Omnicare Decision Addresses Section 11 Liability for Statements About Corporate Legal Compliance
Earlier this year, we issued a client advisory about Indiana State District Council of Laborers and Hod Carriers Pension and Welfare Fund v. Omnicare, Inc., 719 F.3d 498 (6th Cir. 2013), which addresses pleading standards for shareholder suits under Section 11 of the Securities Act of 1933. The decision highlights the potential dangers of giving broad assurances of legal compliance in corporate registration statements. It is particularly significant for companies in heavily regulated industries such as health care and biotechnology, where legal compliance can be complex and difficult to monitor, because it indicates that issuers of securities can face strict liability for material misstatements about compliance, even without actual knowledge that the statements were false.
Now the defendants have petitioned for certiorari, and the Supreme Court has asked for a response from the plaintiffs.
In Omnicare, the U.S. Court of Appeals for the Sixth Circuit held that shareholders can pursue Section 11 claims against securities issuers and signers of registration statements, including directors and certain officers of the issuers, based on alleged false statements about legal compliance or matters of opinion, without alleging that the defendants actually knew that the statements were false at the time they were made. The decision is noteworthy because the Sixth Circuit disagreed with previous decisions by two other federal courts of appeals, which had held that Section 11 claims based on statements of opinion or belief require the plaintiff to allege that the statements were both objectively false and subjectively disbelieved by the defendants at the time they were made. See id. at 506 (disagreeing with Fait v. Regions Financial Corp., 655 F.3d 105, 110 (2d Cir. 2011), and Rubke v. Capitol Bancorp Ltd., 551 F.3d 1156, 1162 (9th Cir. 2009)).
We predicted that, in light of the split between the federal appellate courts, the case might eventually be heard by the Supreme Court. Omnicare has taken the first step in that process, filing a petition for certiorari. And although the shareholder plaintiffs' counsel initially waived their right to respond, the Supreme Court has asked for a response, suggesting that the high court will consider granting further review.
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