Canadian Appeals Monitor

Information and Commentary on Upcoming and Recent Appeal Court Decisions

Liability for Opinions: Omnicare’s Lessons for Canadian Securities Lawyers

Posted in Case Comments, Civil Litigation, Securities
Mira Novek

When might a wrong opinion give rise to prospectus misrepresentation? The U.S. Supreme Court recently addressed this question in its much-anticipated decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund.[1] Its answer provides a useful point of comparison and discussion for Canadian securities lawyers.

The U.S. Supreme Court’s Decision in Omnicare

Section 11 of the U.S. Securities Act of 1933 provides purchasers of securities in a public offering with a statutory right of action against the issuer or certain designated individuals where the registration statement either contained “an untrue statement of material fact” (also known as a “material misstatement”) or “omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading” (also known as a “material omission”). As emphasized by the U.S. Supreme Court, there are two distinct avenues to liability here: the first focuses on what the statement says, the second on what it leaves out. In either case, the purchaser does not have to prove that the issuer acted with any intent to deceive or defraud.

Omnicare provides pharmacy services for nursing home residents. The case arose out of two statements of opinion in a registration statement the company filed in relation to a public offering of common stock. The statements expressed the company’s view that it was in compliance with applicable state and federal laws, including with respect to its practice of accepting rebates from pharmaceutical manufacturers. Accompanying the opinions were several caveats and disclaimers. After the federal government filed suit against Omnicare for allegedly violating anti-kickback laws, pension funds (the “Funds”) that had purchased stock in the public offering brought suit under section 11.

The U.S. Supreme Court separately analyzed an issuer’s potential liability for opinion statements on the basis of both material misstatement and material omission.

Material Misstatement

Upholding the distinction between facts and opinions, the Supreme Court rejected the Funds’ argument that a statement of opinion that ultimately proves incorrect constitutes an untrue statement of material fact. The law, the Court affirmed, is intended to protect investors against false statements of fact, which express certainty about a thing, rather than statements of opinion, which admit the opposite.

However, the Court reasoned that statements of opinion may still attract false-statement liability in one of two ways. First, as every statement of opinion “explicitly affirms one fact: that the speaker actually holds the stated belief” [2], they may be actionable if the opinion is not genuinely held. Second, they may be actionable if the opinion cites supporting facts that turn out to be false. The Court gave the following example: the statement “I believe our TVs have the highest resolution available because we use a patented technology to which our competitors do not have access” [3] affirms not only the speaker’s state of mind, but also a supportive fact—that the company uses a patented technology. If this supporting fact is false, the statement may attract liability.

As the Court found that the statements at issue were bare statements of opinion, and the Funds did not allege they were not genuinely held, the Court held they could not attract liability for material misstatement.

Material Omission

The most interesting aspect of the Court’s decision is its analysis of how a statement of opinion might attract liability, not for what it says, but for what it leaves out.

The parties and the Court agreed that whether an omission renders a statement misleading is an objective inquiry, conducted from the perspective of the reasonable investor. However, they differed as to whether, and how, a statement of opinion could mislead through omission. Omnicare argued that so long as the statement of opinion is genuinely held it could never be misleading, irrespective of what related facts are left out, as a reasonable investor understands a statement of opinion to convey nothing more than the speaker’s own mindset. One might suspect this approach would appeal to the Court given the Court’s reasoning with respect to material misstatement summarized above. After all, the speaker’s genuine belief in the stated opinion is the “one fact”, according to the Court, that is expressly affirmed by every opinion statement.

