Opinion
23-cv-00869-AMO
09-30-2024
THOMAS LAMONTAGNE, Plaintiff, v. TESLA, INC., et al., Defendants.
ORDER GRANTING MOTION TO DISMISS RE: DKT. NO. 62
ARACELI MARTÍNEZ-OLGUÍN UNITED STATES DISTRICT JUDGE
This is a securities action case about Tesla's self-driving car technology. The matter is fully briefed and suitable for decision without oral argument. See Civil L.R. 7-1(b). Having read the parties' papers and carefully considered their arguments and the relevant legal authority, the Court hereby GRANTS the motion to dismiss for the following reasons.
The Court accepts Plaintiffs' allegations in the complaint as true and construes the pleadings in the light most favorable to Plaintiffs. See Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008) (Citation omitted).
Lead Plaintiffs Oakland County Voluntary Employees' Beneficiary Association and Oakland County Employees' Retirement System (collectively, “Plaintiffs”) bring a putative class action alleging Private Securities Litigation Act (“PSLRA”) violations by Tesla, Inc., and Elon Musk (collectively, “Defendants”). ECF 57 (First Amended Complaint or “FAC”). They assert that Defendants made 29 false or misleading statements about the development timeline of its autonomous driving technology, the safety of the technology, and its capabilities.
By the start of the Class Period (February 19, 2019 to February 16, 2023), Tesla included a software package in its vehicles called “Autopilot,” which it described as providing substantial self-driving capabilities, including providing “highway autonomy.” FAC ¶ 63. Musk described Autopilot as being safer than human driving. FAC ¶ 63. Tesla also sold a software upgrade called “Full Self Driving” or “FSD” which enhanced the self-driving capabilities of the car. FAC ¶ 64. As part of the FSD software upgrade, Tesla offered a feature called “Smart Summon” which permitted users to direct the car to drive itself to them across very short distances. FAC ¶ 66. Tesla's software required drivers to occasionally touch the steering wheel, which Musk described as a mere technicality. FAC ¶ 67.
Defendants asserted that Tesla would run a network of “robotaxis” that would allow drivers to use a phone application (similar to Uber) to enable third parties to summon their car and drive them to a destination, allowing drivers to receive passive income while they were not personally using their car. FAC ¶ 75. Tesla equated robotaxis with Level 4-5 autonomy, describing them as “FSD without supervision.” FAC ¶ 76.
The Society for Automotive Engineers has established five levels of vehicle autonomy. FAC ¶ 61. Levels 1-2 refer to systems where a human is driving the vehicle but technology can assist with certain aspects; Level 3 refers to systems where a human can sometimes hand over control of driving tasks but must always be ready to “intervene”; Levels 4-5 refer to systems where the human is not responsible for driving the car while systems are engaged, with Level 4 only providing the functionality in limited conditions (e.g., restricted geographical location or specific conditions such as not during rain). FAC ¶ 61.
During the Class Period, Defendants represented that Tesla was very close to releasing safe and functional Level 4-5 self-driving technology that would drive safer than humans (e.g., Tesla will be “feature complete - full self-driving - this year”). FAC ¶¶ 82-83. However, Tesla's system is currently unsafe for use without human supervision, and its technology is not yet better than humans. FAC ¶¶ 186, 188. Further, the National Transportation Safety Board has criticized Tesla for its dangerous marketing which encourages drivers to not pay as close attention as is necessary for the technology. FAC ¶¶ 190-91. Reports have found that Tesla's autonomous driving technology has led to “far more” crashes than previously reported. FAC ¶¶ 204-05. The Full Self-Driving software has critical safety defects (e.g., it ignores “Do Not Enter” signs, speeds in school zones, runs over children crossing the road, swerves into oncoming traffic). FAC ¶¶ 208-09. Tesla does not report the number of “disengagements” (i.e., human interventions) needed while its vehicles operate. FAC ¶ 211. The self-reported data from Tesla users shows that there is a disengagement of the Tesla's autonomous driving technology once every 16 miles, which is worse than its competitors in the autonomous driving market (1,000 times worse than Waymo and 5,800 times worse than Cruise). FAC ¶ 212.
Throughout the Class Period, Tesla continuously assured investors that it was certain to release full self-driving technology at Level 4-5 autonomy very soon, including by the end of 2020. FAC ¶ 220. When suit was filed, over 3 years and 8 months had passed since the 2020 deadline and Tesla had not yet released even a Level 3 autonomous driving system. FAC ¶ 221.
Plaintiffs bring three causes of action: (1) violation of Section 10(b) of the Securities and Exchange Act and Rule 10b-5(b) against Tesla and Musk; (2) violation of Section 10(b) of the Securities and Exchange Act and Rule 10b-5(a) and (c) against Tesla and Musk; and (3) Violation of Section 20(a) of the Securities and Exchange Act against Musk. Defendants move to dismiss the First Amended Complaint in its entirety. FAC ¶¶ 467-474, 475-483, 484-490.
LEGAL STANDARD
Federal Rule of Civil Procedure 8(a) requires that a complaint contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” A defendant may move to dismiss a complaint for failing to state a claim upon which relief can be granted under Federal Rule of Civil Procedure 12(b)(6). “Dismissal under Rule 12(b)(6) is appropriate only where the complaint lacks a cognizable legal theory or sufficient facts to support a cognizable legal theory.” Mendiondo v. Centinela Hosp. Med. Ctr., 521 F.3d 1097, 1104 (9th Cir. 2008). To survive a Rule 12(b)(6) motion, a plaintiff must plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim is facially plausible when a plaintiff pleads “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
In reviewing the plausibility of a complaint, courts “accept factual allegations in the complaint as true and construe the pleadings in the light most favorable to the nonmoving party.” Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). Nonetheless, Courts do not “accept as true allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” In re Gilead Scis. Secs. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008).
