Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_13-cv-05216/USCOURTS-cand-3_13-cv-05216-7/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:78m(a) Securities Exchange Act

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United States District Court

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

IN RE TESLA MOTORS, INC. SECURITIES

LITIGATION

 /

No. 3:13-cv-05216-CRB

ORDER DENYING MOTION TO

AMEND THE JUDGMENT

Defendants Tesla Motors and Elon Musk (collectively, “Tesla”) request that this

Court amend its judgment by imposing sanctions. See Mot. (dkt. 59). Having conducted a

careful post-judgment review of the attorneys’ conduct for compliance with Federal Rule of

Civil Procedure 11(b), the Court finds that each of Plaintiffs’ counsels’ representations to the

court were proper, nonfrivolous, and factually supported, though ultimately unpersuasive. 

See 15 U.S.C. § 78(u)-4(c)(1). Because the Court, having conducted the inquiry mandated

by the PSLRA, concludes that sanctions are not warranted, it hereby DENIES the motion to

amend the judgment. 

Under the Private Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u-4,

“upon final adjudication of the action, the court shall include in the record specific findings

regarding compliance by each party and each attorney representing any party with each

requirement of Rule 11(b) of the Federal Rules of Civil Procedure as to any complaint,

responsive pleading, or dispositive motion.” 15 U.S.C. § 78u-4(c)(1). The Court is required

to impose sanctions if it finds that a Rule 11 violation occurred, with the presumptive amount

of sanctions for a substantial failure to comply with Rule 11 being the opposing party’s 

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For the Northern District of California

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reasonable attorneys’ fees and associated expenses. 15 U.S.C. §§ 78u-4(c)(2)–(3).

Rule 11(b), in turn, states that by presenting to the Court any pleading or other filing,

an attorney certifies that to the best of the attorney’s knowledge formed after an inquiry

reasonable under the circumstances: 

“(1) it is not being presented for any improper purpose, such as to harass, cause

unnecessary delay, or needlessly increase the cost of the litigation;

(2) the claim, defenses, and other legal contentions are warranted by existing law or

by a nonfrivolous argument for extending, modifying, or reversing existing law or for

establishing new law;

(3) the factual contentions have evidentiary support or, if specifically so identified,

will likely have evidentiary support after a reasonable opportunity for further

investigation or discovery; and

(4) the denials of factual contentions are warranted on the evidence or, if specifically

so identified, are reasonably based on belief or a lack of information. 

Fed. R. Civ. P. 11(b)(1)–(4). 

Each of these representations was satisfied here. Tesla’s principal argument is that

Plaintiffs’ Complaint lacked any factual or evidentiary basis, and that Plaintiffs’ counsel did

not conduct a reasonable or competent inquiry into their factual allegations. When, as here,

the Rule 11 inquiry focuses on a Complaint, this Court “‘must conduct a two-prong inquiry

to determine (1) whether the complaint is legally or factually baseless from an objective

perspective, and (2) if the attorney has conducted a reasonable and competent inquiry before

signing and filing it.’” Holgate v. Baldwin, 425 F.3d 671, 676 (9th Cir. 2005) (quoting

Christian v. Mattel, Inc., 286 F.3d 1118, 1127 (9th Cir.2002)); Kelter v. Associated Financial

Group, Inc., 382 Fed. Appx. 632, 633 (9th Cir. 2010) (same, applying standard in PSLRA

context). In other words, a finding that a Complaint is “frivolous” is appropriate if it “is both

baseless and made without a reasonable and competent inquiry.” Holgate, 425 F.3d at 676

(quoting Moore v. Keegan Mgmt. Co (In re Keegan Mgmt. Co., Sec. Litig.), 78 F.3d 431,

434 (9th Cir.1996)). “The reasonableness standard governing a Rule 11 inquiry is

objective.” Kelter, 382 Fed. Appx. at 633 (citing G.C. and K.B. Investments, Inc. v. Wilson,

