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Justices Face Muddy Waters With Omnicare Middle Ground
By Stephanie Russell-Kraft
Law360, New York (November 07, 2014, 5:04 PM ET) -- The U.S. Supreme Court seems unwilling to
uphold the Sixth Circuit's broad ruling that securities issuers can be held responsible for sharing opinions
with investors that turned out to be false, but experts say a proposed middle-ground ruling in
the Omnicare Inc. case could burden litigants with the uncertainty of having their subjective opinions
evaluated without objective standards.
The case hinges on whether an incorrect opinion provided in a registration statement for public offering
is enough to support claims under Section 11 of the Exchange Act. But it was the question of what
makes an opinion “reasonable” that gave the justices pause during oral arguments on Nov. 3.
A group of Omnicare investors allege the pharmaceutical company’s claims of “legal compliance” tied to
a 2005 public offering were false and misleading because the company and four executives concealed a
kickback scheme, artificially inflating share prices. Omnicare said it couldn’t be held liable because its
opinion was sincerely held at the time, but the Sixth Circuit disagreed in 2013, saying the company and
its executives could be held liable for the statements regardless of whether they knew them to be false
at the time. Omnicare appealed to the high court shortly after.
Although none of the parties — including the solicitor general, who joined in on the side of the plaintiffs
— argued that the high court should uphold the Sixth Circuit’s standard, Omnicare attorney Kannon K.
Shanmugam of Williams & Connolly LLP seemed to be fighting an uphill battle to convince the justices
that a statement of opinion is only actionable if the issuer didn’t believe it at the time.
Instead, the justices seemed most interested in the solicitor general’s proposal: that issuers can be held
liable for statements of opinion under Section 11 if they lacked a “reasonable basis” under the
circumstances, even if their opinion was genuinely held. But the seeming middle-ground option could
bring more trouble — and less clarity — than intended, defense attorneys worry.
“From a defense perspective, it’s not an ideal test,” said Mark Foster, securities litigation partner
at Morrison & Foerster LLP. “A reasonable basis test suggests that it’s objective, but I think it’s anything
but in practice. A reasonable basis test allows someone else to decide whether or not someone’s
opinion was reasonable.”
While Foster said the reasonable basis test has long existed in the courts for other types of soft
information, he said he’s worried about the injection of subjective second-guessing into what is
supposed be an objective standard.
John Durrant, a litigator at Paul Hastings LLP, said the test could lead to “troubling consequences” for
issuers.
“The problem with this approach is that while such a standard sounds simple and even-handed, it could
actually make it very difficult in practice to dismiss cases at the motion to dismiss stage,” he said.
The test might also have a “chilling effect” on statements of opinion in corporate disclosures if issuers
begin to fear they could later be subject to litigation over the reasonableness of those statements, he
added.
During oral arguments, the justices seemed eager to find a middle ground between the two extremes of
the feuding parties, and a bulk of the hearing centered around the reasonable basis test. But they also
struggled with the contours of that test, toying with hypothetical situations in which the reasonableness
of an opinion could or could not be measured.
In several instances, the argument verged on a philosophical debate about the limits of certainty in
human knowledge.
“I can’t help but wonder whether the root of this problem is that not all opinion is created equal,” said
Jonathan Richman, co-head of Proskauer Rose LLP’s securities litigation group. “Saying, ‘We think that
we have 3 million [widgets] in inventory’ is different than ‘We think we are compliant.’”
“You can verify inventory. You can’t verify legal compliance,” he added.
Richman said he would welcome a Supreme Court ruling that provides clarity about this underlying
issue, whether or not it is harmful to defendants.
Claire Davis, securities litigator at Lane Powell PC, is hoping for a second middle-ground option, one that
she believes would avoid the gray area of the reasonable basis standard altogether. Davis co-authored
an amicus brief on behalf of the Washington Legal Foundation in which she urged the court to look at
statements of opinion in terms of whether or not they are misleading.
“All the federal securities statutes, including Section 11, have a provision saying that there’s also liability
if the speaker omits facts necessary to making statements not misleading,” she said. “There’s no reason
that statements of opinion in that regard need to be treated any differently from any other statement.”
If that standard were to be implemented with “some discipline,” Davis said, many of the justices’
questions would be resolved without needing to delve into the murky waters of what is reasonable.
“It also maintains the subjective falsity component of opinion,” she said. “An opinion could be literally
true but nonetheless part of a misleading statement.”
The government is represented by Anne K. Small, Michael A. Conley and John W. Avery of the
U.S. Securities and Exchange Commission; U.S. Solicitor General Donald B. Verrilli Jr.; Deputy Solicitor
General Malcolm L. Stewart; and Assistant to the Solicitor General Nicole A. Saharsky.
Omnicare is represented by Linda T. Coberly, Harvey Kurzweil, Richard W. Reinthaler, John E. Schreiber
and Andrew C. Nichols of Winston & Strawn LLP; and Kannon K. Shanmugam, Joseph M. Terry, John S.
Williams and A. Joshua Podoll of Williams & Connolly LLP.
The investors are represented by Eric A. Isaacson of Robbins Geller Rudman & Dowd LLP and Thomas C.
Goldstein of Goldstein & Russell PC.
The case is Omnicare Inc. et al. v. Laborers District Council Construction Industry Pension Fund et al.,
case number 13-435, in the Supreme Court of the United States.
--Editing by John Quinn and Christine Chun.
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