But in an interesting turn, the Court rejected Omnicare’s reasoning, finding that a statement of opinion may also, depending on the circumstances, imply facts about the issuer’s basis for holding that opinion. These facts might relate to either “the inquiry the issuer did or did not conduct” or “the knowledge it did or did not have”.[4] If it is found that “the real facts are otherwise, but not provided, the opinion statement will mislead its audience.”[5]

The Court gave the following examples. If an issuer expresses the opinion that its conduct is lawful without having consulted a lawyer, the statement could be “misleadingly incomplete”.[6] This is because, in a securities context, a reasonable investor likely expects such a statement to “rest on some meaningful legal inquiry”.[7] Equally, if the issuer expresses the opinion in the face of its lawyer’s contrary advice, or with knowledge that an enforcement agency was taking the opposite view, the statement might attract omissions liability. This is because a reasonable investor “expects not just that the issuer believes the opinion (however irrationally), but that it fairly aligns with the information in the issuer’s possession at the time.”[8]

However, the Court clarified that not every countervailing fact must be disclosed, as reasonable investors understand that opinions are based on a weighing of competing facts. Suppose—to borrow another example given by the Court—a statement of opinion regarding legal compliance did not reveal that a single junior lawyer had expressed doubts about the legality of a practice when these were not shared by six more senior lawyers, the omission would not render the statement misleading, even if the junior lawyer’s opinion ultimately proved correct. While the Court framed this as a question about what a reasonable investor would find misleading, it may in fact go to the materiality of the omission, which is an essential ingredient to a finding of omissions liability. Materiality is defined in the relevant U.S. case law to mean “there is a substantial likelihood that a reasonable [investor] would consider it important”.[9]

Finally, the Court made clear that whether an opinion statement is misleading will depend on context, which includes whatever relevant facts the issuer did reveal in the registration statement, as well as “any other hedges, disclaimers, or qualifications”.[10]

In the result, the Court remanded the case to the lower court to determine whether Omnicare had stated a viable omissions claim in light of this new standard.

Significance

In determining when a statement of opinion might amount to an actionable misrepresentation, one of the most difficult questions to answer is where reasonableness fits in. It is less contentious that an issuer must actually hold an opinion it communicates to the public, but what if that genuinely held opinion is nonetheless objectively unreasonable?

It is debatable whether the U.S. Supreme Court’s omissions analysis imposes an objective standard of reasonableness on every opinion statement included in a registration statement, as suggested by Justice Scalia in his dissenting opinion.[11] On the one hand, asking whether an omission renders a statement “misleading” seems but a roundabout way of asking whether the excluded information reveals it to be unreasonable. Take the Court’s suggestion that a legal opinion may be “misleadingly incomplete” for failing to disclose that it is not shared by the company’s lawyers. There is something slippery about this analysis. It seems more straightforward to say that what is really objectionable about the company’s statement is, not that it is incomplete, but that it is unreasonable.

On the other hand, there may be instances where the Court’s omissions analysis does not yield the same results as a reasonableness one. This may occur, for example, where an issuer proactively discloses material facts that might later be found, on an objective standard, to render its opinion unreasonable. Accordingly, one would expect to see the volume of disclosure, hedges, disclaimers, and qualifications accompanying statements of opinions to expand rapidly as a result of the Court’s decision.

But the two standards may also potentially yield different results in the situation where disclosure of an underlying fact is not made. Consider the situation where reasonable investors disagree about the likely impact of a particular fact on an issuer’s opinion. Even if the issuer’s opinion is found to fall within a range of reasonable opinions, its failure to disclose that fact might nevertheless render the statement of opinion “misleadingly incomplete” in the eyes of a reasonable investor. If Omnicare is applied in this manner, it could in fact result in a lower threshold for liability than would applying a reasonableness standard in such cases.

