Post by Greg Klass
In this first post, I’d like to point readers to opinions in Omnicare v. Laborers District Council Construction Industry Pension Fund, 575 U.S. ___ (2015). Though a securities fraud case, the Omni opinions raise more general questions about the private law of deception.
The issue in Omni was whether a company could be held liable under 15 U.S.C. § 77k(a) for so-called statements of opinion, such as “We believe that our contract arrangements with other healthcare providers, our pharmaceutical suppliers and our pharmacy practices are in compliance with applicable federal and state laws.” Slip op. at 3. The Sixth Circuit had held that such statements were actionable if the company’s beliefs were “objectively false.” The Supreme Court reversed, based on the common law rule that a statement of belief is (in most cases) actionable only if the speaker does not actually hold the belief. It is not enough to show that the belief was false. A plaintiff must show that it was not actually held.
The opinion is interesting because Kagan’s majority opinion does not stop there. Appealing to the Restatement (Second) of Torts and Prosser & Keeton, the Court further held that “a reasonable investor may, depending on the circumstances, understand an opinion statement to convey facts about how the speaker has formed that opinion – or otherwise put, about the speaker’s basis for holding that view.” Slip op. at 11. In other words, a statement of belief might imply that the speaker had a reasonable basis for that belief. And if that implicit representation is false, it might be actionable. Justice Scalia dissented, arguing (a) that the common law rule of an implied basis for belief applies only to statements by experts, and (b) an expert’s report of her own belief implies only that she believes that she has a reasonable basis for it, not that the belief is supported by some externally determined standard. “When an expert expresses an opinion instead of stating a fact, it implies (1) that he genuinely believes the opinion, (2) that he believes his basis for the opinion is sufficient, and (most important) (3) that he is not certain of his result. Nothing more.” Slip op. at 7.
How should courts determine the legal meaning of statements of opinion found in documents such as registration statements? Kagan’s majority opinion treats the question as a factual issue, for the trial court to determine on remand in light of all relevant surrounding circumstances. The inquiry “necessarily brings the reasonable person into the analysis, and asks what she would naturally understand a statement to convey beyond its literal meaning.” Slip op. at 17. Scalia, on the contrary, wants a blanket rule. Rather than particularized inquiries, he would have the Court hold that every statement of opinion in a registration makes the three representations he lists, and “[n]othing more.”
Kagan’s majority opinion nicely describes our everyday interpretive practices, which generally provide the interpretive rules in fraud cases. And her point about implied reasonable basis finds support in H.P. Grice’s theory of conversational implicature, which includes the rule, “Do not say that for which you lack adequate evidence.”
The problem is that it is not obvious that our everyday interpretive rules apply to highly formal documents like company’s registration statement. I have made a similar point elsewhere about mass advertising. Moreover, especially in the case of legally required documents such as registration statements, legal rules of interpretation and construction are likely to affect how a reasonable person understands what is said. Meaning is, in these contexts, highly endogenous. In crafting a rule for such circumstances, courts should therefore look not only to our everyday, extralegal interpretive practices. They should also consider what sorts of meanings will serve the relevant legal ends.
These observations suggest a per se rule for the meaning of statements of opinion in registration statements, or something like Scalia’s more categorical approach. But Scalia does not provide any policy-based arguments for his preferred rule. The question should be which interpretation of statements of opinion in registration statements is likely to advance the goals of 15 U.S.C. § 77k(a). Scalia does not give us a reason to think that his minimalist rule does that. Scalia writes as if his rule were simply the only possible interpretation of such statements.
Here one might recall the FTC’s reasonable basis rule for mass advertisements. The FTC has determined that ““[a]bsent an express or implied reference to a certain level of support, and absent other evidence indicating what consumer expectations would be, the Commission assumes that consumers expect a ‘reasonable basis’ for claims.” FTC Policy Statement Regarding Advertising Substantiation, in Thompson Med. Co., 104 F.T.C. 648, 1984 WL 565377, at app. (1984). By adopting that a per se default interpretation, the FTC encourages advertisers to make only those claims for which they have a reasonable basis. A similar reasonable-basis rule for statements of opinion in registration statements might have similar benefits. Unfortunately, neither the majority nor the dissent in Omnicare considered the possibility.