On March 24, 2015, the U.S. Supreme Court issued its opinion in Omnicare, Inc. v. Laborers Dist. Council Const. Industry Pension Fund, 135 S. Ct. 1318 (2015). My partner Claire Davis and I are publishing a forthcoming one-year anniversary article on Omnicare. In addition to discussing the lower courts’ application of the decision, we take apart the fallacy that Omnicare is “plaintiff-friendly” – a proposition that led to my June 2015 rant “Hey There Fellow Securities Defense Lawyers: Omnicare is GOOD for Us!” We will post a link to the anniversary article when it’s out. For now, I want to further explain why I care so much about Omnicare.
As a reminder, Omnicare holds that a statement of opinion is only false if the speaker does not genuinely believe it, and that it is only misleading if – as with any other statement – it omits facts that make it misleading when viewed in its full context. The Court’s ruling on what is necessary for an opinion to be false establishes a uniform standard that resolves two decades of confusing and conflicting case law. And the Court’s ruling regarding how an opinion may be misleading emphasizes that courts must evaluate the fairness of challenged statements (both opinions and other statements) within a broad factual context, eliminating the short-shrift that many courts have given the misleading-statement analysis.
In my tax law class in law school, my professor said that he could teach all of tax law through the U.S. Supreme Court case Old Colony Trust Co. v. Commissioner, 279 U.S. 716 (1929). Similarly, Omnicare provides the foundation for multiple legal and strategic elements of a strong defense of a securities class action. It is truly a case study in how to defend a securities case. Below, I address three of those components.
1. Omnicare’s directive that courts consider context better allows defense lawyers to show the defendants said nothing false.
Our North Star in defending any securities class action is to explain that the defendants said nothing false. At the core of every securities class action is a person who is alleged to have lied. Clients generally feel strongly that they did their best and told the truth. The reasons for their belief are always the right place to start constructing the defense, and usually remain the gist of the defense after categorizing the facts under the relevant legal standards.
Sticking up for the truth of what our clients said also gives them a voice during the long initial stages of the motion-to-dismiss process. Although the Reform Act’s prolonged introductory stages were designed to help defendants, they don’t allow defendants to tell their side of the story – which is frustrating and often harmful to the reputations of real people.
But the Reform Act, and now Omnicare’s context standard, leave securities defense lawyers with broad latitude to support the truth of what their clients said, and to attack allegations of falsity, as to both statements of fact and statements of opinion. A proper falsity analysis always starts by examining each challenged statement individually, and matching it up with the facts that plaintiffs allege illustrate its falsity. From there, the truth of what the defendants said can be supported in numerous ways that are still within the proper scope of the motion-to-dismiss standard: showing that the facts alleged do not actually undermine the challenged statements, because of mismatch of timing or substance; pointing out gaps, inconsistencies, and contradictions in plaintiffs’ allegations; demonstrating that the facts that plaintiffs assert are insufficiently detailed under the Reform Act; attacking allegations that plaintiffs claim to be facts, but which are really opinions, speculation, and unsupported conclusions; putting defendants’ allegedly false or misleading statements in their full context to show that they were not misleading; and pointing to judicially noticeable facts that contradict plaintiffs’ theory.
A good motion to dismiss has always analyzed a challenged statement (of fact or opinion) in its broader factual context to explain why it’s not false or misleading. But many defense lawyers unfortunately leave out the broader context, and courts have sometimes taken a narrower view. Now, this type of superior, full-context analysis is clearly required by Omnicare. And combined with the Supreme Court’s directive in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007), that courts consider scienter inferences based not only on the complaint’s allegations, but also on documents on which the complaint relies or that are subject to judicial notice, courts clearly must now consider the full array of probative facts in deciding both whether a statement was false or misleading and, if so, whether it was made with scienter. Plaintiffs can’t cherry-pick what the court considers anymore.
2. Omnicare’s subjective falsity holding allows us to stick up for the truth of all of our clients’ statements.
Opinions are ubiquitous in corporate communications. Corporations and their officers routinely share subjective judgments on issues as diverse as asset valuations, strength of current performance, risk assessments, product quality, loss reserves, earnings forecasts, and progress toward corporate goals. Indeed, I would guess that more than 75% of all securities class actions involve one or more statements of opinion as a core allegation.
Yet for decades before Omnicare, it was difficult to defend the truth of an opinion. The law was hopelessly muddled. For a full discussion, I invite you to review pages 13-19 of our Omnicare amicus brief on behalf of Washington Legal Foundation. To argue the truth of statements of opinion, we would provide the best possible statement of the legal standard under the law of the circuit we were in, try to convince the court that the real standard should be the standard that is now the Omnicare standard, and then argue that the opinion was true and not misleading under the standard we advanced. Now, under Omnicare, we can stick up for the truth of all of our clients’ statements, both fact and opinion, without having to first engage in a mini-argument of the law governing opinions.
3. Omnicare allows judges wider latitude to rule in defendants’ favor.
Judges want to figure out if the defendants tried to tell the truth. The law provides wide latitude for judges to dismiss claims, and we want to give them every reason to do so. If the judge accepts that the defendants did their best to be fair and candid in their public statements, he or she will be more inclined to accept other arguments.
So the argument against falsity, utilizing the tools Omnicare has provided, is the right place to start, even if there are stronger alternative arguments. For example, in an earnings forecast case, the best approach is to first defend the truth of the forecast – a statement of opinion – and then use the Reform Act’s Safe Harbor as a fallback argument. Likewise, a strong argument against scienter is best set up by a strong argument against falsity. The element of scienter requires plaintiffs to demonstrate that the defendants said something knowingly or recklessly false – in order to do this, plaintiffs must tie their scienter allegations to each particular challenged statement. A scienter argument that doesn’t build on a strong falsity argument is a strategic mistake.
I hope that this short guide to how to use the powerful tool the Court gave us in Omnicare is helpful. If we in the defense bar use the decision correctly, companies and their directors and officers will have greater freedom to speak without undue fear of liability, and we will win more cases in which their opinions are challenged.