Implications for Canadian securities law

The Supreme Court of Canada has not addressed an issuer’s liability for opinion statements as fully or directly as the U.S. Supreme Court did in Omnicare. Its most relevant decision to date is Kerr v. Danier Leather Inc., 2007 SCC 44.[12]

One of the subsidiary issues in Danier was whether a forecast in a prospectus, being an opinion about future events, could constitute a misrepresentation under Ontario’s Securities Act, which is defined as either “(a) an untrue statement of material fact, or (b) an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it was made”.[13]

While acknowledging that a forecast “is not a fact in the sense that actual results are facts”,[14] the trial judge, Justice Lederman, held that a forecast nevertheless contained the following implied assertions of fact:

  1. the forecast was not prepared using reasonable care and skill; or
  2. management does not generally believe the forecast; or
  3. management’s belief in the forecast is not reasonable; or
  4. management is aware of facts that would seriously undermine the forecast.[15]

In this view, unreasonable forecasts (or opinions) would attract not only omissions liability but also false-statement liability: if the implied representation of reasonableness proves untrue, it would constitute “an untrue statement of material fact”.[16]

This holding was significantly narrowed on appeal. The Ontario Court of Appeal would have rejected it completely, finding that the forecast did not contain an implied representation of objective reasonableness, either as a matter of law or of fact. However, the Supreme Court of Canada found that the forecast did contain an implied representation of reasonableness as a matter of fact, based on the language of the prospectus. Still, it did not address the broader issue of whether reasonableness should also be implied as a matter of law.

With this question left undecided, Omnicare provides a useful point of comparison and discussion: while Omnicare does not extend false-statement liability to genuinely held but unreasonable opinions, it accomplishes much the same thing through a robust, if unintuitive, omissions analysis. To what extent Canadian courts will find this analysis relevant and persuasive remains to be seen.[17]

Case Information:

Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 575 U.S.___(2015)

Docket: 13-435

Date of Decision: March 24, 2015

______________________________

[1] 575 U.S.___(2015) [Omnicare]

[2] Ibid. at 7

[3] Ibid. at 8

[4] Ibid. at 18

[5] Ibid. at 11

[6] Ibid. at 12

[7] Ibid.

[8] Ibid.

[9] Ibid. at 20, citing TSC Industries, 426 U.S., at 449

[10] Ibid. at 20

[11] See especially ibid. at 3, 6-7

[12] Kerr v. Danier Leather Inc., 2007 SCC 44 [Danier SCC]

[13] Securities Act, RSO 1990, c. S.5, s.1

[14] Kerr v. Danier Leather Inc., 2004 CanLII 8186 (ON SC) at para. 65 [Danier Trial]

[15] Ibid. at para. 77

[16] Ibid. at paras 77-78

[17] In considering Omnicare’s impact, if any, on the development of Canadian case law in this area, differences in the statutory regimes and relevant jurisprudence must also be borne in mind, including for example differences in how they define materiality

 

 

 

 

 

 

 

 

 

“I don’t wanna hear it!” Supreme Court affirms Federal Court’s refusal to exercise jurisdiction in Strickland v Canada (Attorney General)

Posted in Case Comments, Civil Procedure/Evidence
Ryan MacIsaac

Parliament created the Federal Courts system in 1970 to consolidate judicial supervision of federal boards, commissions and tribunals. The goal was to reduce the multiplicity of inconsistent judicial review rulings in provincial superior courts across the country. The Federal Courts Act hence gives the Federal Courts “exclusive original jurisdiction” to grant judicial review remedies against federal boards, commissions and tribunals (e.g., quashing a Minister’s decision). But can superior courts grant such remedies too? And if so, how is a litigant to know when to go to the Federal Court, and when to go to a superior court? The Supreme Court of Canada has provided a framework for answering these questions in Strickland v Canada (Attorney General), 2015 SCC 37.

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Have Mercy! Supreme Court Clarifies Mercy Power under Criminal Code

Posted in Administrative, Case Comments, Criminal
Byron Shaw

In “Burning Love”, Elvis pleaded with the Lord to have mercy. It was coming closer. The flames were lickin’ his body. He felt like he was slipping away. It was hard to breathe. His chest was a heavy. He was burning a hole where he lay. Burning a hole with burning love. In short, Elvis was just a hunk. A hunk of burning love.[1]

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The SCC Monitor (07/07/2015)

