Supreme Court Update: Omnicare, Inc. v. Laborers Industry Pension Fund (13-435), B&B Hardware v. Hargis Industries (13-352) and Order List
Greetings, Court Fans!
The Court began its March sitting this week (just in time for April), and issued decisions and two new cert grants. In this Update, we'll discuss Omnicare, Inc. v. Laborers Industry Pension Fund (13-435), on issuer liability for opinions in securities registration statements, and B&B Hardware v. Hargis Industries (13-352), on the preclusive effect of agency decisions in federal court. Let's get to it.
Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund (13-435), was a mixed bag for issuers of securities. Under the Securities Act of 1933, a company wishing to issue securities must file a registration statement. Aside from certain required information regarding the issuer and the securities being offered, the issuer may also include additional facts or opinions. Under Section 11 of the Act, an issuer is liable if the registration statement (1) "contain[s] an untrue statement of a material fact;" or (2) "omit[s] to state a material fact … necessary to make the statements therein not misleading." In its registration statement, Omnicare included (nonrequired) statements to the affect that it "believed" its contractual relationships with pharmaceutical manufacturers were lawful and that its pharmacy practices were in compliance with federal and state laws. Omnicare also included cautionary language that some states had initiated enforcement actions against pharmaceutical manufacturers for offering payments to pharmacies to dispense their products and that the laws might be interpreted in the future in a way that was inconsistent with Omnicare's interpretation. Omnicare's foreshadowing proved to be right: The Federal Government eventually sued Omnicare, claiming that its receipt of payments from pharmaceutical manufacturers amounted to unlawful kickbacks. This prompted shareholders to file suit against Omnicare, arguing that the legal compliance opinions in the registration statement were false and violated Section 11.
The District Court granted Omnicare's motion to dismiss, concluding that plaintiffs could not establish that the opinion statements were false because they had not alleged that Omnicare's officers knew at the time the statements were made that they were violating the law. But the Sixth Circuit reversed, finding that an allegation that the opinions were objectively false was enough. The Supreme Court vacated the Sixth Circuit decision, but didn't entirely agree with the District Court, either.
Led by Justice Kagan, the Court first addressed when an opinion statement can amount to a "false statement of material fact." The answer: rarely. As the Court explained, the only "fact" conveyed in an opinion statement is the belief of the speaker. Thus, the only time an opinion statement will qualify as a "false statement" is where the speaker subjectively does not believe the opinion. So far, a big win for securities issuers: An honestly held belief cannot constitute a false statement merely because it turns out to be wrong. But, the Court did not stop there. According to Justice Kagan, the next step is to analyze whether the opinion statement is rendered misleading due to the omission of material information. If a registration statement omits material facts about the issuer's inquiry into, or knowledge concerning, a statement of opinion, and if those facts conflict with what a reasonable investor, reading the statement fairly and in context, would take from the statement, then the issuer is subject to liability under Section 11's omission's clause. Here, the Court opined that a reasonable investor might assume a legal compliance opinion was based on lawyer's advice. If Omnicare just gave the opinion with no review whatsoever, or gave the opinion notwithstanding contrary advice from a lawyer, providing the opinion might be misleading.
The Court took pains to stress, however, that an opinion is not misleading just because an issuer knows, but fails disclose, any fact cutting the other way. Opinions are often based on a weighing of facts. For example, if an issuer stated that it believed it was in legal compliance based on multiple reviews by lawyers, the fact that a single junior lawyer may have expressed a different opinion probably does not need to be disclosed. Whether an omission makes an opinion misleading depends on "context." Importantly, the opinion must be viewed in context of the other disclosures in the registration statement, including any caveats or cautionary language, like that included in Omnicare's statement.
The Court therefore vacated the judgment, and instructed the lower courts on remand to undertake the omission analysis under this newly articulated standard. The Court cautioned that a conclusory allegation that Omnicare "lacked reasonable grounds to believe" its statements would not be sufficient to survive a motion to dismiss. Rather, plaintiffs must come forward with specific facts showing why the belief was not reasonable, such as an attorney opinion warning that their conduct was unlawful. If the plaintiffs could clear that hurdle, the Court emphasized that the lower courts must also consider Omnicare's cautionary language when determining whether the legal compliance opinions could mislead a reasonable investor.
