Ind. State Dist. Council of Laborers v. Omnicare, Inc.

• Decision Date: 23 July 2013
• Docket Number: No. 12–5287.,12–5287.
• Citation: 719 F.3d 498
• Parties: INDIANA STATE DISTRICT COUNCIL OF LABORERS AND HOD CARRIERS PENSION AND WELFARE FUND, on behalf of itself and all others similarly situated, Plaintiff, Cement Masons Local 526 Combined Funds; Laborers District Council Construction Industry Pension Fund, Plaintiffs–Appellants, v. OMNICARE, INC.; Joel F. Gemunder; David W. Froesel, Jr.; Cheryl D. Hodges; Edward L. Hutton; Sandra E. Laney, Defendants–Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

719 F.3d 498

INDIANA STATE DISTRICT COUNCIL OF LABORERS AND HOD CARRIERS PENSION AND WELFARE FUND, on behalf of itself and all others similarly situated, Plaintiff,Cement Masons Local 526 Combined Funds; Laborers District Council Construction Industry Pension Fund, Plaintiffs–Appellants,

v.OMNICARE, INC.; Joel F. Gemunder; David W. Froesel, Jr.; Cheryl D. Hodges; Edward L. Hutton; Sandra E. Laney, Defendants–Appellees.

No. 12–5287.

United States Court of Appeals, Sixth Circuit.

Argued: Jan. 15, 2013.

Decided and Filed: May 23, 2013.

Rehearing and Rehearing En Banc Denied July 23, 2013.

ARGUED:Eric Alan Isaacson, Robbins Geller Rudman & Dowd LLP, San Diego, California, for Appellants. Harvey Kurzweil, Winston & Strawn LLP, New York, New York, for Appellees. ON BRIEF:Eric Alan Isaacson, Henry Rosen, Jennifer L. Gmitro, Amanda M. Frame, Robbins Geller Rudman & Dowd LLP, San Diego, California, for Appellants. Harvey Kurzweil, Richard W. Reinthaler, John E. Schreiber, Winston & Strawn LLP, New York, New York, Wm. T. Robinson III, Michael E. Nitardy, Frost Brown Todd LLC, Florence, Kentucky, for Appellees.

Before: COLE and GRIFFIN, Circuit Judges; GWIN, District Judge. ^*

COLE, J., delivered the opinion of the court in which GRIFFIN, J., and GWIN, D.J., joined. GWIN, J. (pp. 510–11), delivered a separate concurring opinion.

OPINION

COLE, Circuit Judge.

Plaintiffs, all Omnicare investors, appeal the dismissal of their securities suit under § 11 of the Securities Act of 1933, 15 U.S.C. § 77k (2010), against Defendants Omnicare, Inc., its officers, and directors. Plaintiffs allege that Defendants made material misstatements and/or omissions in a Registration Statement filed with the Securities and Exchange Commission in connection with a December 2005 public stock offering. The district court held that Plaintiffs had not adequately pleaded knowledge of wrongdoing on the part of Defendants and dismissed the complaint for failure to state a claim upon which relief can be granted. Plaintiffs seek reversal of the district court's dismissal order on the grounds that § 11 is a strict liability provision. For the following reasons, we REVERSE and REMAND in part and AFFIRM in part.

I.

Defendant Omnicare is the nation's largest provider of pharmaceutical care services for the elderly and other residents of long-term care facilities in the United States and Canada. Ind. State Dist. Council v. Omnicare Inc., 583 F.3d 935, 938 (6th Cir.2009) (hereinafter “Omnicare I ”); Ind. State Dist. Council v. Omnicare Inc., 527 F.Supp.2d 698, 700–01 (E.D.Ky.2007). During the relevant time period, Defendant Joel Gemunder was Omnicare's Chief Executive Officer; Defendant David Froesel was Omnicare's Chief Financial Officer and a Senior Vice President; Defendant Cheryl Hodges was Omnicare's Secretary and a Senior Vice President; Defendant Edward Hutton was Chairman of the Board of Directors; ¹ and Defendant Sandra Laney was a Director.

Plaintiffs are investors who purchased Omnicare securities in a December 15, 2005, public offering. In conjunction with the public offering, Omnicare offered 12.8 million shares of common stock and made related filings with the Securities and Exchange Commission. These filings were incorporated into a Registration Statement which is central to the current litigation. Plaintiffs did not hold the stock long. They sold all of these securities by January 31, 2006.

Plaintiffs seek relief under § 11 of the Securities Act of 1933, 15 U.S.C. § 77k. Section 11 provides a remedy for investors who have acquired securities under a registration statement that was materially misleading or omitted material information. It imposes liability on issuers and signers of registration statements containing untrue statements or omissions of material fact. 15 U.S.C. § 77k(a). Section 11 also imposes liability on the directors of the issuer. Id. at § 77k(a)(2).