A Commentary on Recent Legal Developments by the Canadian Appeals Monitor

Posted in The SCC Monitor
Ryan MacIsaac

It has been a busy couple of weeks since our last post. The SCC has released two judgments and six leave decisions of interest. In addition, a pending judgment of interest will be released this week. One of the released judgments and four of the leave decisions will be of interest to those involved in real estate development, management and sales. The other judgment involves government liability and how to apportion damages where the plaintiff has reached settlements with non-parties relating to the same injury. The remaining leave decisions involve an order to a foreign whistleblower to produce documents in a prosecution for foreign corrupt practices, and the finality of tribunal decisions. Finally, the SCC will release a decision this Thursday that will address when a legal action should move forward in Federal Court versus in a provincial superior court. Continue Reading

The Ontario Court of Appeal Finds Franchise Disclosure Document Fatally Deficient

Posted in Case Comments, Franchise and Distribution
Helen FotinosSam KhajeeiAdam Ship

On McCarthy Tétrault LLP’s Consumer & Retail Advisor blog, Helen Fotinos, Sam Khajeei and Adam Ship recently published a helpful discussion of the Ontario Court of Appeal’s decision in 2240802 Ontario Inc. v Springdale Pizza Depot Ltd., which will be of interest to readers of the Canadian Appeals Monitor.

More Oil for a Slippery Slope: Quebec Court of Appeal Authorizes Class Action Against the Vehicle Manufacturer KIA

Posted in Case Comments, Civil Litigation, Class Actions, Manufacturing, Quebec Court of Appeal
Emira Tufo

On June 12th, in Martel c. KIA Canada inc. (2015 QCCA 1033), the Quebec Court of Appeal reversed a ruling of the Superior Court which had refused to authorize a class action against the vehicle manufacturer, KIA, for allegedly misrepresenting the frequency of servicing necessary for the proper maintenance of its vehicles. Looking for an economical vehicle, the Petitioner, Thérèse Martel, had purchased a KIA based on representations made in its official manual that servicing would be required only every 12,000 km. Having brought her vehicle in for its first inspection, however, Ms. Martel was informed by the dealer that more frequent servicing was required by Quebec’s harsh climate. At her second inspection, she was informed that an oil change was required more frequently still. The Petitioner instituted a motion for the authorization of a class action on behalf of all purchasers of KIA vehicles who had been victims of false representations contained in the manufacturer’s manual.

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The SCC Monitor (18/06/2015)

A Commentary on Recent Legal Developments by the Canadian Appeals Monitor

Posted in Civil Procedure/Evidence, Class Actions, Health, The SCC Monitor
Sam Rogers

The Supreme Court of Canada has recently dismissed two leave applications and granted leave in one case that will be of interest to our readers. These cases touch on: case management and civil procedure in class actions (including when parent companies may be joined in an action); the standard of review and standing of administrative boards and tribunals; and interpretation of the federal Interest Act in regards to mortgage incentives and penalties. Continue Reading

Melting Pot or Mosaic? The Ongoing Culture Shift since Hryniak

Posted in Case Comments, Civil Procedure/Evidence, Procedural Rights, Procedure
Kelli McAllister

Over the past year, courts across Canada have responded to the Supreme Court of Canada’s clarion call in Hryniak v Mauldin (“Hryniak”) for a culture shift to promote access to justice including through summary judgment.[1] The latest word on this front has come from the Alberta Court of Appeal in two recent decisions which seemingly conflict on the threshold to be applied to summary judgment applications.[2] The inherent tension created by Hryniak in Alberta is that the summary judgment rule (Rule 7.3) reflects the 2006 views of the Supreme Court of Canada: that such applications should be used to weed out claims with no chance of success. Post-Hryniak, courts are to consider summary judgment as a legitimate alternative to trial which impliedly sets a lower bar or threshold. An interesting mélange of Ontario and Albertan law has become the order of the day in Alberta – a true cultural melting pot for summary judgment. Continue Reading

Pick Your Poison: the Court of Appeal Clarifies the Distinction between the Oppression Remedy and the Derivative Action

