Monday, March 3, 2014
SUPREME COURT GRANTS CERT IN SECTION 11 CASE
On Monday, March 3, 2014, the U.S. Supreme Court granted certiorari in Omnicare, Inc. v. Laborers District Council. The case involves claims under Section 11 of the Securities Act of 1933 (“Section 11”) regarding false statements in a registration statement. Section 11 provides for strict liability for issuers, and provides for liability subject to certain affirmative defenses, such as due diligence, for underwriters and others. In the Omnicare case, the registration statements stated that Omnicare was operating in compliance with the law. The complaint alleged that these statements were false because Omnicare was soliciting and paying kickbacks, and Omnicare ultimately paid $150 million in settlements for doing so. The district court characterized the statements regarding legal compliance as “soft information,” or statements of opinion, and dismissed the claims because the plaintiffs had not sufficiently pleaded that the defendants knew the statements were false when made. The U.S. Court of Appeals for the Sixth Circuit agreed that the statements were “soft information,” but nevertheless reversed the dismissal, holding that, because Section 11 is a strict liability statute, the plaintiffs needed only to plead that the statements were in fact false, and did not need to plead that defendants knew they were false. The Sixth Circuit explicitly declined to follow the Second and Ninth Circuits, both of which have held that plaintiffs asserting Section 11 claims based on soft information must plead not only that the statements were false, but also that the defendants did not actually believe them at the time. The Supreme Court granted certiorari to resolve the circuit split.
The Sixth Circuit’s opinion is quite broad, and if the Supreme Court affirms, it could lead to a significant expansion of liability under Section 11. Where information that is disclosed is specifically identified as an opinion, a court is much less likely, even under the Sixth Circuit’s approach, to sustain a claim under Section 11. For example, a statement such as “Management believes this is a high value transaction” is preferable to “This is a high value transaction.” The former statement cannot be false without an allegation that management did not believe it at the time, because what is being disclosed is management’s belief. The latter statement could be proven, in retrospect, to be false, even though no one had reason to believe it was false when it was made. Thus, when disclosing soft information, the former type of formulation is advisable whenever possible.
The Supreme Court will hear the case during the Term that begins in October 2014.