Background
In March 2015, the Supreme Court rendered the seminal Omnicare decision, establishing a new framework for determining whether a statement of opinion is actionable under Section 11 of the Securities Act of 1933 (the “Securities Act”). The Supreme Court held that, where an investor has alleged that an issuer omitted material information and thereby rendered a statement of opinion misleading, the investor must identify particular and material facts going to the basis of the opinion of the issuer whose omission makes the opinion statement at issue misleading. This holding altered the standard for opinion liability in the 2nd Circuit, which previously required proof of objective and subjective falsity. See Fait v. Regions Fin. Corp., 655 F.3d 105 (2d Cir. 2011). Omnicare affirmed that liability may arise from either the speaker not holding the stated belief or the speaker’s supporting facts being untrue. Although this opinion significantly altered the landscape of opinion statement liability, the Supreme Court emphasized that meeting its pronounced standard under Omnicare was still “no small task for an investor.” 135 S. Ct. at 1332.
Sanofi, an appeal of two related actions, centered on the optimistic projections that developers of Lemtrada made about securing U.S. Food and Drug Administration (FDA) approval of the potential breakthrough treatment. Sanofi acquired Genzyme, the developer of Lemtrada (a drug used to treat multiple sclerosis), in 2011. As part of its acquisition, Sanofi issued contingent value rights (CVR) to Genzyme shareholders, which entitled the holders to cash payouts when certain milestones, such as FDA approval, were met. Plaintiffs claimed that Sanofi made certain opinion statements in its offering documents and to the market as a whole that artificially inflated the value of the CVRs. Specifically, plaintiffs claimed that certain statements concerning Sanofi’s expectation of FDA approval for Lemtrada and positive results of its clinical trials were misleading, because they omitted the FDA’s repeated warnings to Sanofi regarding its use of single-blind instead of double-blind studies. In November 2013, in anticipation of its upcoming hearing on Sanofi’s application for Lemtrada approval, the FDA released briefing materials that included concerns about the double-blind studies, which led to the value of the CVRs dropping 62 percent. The next month, the FDA denied approval for Lemtrada, causing the CVR value to drop even more. Although the FDA eventually approved Lemtrada, by then, the first CVR milestone payment had already passed. Thereafter, the two sets of plaintiffs sued Sanofi and some of its officers and directors.
Before the Supreme Court’s decision in Omnicare, the district court dismissed both complaints for failure to state a claim. With regard to the allegations of false and misleading opinion statements, the court found that there had been no showing of objective falsity as required under the 2nd Circuit’s pre-Omnicare standard. The 2nd Circuit affirmed and published its opinion primarily to analyze the impact of the intervening Omnicare decision.
The 2nd Circuit Affirms and Explains Omnicare
The 2nd Circuit focused on three categories of allegedly false and misleading opinion statements: (1) statements related to Sanofi’s expectation that the FDA would approve Lemtrada by March 31, 2014; (2) statements made after the tender offer regarding the launch of Lemtrada, including satisfaction with the progress of Lemtrada and the company’s expectation of an FDA decision by the end of 2013; and (3) statements regarding positive opinions on the results of the Lemtrada clinical trials.
At the outset, the 2nd Circuit laid out some parameters of the Omnicare decision. It acknowledged that the Supreme Court itself cautioned against an expansive reading of the decision, noting that a statement of opinion is not necessary misleading when an issuer knows, but fails to disclose, some facts cutting the other way, since “reasonable investors understand that opinions sometimes rest on a weighing of competing facts.” 135 S. Ct. at 1329. Moreover, the Supreme Court recognized that context matters and that opinion statements cannot be viewed and analyzed in a vacuum.