Posted in Corporate Law
Anu Koshal

Introduction

On May 26, 2015, the Ontario Court of Appeal issued its decision in Rea et al v Wildeboer (“Wildeboer”). The decision clarifies the nature, purpose, and difference between two of the most widely-used shareholder remedies in Canadian corporate law: the oppression remedy and the derivative action. Continue Reading

The Supreme Court rules that the Charter permits courts to award damages against the Crown for wrongful non-disclosure absent proof of malice

Posted in Case Comments, Constitutional, Criminal
Renée Zatzman

Does s. 24(1) of the Canadian Charter of Rights and Freedoms authorize a court of competent jurisdiction to award damages against the Crown for prosecutorial misconduct absent proof of malice?

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Jurisdiction in International Commercial Contracts: New Guidance from the B.C. Court of Appeal

Posted in Case Comments, Conflict of Laws, Contracts, Corporate Law, Transportation
Sam Rogers

We live in an increasingly interconnected world with trade liberalization and globalization continuing unabated. These changes present many opportunities for businesses but also raise new challenges for businesses operating across borders.

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What Lies Beneath: The Unexpected Reach of Litigation Privilege

Posted in Case Comments, Civil Procedure/Evidence
Kate Findlay

In an interesting decision clarifying the reach of litigation privilege, the British Columbia Court of Appeal in No Limits Sportswear Inc. v. 0912139 B.C. Ltd., 2015 BCCA 193, has recently held that litigation privilege extends to communications between formerly adverse parties who have settled their dispute and are cooperating against a remaining co-defendant, even where the pleadings have not yet been amended to reflect this new reality.

Background Continue Reading

The “Bright Line” Rule is dimmed by the Alberta Court of Appeal in Statesman

Posted in Case Comments, Construction and Real Estate, Corporate Law, Professions
Ryan MacIsaac

Joint retainers are common in modern legal practice. But what happens when a dispute is brewing between two parties represented by the same law firm? How is a lawyer to know when the “bright line” of conflict of interest has been crossed? And when the duty of loyalty to a client is breached, when is disqualification of the law firm an appropriate remedy? The Alberta Court of Appeal addressed these issues in Statesman Master Builders Inc v Bennett Jones LLP, 2015 ABCA 142 (“Statesman”). Continue Reading

The SCC Monitor (25/05/2015)

A Commentary on Recent Legal Developments by the Canadian Appeals Monitor

Posted in The SCC Monitor
Byron Shaw

On Thursday, May 28, 2015, the Supreme Court of Canada will release judgment on several leave applications currently before the Court, including the following.

Mangal v. William Osler Health Centre (36174)

Mangal is a medical malpractice case in which a woman died in hospital several hours after a caesarean section. The case raises the question of whether a trial judge may adopt new theories of factual causation not advanced by the parties.

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Has the Supreme Court of Canada done away with the concept of apparent bias?

Posted in Case Comments, Civil Procedure/Evidence
Keegan Boyd

In White Burgess Langille Inman v. Abbott and Haliburton Co., a must-read decision for anyone involved in litigation, the Supreme Court of Canada tackles some of the difficult questions associated with how to properly deal with the proposed evidence of potentially biased experts.

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The SCC Monitor (19/05/2015)

A Commentary on Recent Legal Developments by the Canadian Appeals Monitor

Posted in The SCC Monitor
Renée Zatzman

The Supreme Court of Canada has released a number of significant decisions since our last update that are of interest to Canadian businesses and professions, addressing the level of evidence required of a material change to support a securities class action in Quebec, damages for wrongful conviction, and requirements for expert evidence.

