As we addressed in our recent year-end review, there has been much discussion about the impact of the Supreme Court’s decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S.Ct. 1318 (2015), which arguably expanded the scope of potential liability under Federal securities laws for allegedly false or misleading statements of opinion. Recently, in Tongue v. Sanofi, 2016 WL 851797 (2d Cir. Mar. 4, 2016), the Second Circuit elaborated on what it considered to be the intended scope of the Supreme Court’s opinion. In particular, the court discussed the Supreme Court’s holding that a statement of opinion, “though sincerely held and otherwise true as a matter of fact, may nonetheless be actionable if the speaker omits information whose omission makes the statement misleading to a reasonable investor.”

Plaintiffs in Sanofi brought claims under both the Securities Act of 1933 and the Securities Exchange Act of 1934, alleging that Defendants issued false and misleading statements of opinion about the clinical testing of a new drug used to treat multiple sclerosis, the timing of the drug’s release, and the likelihood of the drug obtaining FDA approval. According to Plaintiffs, Defendants failed to disclose that the FDA repeatedly had expressed concern about whether the drug could be approved without conducting “double-blind” studies. The FDA rejected the initial application primarily due to the failure to conduct a double-blind study, and though the FDA eventually approved the drug on the basis of “single-blind” studies alone, the drug’s release was delayed as a result. The U.S. District Court for the Southern District of New York dismissed Plaintiffs’ claims for, among other things, failure to plead either an actionable misstatement or scienter.

The Second Circuit affirmed the district court’s dismissal, but in doing so, provided some insight on how it interprets the proper scope of the Supreme Court’s Omnicare opinion. Prior to Omnicare, under the Second Circuit’s decision in Fait v. Regions Financial Corp., 655 F.3d 105, 110 (2d Cir. 2011), statements of opinion could only be actionable if the speaker subjectively disbelieved the statement at the time it was made. While acknowledging that Omnicare somewhat expanded the potential for liability based on statements of opinion, the Second Circuit emphasized that a plaintiff hoping to state a claim based on an allegedly false or misleading statement of opinion still must satisfy a heavy pleading burden that the Sanofi Plaintiffs failed to meet.

The court found that “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 “does not impose liability merely because an issuer failed to disclose information that ran counter to an opinion expressed in the registration statement.” The mere availability of facts running counter to the expressed opinion is not enough. Rather, allegedly omitted facts “must ‘conflict with what a reasonable investor would take from the statement itself.'”

The court emphasized “the need to examine the context of an allegedly misleading omission.” In this case, “the Offering Materials themselves made numerous caveats to the reliability of the projections, and a reasonable investor, especially one dealing in a complex financial instrument…would have considered the statements ‘in light of all [the] surrounding text, including hedges, disclaimers, and apparently conflicting information.'” Among other things, the court also noted that Defendants disclosed that the drug in question was subject to single-blind, as opposed to double-blind, clinical trials, and that Plaintiffs were sophisticated, experienced investors in the pharmaceutical industry who would have known (1) that the FDA and the Company would have been engaged in an ongoing dialogue about the sufficiency of clinical trials prior to approval; and (2) that the FDA’s preference for double-blind trials posed a risk to FDA approval. The court concluded that “no reasonable investor would have been misled by Defendants’ optimistic statements regarding the approval and launch.”

Finally, the Second Circuit let stand the district court’s conclusion that for purposes of liability under the 1934 Act, Plaintiffs had also failed to adequately plead scienter, and that the statements fell within the PSLRA’s safe harbor provision for forward-looking statements.