326 F.3d 1096, 1109 (9th Cir.2003)).

The Court agreed with Tesla that Plaintiffs failed to allege a single actionable false or

misleading statement in their 87-page Complaint, and accordingly granted the motion to

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dismiss. See Second Amended Complaint (“SAC”) (dkt. 42); Order Granting Mot. Dismiss

(dkt. 56). But the Court cannot agree that sanctions are warranted under the PSLRA

framework. Plaintiffs’ factual contentions have full evidentiary support, as far as the Court

and parties can tell at this stage. Competent evidence supports the allegations that Tesla and

Musk did make the various press releases, and did conduct the various battery tests, and that

the Model S did experience a series of fires caused by road debris–all generally in the form

and substance and sequence the Complaint alleges. The strictly factual aspects of Plaintiffs’

Complaint were supported by a lengthy and thorough investigation, which included extensive

witness interviews, a detailed history of the engineering and development of the Roadster

and Model S Tesla vehicles, and reviews of public documents, conference calls, press

releases, financial filings, and stock performance. By and large, the underlying events appear

to have occurred much in the way Plaintiffs allege. 

Tesla does not really argue otherwise. Rather, Tesla takes umbrage at the legal

conclusions that Plaintiffs advanced in light of this factual backdrop—that in light of the

battery tests and fires, Tesla’s press releases and statements were false and misleading

representations to investors. In so doing, Tesla’s argument and this Court’s inquiry move

from the factual territory of Rule 11(b)(3) to the legal one of Rule 11(b)(2). But although the

Court disagreed, and stridently so, that Plaintiffs’ factual allegations pled a single false

statement to survive a motion to dismiss, this is hardly “one of the rare and exceptional cases

that warrant the extraordinary remedy of Rule 11 sanctions.” See Kelter, 382 Fed. Appx. at

634 (citations omitted). The facts known to Plaintiffs support a good-faith, if erroneous,

argument that Tesla’s disclosures were misleading—as, for example, the National Highway

Traffic Safety Administration might have thought when it issued a clarification of its 5-Star

Safety Ratings on its webpage, complete with a picture of a Tesla, shortly after one of

Tesla’s press releases. See SAC ¶ 126. While these and other statements did not come close

to being actionable in the full context of Tesla’s disclosures to the market, Plaintiffs’

Complaint did not raise the objectively baseless and frivolous claims that have previously

been the subject of fee awards. See, e.g., Patton v. County of Kings, 857 F.2d 1379,

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For the Northern District of California

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 In seeking leave to file a sur-reply pursuant to Local Civil Rule 7-3(d), the Plaintiffs attached a memorandum

containing the substance of their objections. See Proposed Sur-Reply (dkt. 81-1). The Court has considered this material.

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1381–82 (9th Cir.1988) (affirming an award of fees where a plaintiff raised one claim that

was directly contrary to established precedent, and a second claim without citing any

authority in support); Fed. R. Civ. P. 11(b)(2). 

Accordingly, the Court finds that Plaintiffs’ filings complied with Rules 11(b)(2) and

(3). Tesla does not allege, nor is there any indication to support, that Plaintiffs violated Rule

11(b)(1) or (4). The Court DENIES Tesla’s motion to amend the judgment. In light of a

careful review of the parties’ arguments, the relevant law, and the record in this case, and

pursuant to Civil Local Rule 7–1(b), the Court finds this matter appropriate for resolution

without oral argument and hereby VACATES the hearing on this motion scheduled for April

3, 2015, at 10:00 a.m. The pending stipulation to alter the hearing date (dkt. 68) and

administrative motion to file under seal (dkt. 72) are DENIED AS MOOT. Plaintiffs’ motion

for leave to file sur-reply (dkt. 80) is GRANTED.1

 

IT IS SO ORDERED.

Dated: March 23, 2015 

CHARLES R. BREYER

UNITED STATES DISTRICT JUDGE

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