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Solicitor-Client Privilege Wins Again Court of Appeal Endorses Restrictive Statutory Interpretation in University of Calgary v JR

Posted in Case Comments, Solicitor-Client Privilege
Roland HungKimberly Macnab

The privileged position that solicitor-client privilege occupies in our legal system was recently reiterated and reinforced in the context of access to information requests in University of Calgary v JR. On April 2, 2015, the Alberta Court of Appeal considered the authority delegated to the Office of the Information and Privacy Commissioner (“OIPC”) as it went head to head against solicitor-client privilege.[1]

Overview Continue Reading

To Comply or Not to Comply? When Experts Fall Outside the Scope of Rule 53.03

Posted in Case Comments, Civil Procedure/Evidence
Kosta KalogirosShanique Lake

On March 26, 2015, the Ontario Court of Appeal released its decision in Westerhof v. Gee Estate concurrently with its companion case McCallum v. Baker[1]. Both decisions were heard at the same time as Moore v. Getahun[2] and, together, form what has been referred to as the Expert Evidence Trilogy (“Trilogy”).

There was an exceptional degree of interest by the Ontario bar in the Trilogy, with six parties intervening in the appeals: The Advocates’ Society; The Holland Group; the Ontario Trial Lawyers Association; the Canadian Defence Lawyers Association; the Canadian Institute of Chartered Business Valuators and the Criminal Lawyers’ Association. Facta of the parties and all interveners are available here. Our coverage of the Moore v. Getahun decision, which was released earlier this year, is available here.

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Court of Appeal Rules on Privilege over Regulator’s Investigation File

Posted in Case Comments, Class Actions
William D. BlackShane C. D'Souza

Does privilege shield a regulator’s investigation file that has not been produced to a respondent? The Ontario Court of Appeal recently grappled with whether or not to compel a regulator to produce its investigation file of its member to plaintiffs in a class action against that member. There are important lessons in the Court’s determination that case-by-case privilege did not apply in the circumstances. Nevertheless, the Court held that plaintiffs did not need the regulator’s documents to prove their allegations in the class action, and on that basis declined to order production. Continue Reading

The SCC Monitor (24/04/2015)

A Commentary on Recent Legal Developments by the Canadian Appeals Monitor

Posted in The SCC Monitor
Katherine Booth

Since our last post, the Supreme Court has released a number of significant decisions, including a decision about the standard of review applicable to statutory appeals and the test for civil contempt. It also dismissed two applications for leave to appeal in cases of particular interest to Canadian businesses, regarding what constitutes sufficient proof of illegal insider trading and whether Canadian courts have jurisdiction over secondary market misrepresentation class actions when the shares were purchased on a foreign exchange. Finally, it granted leave to appeal in a class actions case dealing with a provincial court’s jurisdiction over out-of-province third party defendants.

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Screening Secondary Market Liability Actions: the Supreme Court Raises the Bar for Plaintiffs

Posted in Case Comments, Class Actions, Securities
Miranda LamPierre-Jerome BouchardLaure Fouin

On April 17, 2015, the Supreme Court of Canada (SCC) rendered its opinion in Theratechnologies inc. v. 121851 Canada inc., 2015 SCC 18 (Theratechnologies), its first decision on the Quebec statutory secondary market liability regime adopted in 2007 pursuant to a reform of the Quebec Securities Act (QSA).  Like its sister statutes in other provinces, although the QSA regime facilitates a plaintiff’s burden, mostly by presuming that variation in market price is linked to a misinformation or omission, it also imposes an authorization process under which a claimant must establish that its action is brought in good faith and has a reasonable possibility of success.

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Negligence of Public Authorities – “We have been using a screwdriver to turn a bolt”, Federal Court of Appeal says

Posted in Administrative, Case Comments
Marc-Andre Russell

The majority decision (Stratas and Nadon, J.A.) of the Federal Court of Appeal (“FCA”) in Paradis Honey Ltd. v. Canada, 2015 FCA 89 calls for a complete overhaul of the law governing public authority liability. In a surprising obiter, the Court expressed its view that the well-known analytical framework used for negligence is an anomaly when applied to public authorities, and that the last decades of case law using private law tools to solve public law problems should be revisited. The case can be seen as an open invitation for the Supreme Court of Canada to grant leave to appeal and elaborate a new test for negligence of public authorities. Continue Reading