According to the Third Amended Complaint ², Omnicare was engaged in a variety of illegal activities including kickback arrangements with pharmaceutical manufacturers and submission of false claims to Medicare and Medicaid. Plaintiffs allege that representations in the Registration Statement were material, untrue and misleading because they effectively concealed Omnicare's illegal activities from its investors. According to the Plaintiffs, the Registration Statement stated “that [Omnicare's] therapeutic interchanges were meant to provide [patients with] ... more efficacious and/or safer drugs than those presently being prescribed” and that its contracts with drug companies were “ legally and economically valid arrangements that bring value to the healthcare system and patients that we serve.” Plaintiffs claim that given Omnicare's alleged illegal activities, these and other statements indicating compliance with the law were misleading. Specifically, Plaintiffs allege that these statements of “legal compliance” made in the Registration Statement were material, false and misleading, and therefore in violation of § 11.

Furthermore, Plaintiffs allege that Omnicare failed to comply with Generally Accepted Accounting Principles (“GAAP”), such that the financial statements filed in connection with the December 2005 public offering substantially overstated the company's revenue. Therefore, according to Plaintiffs, the financial statements contained material misstatements and omissions in violation of § 11.

Plaintiffs filed this case in the United States District Court for the Eastern District of Kentucky in February 2006 as a putative securities class action, alleging claims for violations of § 10(b), Rule 10b–5 and § 20(a) of the Securities and Exchange Act of 1934. Omnicare I, 583 F.3d at 939. A class was never certified. Plaintiffs later amended the complaint, adding a claim under § 11 for material misstatements and omissions in the Registration Statement. That § 11 claim is the basis of the instant appeal.

Defendants moved to dismiss the complaint on a variety of grounds. On October 12, 2007, the district court granted Defendants' motion and dismissed the complaint in its entirety. Omnicare, 527 F.Supp.2d at 712. With respect to the § 10(b), Rule 10b–5 and § 11 claims, the district court determined that Plaintiffs had failed to plead loss causation—the causal connection between a defendant's misconduct and the plaintiff's loss. Id. at 704–05. The claim made under § 20(a) was dismissed as well. Id. at 711. Plaintiffs appealed.

On October 21, 2009, this Court affirmed the judgment of the district court with respect to all claims except the § 11 claim. We held that “loss causation” is not an element of a § 11 claim but is instead an affirmative defense. Omnicare I, 583 F.3d at 947. Accordingly, we determined that the district court had erred by requiring Plaintiffs to plead loss causation in order to state their § 11 claim. We remanded the case to district court for further analysis. Id. at 948.

Plaintiffs pursued a writ for certiorari, which they later dismissed, and then moved for leave to amend the complaint in order to re-plead the § 11 claim. The motion was granted. The Third Amended Complaint encompasses two types of § 11 allegations: (1) material misstatements and omissions made with reference to the statements of “legal compliance”; and (2) material misstatements and omissions in reference to GAAP. Defendants filed a motion to dismiss the Third Amended Complaint.

On February 13, 2012, the district court granted Defendants' motion, concluding that because the Plaintiffs' § 11 claim “sounds in fraud,” it was subject to but failed to meet the heightened pleading standard of Federal Rule of Civil Procedure 9(b). The court furthermore held that, for both claims asserted under § 11, Plaintiffs were required, but failed to plead, knowledge of falsity on the part of the Defendants. Because the court found that the complaint failed to satisfy the pleading standards of Rule 9(b), and because Plaintiffs had not sufficiently pleaded Defendants' knowledge of falsity, the complaint was dismissed. Plaintiffs again appealed.

II.

Whether the district court properly dismissed a complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) is a question of law subject to de novo review. Kottmyer v. Maas, 436 F.3d 684, 688 (6th Cir.2006). The court must construe the complaint in a light most favorable to the plaintiff and accept all factual allegations as true. Id. at 688. The factual allegations must “raise a right to relief above the speculative level.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). Stated otherwise, the Rule 12(b)(6) standard requires that the plaintiff provide “enough facts to state a claim to relief that is plausible on its face.” Id. at 570, 127 S.Ct. 1955. A complaint must “contain either direct or inferential allegations respecting all the material elements to sustain a recovery under some viable legal theory.” Mezibov v. Allen, 411 F.3d 712, 716 (6th Cir.2005).

While notice pleading requirements are based on Rule 8, see Twombly, 550 U.S. at 555, 127 S.Ct. 1955, claims for fraud are held to the heightened pleading standard of Rule 9(b). We held in Omnicare I that, although § 11 claims do not require pleading of scienter, Rule 9(b) pleading standards still apply to § 11 claims that sound in fraud. Omnicare I, 583 F.3d at 948. We furthermore held that the § 11 claims pleaded by Plaintiffs in the instant case met this requirement. Id.

Plaintiffs argue that, since this Court's decision in Omnicare I, they have amended their complaint to abandon all claims “that could be construed as alleging fraud or intentional or reckless misconduct” and that, as a result, Rule 9(b) no longer applies. They base this argument primarily on a disclaimer that has been added to the complaint stating: “Plaintiffs expressly exclude and disclaim any allegation that could be construed as alleging fraud or intentional or reckless misconduct,...