
concurring opinion of Associate Justice Antonin Scalia in that case, Davis said. Justice Scalia held that
both subjective and objective falsity were required for liability, and used the example of a director
touting a favorable company sale price.
“[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,” Justice Scalia said in his
opinion.
Davis told Law360 that she expects the majority of the court to side with Justice Scalia while it attempts
to resolve any confusion wrought by Virginia Bankshares.
“I would expect that the court would make a decision that is consistent with the holding and the
reasoning in Virginia Bankshares and hope that, in addition to that, they will provide some clarity and
guidance on what that means,” Davis said.
Should the Supreme Court buck the trend of several federal courts and side with the Sixth Circuit, it
would not only up-end several circuit courts’ precedent, but may also silence communications between
executives and shareholders.
“In my view a ruling by the Supreme Court that affirms the Sixth Circuit would have a chilling effect on
the ability of corporate officers to make statements of opinion about where their company is and where
it’s headed,” Smith said.
A decision in favor of the Sixth Circuit could also usher in a new wave of doubt, Davis added.
“I think it opens up a lot of difficult questions if the court doesn’t hold what we all know to be true,
which is if you’re voicing an opinion, you’re not lying unless that’s not actually your opinion."
Omnicare is represented by Linda T. Coberly, Gene C. Schaerr, Steffen N. Johnson, Elizabeth P. Papez,
Harvey Kurzweil, Richard W. Reinthaler, James P. Smith III and John E. Schreiber of Winston & Strawn
LLP.
The respondents are represented by Kevin L. Murphy of Graydon Head & Ritchey LLP and Darren J.
Robbins, Eric Alan Isaacson, Henry Rosen, Steven F. Hubachek and Amanda M. Frame of Robbins Geller
Rudman & Dowd LLP.
The case is Omnicare Inc. v. Laborers District Council Construction Industry Pension Fund, case number
13-435, in the Supreme Court of the United States.
--Additional reporting by Stewart Bishop. Editing by Edrienne Su.
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