Justice Scalia concurred in part and in the judgment. He agreed with the majority that an opinion only amounts to a false statement where the speaker does not believe it. However, he would not embrace the Court's incomplete opinion approach. Most of the time, an opinion is just that—a statement of belief. It does not imply a specific reason for the belief or level of investigation. The only exception to this rule is where the speaker is an expert (i.e., a lawyer's legal opinion or jeweler's estimate of value) or there is a special relationship of trust or confidence. Generic statements by a company that it believes it is in compliance with laws do not fall in these narrow confines. Justice Thomas also concurred in part and in the judgment. Like Justice Scalia, he agreed with the majority's false statement analysis, but he would not have reach the omission issue at all, since he did not believe it was properly before the Court.
Next, in B&B Hardware v. Hargis Industries (13-352), the Court confronted the question of whether and when an agency determination is entitled to preclusive effect in federal court. The Court's answer: When it should be!
The case involved a contentious trademark dispute between B&B and Hargis—both manufacturers of metal fasteners, but in different industries—over the use of similar trademarks. Hargis tried to register its mark "SEALTITE" with the U.S. Patent and Trademark Office but B&B, the owner of the mark "SEALTIGHT" filed an opposition with the Trademark Trial and Appeal Board (TTAB). The TTAB, after a lengthy adversarial proceeding, agreed with B&B that SEALTITE should not be registered because of the risk of confusion with SEALTIGHT. Meanwhile, while the TTAB dispute was pending, B&B had also sued Hargis for trademark infringement in federal court. While the TTAB was the first tribunal to decide the issue of confusion, the District Court refused to give that determination preclusive effect in the infringement action, because the TTAB is not an Article III court. The Eighth Circuit affirmed, holding that the TTAB determination was not entitled to preclusive effect, primarily because it involved slightly different factors than those employed in the Eighth Circuit.
The Supreme Court reversed, 7-2. Justice Alito began by confirming that issue preclusion is not limited to situations in which the same issue is before two courts. Citing Astoria Fed. Savings & Loan v. Solimino (1991), he invoked a presumption in favor of preclusion for agency decisions, unless it appears from the agency's enabling statute that Congress did not intend for its decisions to have preclusive effect. There is no such indication in the TTAB's enabling statute, the Lanham Act. Having concluded that there is no categorical impediment to issue preclusion for agency decisions, Justice Alito addressed, and rejected, the Eighth Circuit's reasons for not applying the doctrine in this case. While the TTAB and Eighth Circuit use somewhat different factors to assess the likelihood of confusion, the standard is the same whether the likelihood of confusion is assessed in the TTAB's registration context or in a federal court's infringement context. Moreover, while the TTAB does not use live testimony in making its determinations, procedural differences alone do not defeat issue preclusion. And, while the stakes in a registration dispute before the TTAB may sometimes be lower than the stakes in a federal infringement case, this is not always the case, and issue preclusion should be available where the parties have a sufficient stake in the outcome of the agency determination to fully articulate their positions in an adversarial manner.
In dissent, Justice Thomas (joined by Scalia) objected to the very premise of the majority opinion—namely, that agency decisions are presumed to have preclusive effect. This presumption, Thomas wrote, "was first announced in poorly supported dictum in a 1991 decision of this court" (i.e. Astoria), and is not in fact borne out by the history of administrative preclusion, which shows that collateral estoppel was traditionally applied only to "courts of competent jurisdiction," meaning courts with authority and jurisdiction to conclusively resolve a dispute. In light of that history, there was no reason, in Thomas's view, to assume that Congress intended for decisions of the TTAB to have preclusive effect when it enacted the Lanham Act, which was enacted long before troublesome Astoria dictum came along. On the contrary, in Justice Thomas's view, applying a presumption of preclusion raises constitutional concerns regarding the separation of powers. In short, because the "common law does not support a general presumption in favor of administrative preclusion," Thomas and Scalia would have held that the TTAB's trademark-registration decisions are not entitled to preclusive effect in a subsequent infringement suit.
The Court also granted cert in two new cases on Monday:
Montgomery v. Louisiana (14-280) asks whether the Court's decision in Miller v. Alabama (2012), which held that mandatory sentences of life without parole for juveniles violate the Eighth Amendment, adopts a new substantive rule that applies retroactively on collateral review to people sentenced before Miller was decided.
Direct TV v. Imburgia (14-462) asks whether the California Court of Appeal erred in holding that a reference to state law in an arbitration agreement governed by the FAA requires the application of state law preempted by the FAA.
We'll be back soon with the Court's remaining decisions from this week.