On August 24, 2018, Judge Charles Breyer of the United States District Court for the Northern District of California dismissed with leave to amend a putative class action against an electric car manufacturer (the “Company”), its Chief Executive Officer, and its Chief Financial Officer for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5. Wochos v. Tesla, Inc., et al., No. 17-cv-05828 (N.D. Cal. Aug. 24, 2018). Plaintiffs alleged that defendants made false and misleading statements regarding production projections for the Company’s Model 3 that it failed to meet. Stating that “[f]ederal securities laws do not punish companies for failing to achieve targets,” the Court held that the challenged statements were protected by the safe harbor provision of the Private Security Litigation Reform Act of 1995 (“PSLRA”) because they were forward-looking and accompanied by meaningful cautionary language.
In 2016, the Company, an electric car manufacturer, announced plans to produce an affordable, mass market vehicle called the Model 3. In a quarterly report filed on May 3, 2016, the Company said it planned to ramp up Model 3 production to 5,000 finished vehicles per week by the end of 2017. Defendants reiterated this in subsequent statements. On October 2, 2017, the Company announced it failed to meet the goals for the third quarter of 2017 because of “production bottlenecks.” A month later, the Company moved its goal of 5,000 per week to the end of the first quarter of 2018, again citing bottlenecks. Based in part on information from former employees who allegedly informed the CEO that the production targets were “impossible” to meet, plaintiffs claimed that defendants’ statements regarding the Model 3 production schedule, production status, and production process were false.
The Court first considered defendants’ request for judicial notice of various documents containing public statements made by defendants regarding Model 3 production that were not specifically referenced in the complaint. Finding that the accuracy of the documents could not reasonably be disputed and that the documents constitute the subject matter of the claim, i.e., the Company’s public statements about Model 3 production, the Court took judicial notice of the filings and earnings call transcripts. The Court noted it was not taking notice of these documents for the truth of any facts asserted therein, but instead, for what the Company told the market.
Under the PSLRA safe harbor, a forward-looking statement is not actionable if it is accompanied by meaningful cautionary language (unless plaintiffs can show the defendant actually did not believe the statement was true). The Court concluded almost all of the allegedly misleading statements were forward-looking. For example, the Court held that statements the Company was “on track” to achieving its Model 3 production goals were forward-looking, rejecting the argument the statements were representations of the then-current state of affairs. According to the Court, “every future projection depends on the currents state of affairs,” and accepting plaintiffs’ argument would collapse the distinction between present and forward-looking statements.
The Court then found that the Company’s forward-looking statements were accompanied by meaningful cautionary language including, for example, that (a) “[the Company] may experience . . . delays . . . in bringing to market and ramping up production of new vehicles, such as Model 3”; (b) “a car consists of several thousand unique items,” and the Company could “only go as fast as the slowest item”; (c) it had “no experience to date in manufacturing vehicles at the high volumes [it] anticipate[d] for the Model 3”; and (d) its production plan was based on a number of assumptions. The Court also held that plaintiffs’ complaint did not establish that defendants knew it was impossible (rather than unlikely) to meet the production goals. Consequently, the Court found that the statements at issue were protected by the PSLRA’s safe harbor provision.