With respect to the first set of opinion statements on expectation of FDA approval, the 2nd Circuit found that the FDA’s interim feedback did not conflict with any reasonable interpretation of Sanofi’s statements. Although the FDA had expressed concern about the use of single-blind studies, the FDA also stated that any deficiency could be overcome if the test results showed “an extremely large effect,” and there was no dispute that the drug’s treatment effect was large. Moreover, the 2nd Circuit again underscored the importance of context in its examination, noting that plaintiffs were sophisticated investors who were (1) well aware that issuers’ projections are synthesized from a variety of information, some of which may be in tension with the ultimate projection; and (2) well accustomed to the customs and practices of the drug industry and would, therefore, fully expect that Sanofi and the FDA were engaged in an ongoing dialogue that necessarily would include differing views on the adequacy of various aspects of the clinical trials. In addition, these statements were made in the offering materials, which the court noted included numerous caveats to the reliability of projections. Thus, these sophisticated investors could not claim ignorance to the intricacies of the pharmaceutical industry drug-approval process.
In addition, Sanofi rejected plaintiffs’ contentions that Omnicare essentially required defendants to disclose all information that runs counter to its expressed opinion. This was the case even though the 2nd Circuit acknowledged that plaintiffs certainly would have been interested in knowing about the FDA feedback, and perhaps would have even acted otherwise had it been disclosed. “Certainly, plaintiffs would have been interested in knowing about the FDA feedback, and perhaps would have acted otherwise had the feedback been disclosed, but Omnicare does not impose liability merely because an issuer failed to disclose information that ran counter to an opinion expressed in the registration statement.” Again relying on the sophistication of the plaintiff investors, the court noted that the FDA had made its preference for double-blind studies publicly well-known, and investors whose complex financial instrument value was tied to FDA approval should keep themselves apprised of the FDA’s positions. “Sophisticated investors, aware of the FDA’s strong preference for double‐blind trials, cannot claim surprise when it is revealed that the FDA meant what it said.”
As to the second set of challenged opinion statements, the 2nd Circuit concluded that they failed to support a claim for many of the same reasons, most notably that no reasonable investor would have inferred that mere statements of confidence—such as feeling “relaxed” or “satisfied”—suggested that the FDA had not engaged in industry-standard dialogue with Sanofi about potential deficiencies in the testing methodology. Further, the opinion statements regarding timing of the FDA approval were not false. Sanofi expected to receive an FDA decision by the end of 2013; indeed, the first decision, albeit a denial, was announced on December 30, 2013.
Finally, Sanofi’s opinions on the positive results of its clinical trials did not rise to the Omnicare standard either. The 2nd Circuit rejected the idea that statements about the effectiveness of Lemtrada could be misleading merely because the FDA disagreed with the conclusion, so long as the issuer had conducted a meaningful inquiry and, in fact, held that view, especially in light of Lemtrada’s global approval and rollout plan.
Sanofi’s Significance
As the first decision to interpret Omnicare in perhaps the most popular venue for securities suits, Sanofi is both anticipated and instructive. The 2nd Circuit has significantly narrowed the interpretation of opinion statement liability: Omnicare does not require issuers and other statement makers to disclose any and all facts that conflict with the stated opinion; rather, statements of opinion must merely “fairly align” with the information in the issuer’s possession at the time.
Three additional aspects of Sanofi are important to keep in mind. First, the 2nd Circuit relied heavily on the sophistication of the plaintiff investors in those cases in finding that the omission of the FDA dialogue did not make defendants’ statements false or misleading. It remains to be seen whether it, or any other court, will conclude differently in a case involving unsophisticated, or less sophisticated, investors. Additionally, Omnicare addressed claims under Section 11 of the Securities Act, while the Sanofi cases involved both Section 11 claims and allegations under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. While not expressly discussed, Sanofi seems to have applied the Omnicare standard across the board to the Exchange Act claims as well, an outcome that practitioners were awaiting. Third, it is noteworthy that the court relied on the public nature of FDA’s concerns about study design, leaving open the possibility of a different outcome if the nature of a regulatory agency’s concerns remained confidential.
The 2nd Circuit has narrowly interpreted the Supreme Court’s Omnicare decision; only time will tell if other circuits will follow suit. For now, issuers in the 2nd Circuit can breathe a sigh of relief: “Plaintiffs’ case essentially boils down to an allegation that the statements were misleading for failure to include a fact that would have potentially undermined defendants’ optimistic projections. But Omnicare imposes no such disclosure requirements on issuers.”