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 it 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 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 well-grounded.’”); 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 decision 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.