Securities fraud cases have heightened pleading requirements as the complaint must satisfy both the pleading requirements of Federal Rule of Civil Procedure 9(b) and the PSLRA. In re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694, 701 (9th Cir. 2012). Pursuant to Rule 9(b), claims alleging fraud must “state with particularity the circumstances constituting fraud...” Fed.R.Civ.P. 9(b). The PSLRA mandates that “the complaint shall specify each statement alleged to have been misleading, [and] the reason or reasons why the statement is misleading. . . [.]” 15 U.S.C. § 78u-4(b)(1)(B). The PSLRA further requires that the complaint “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Tellabs, Inc. v. Makor Issues & Rts., Ltd., 551 U.S. 308, 314 (2007) (quoting 15 U.S.C. § 78u-4(b)(2)(A)). This means a plaintiff must allege that “the defendant[] made false or misleading statements either intentionally or with deliberate recklessness.” In re VeriFone Holdings, 704 F.3d at 701 (quoting Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 991 (9th Cir. 2009)).
DISCUSSION
I. REQUEST FOR JUDICIAL NOTICE
While the scope of review on a motion to dismiss is generally limited to the contents of the complaint, courts may take judicial notice of facts that are “not subject to reasonable dispute.” Fed.R.Evid. 201(b). Courts may consider documents incorporated into the complaint by reference, Tellabs, 551 U.S. at 322, and take judicial notice of matters of public record, Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001), and publicly available financial documents such as SEC filings, Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1064 n.7 (9th Cir. 2008). Courts may not assume the truth of an incorporated document “if such assumptions only serve to dispute facts in a well-pleaded complaint.” Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 1003 (9th Cir. 2018).
Defendants seek judicial notice of 20 exhibits (Exs. A-T). ECF 63 (“RJN”). Defendants assert that Exhibits A through H and J through T are incorporated by reference. Id. at 2; see Marder v. Lopez, 450 F.3d 445, 448 (9th Cir. 2006). Plaintiffs' FAC is premised on earnings call transcripts (Ex. C, H, J-S), see FAC ¶¶ 321, 329, 333, 347; and Tesla's Forms 10-K (Exs. B, D-G), see FAC ¶¶ 372-75. The FAC also relies on a Southern District of New York order (Ex. T) that purportedly enjoins Tesla from invoking the PSLRA safe harbor, see FAC ¶ 459, and references Tesla's website and its disclosures (Ex. A), see FAC ¶ 187. Because the FAC alleges misstatements based on Tesla's website and the Southern District of New York order, they are incorporated by reference despite not being attached to the complaint. See U.S. v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003) (“Even if a document is not attached to a complaint, it may be incorporated by reference into a complaint if the plaintiff refers extensively to the document or the document forms the basis of the plaintiff's claim.”).
Ex. A (Tesla Autopilot Support Page); Ex. B (Tesla 2019 Form 10-K); Ex. C (Oct. 21, 2020 Earnings Call Transcript); Ex. D (Tesla 2018 Form 10-K); Ex. E (Tesla 2020 Form 10-K); Ex. F (Tesla 2021 Form 10-K); Ex. G (Tesla 2022 Form 10-K); Ex H (Apr. 20, 2022 Earnings Call Transcript); Ex. J (Apr. 24, 2019 Earnings Call Transcript); Ex. K (Jul. 24, 2019 Earnings Call Transcript); Ex. L (Oct. 23, 2019 Earnings Call Transcript); Ex. M (Apr. 29, 2020 Earnings Call Transcript); Ex. N (Jul. 22, 2020 Earnings Call Transcript); Ex. O (Jan. 27, 2021 Earnings Call Transcript); Ex. P (Jan. 26, 2022 Earnings Call Transcript); Ex. Q (Oct. 19, 2022 Earnings Call Transcript); Ex. R (Jan 29, 2020 Earnings Call Transcript); Ex. S (Apr. 26, 2021 Earnings Call Transcript); Ex. T (Oct. 16, 2018 Tesla Order).
The Court also takes judicial notice of the contents of Exhibits B and D through G as they are Forms 10-K filed with the SEC. See In re Yahoo! Inc. Customer Data Sec. Breach Litig., 2017 WL 3727318, at *10 (N.D. Cal. Aug. 30, 2017) (holding that SEC filings referenced in the complaint “are proper subjects of judicial notice”). The Court takes judicial notice of Exhibits C, H, and J through S as they are earnings call transcripts. See Sneed v. AcelRx Pharm., Inc., 2022 WL 4544721, at *3 (N.D. Cal. Sept. 28, 2022) (finding “transcripts of earnings calls . . . are proper subjects of judicial notice”). The Court further takes judicial notice of Exhibit I, which reflects Tesla's stock price on the first and last days of the Class Period. See, e.g., Metzler, 540 F.3d at 1064 n.7 (holding that district court properly took notice of stock price). Exhibit A, which is an excerpt of content from Tesla's website as displayed during the Class Period, is the proper subject of judicial notice. See Threshold Enterprises Ltd. v. Pressed Juicery, Inc., 445 F.Supp.3d 139, 146 (N.D. Cal. 2020) (finding that “websites and their contents may be judicially noticed”). Finally, the Court takes judicial notice of Exhibit T, the Southern District of New York order, as the Court may take judicial notice of court filings, see Reyn's Pasta Bella, LLC v. Visa USA, Inc., 442 F.3d 741, 746 n.6 (9th Cir. 2006).
Plaintiffs do not object to the Court taking judicial notice of each of these documents.
II. SECTION 10(B) CLAIM
Section 10(b) of the Securities Exchange Act makes it unlawful for any person to “use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.” 15 U.S.C. § 78j(b). To state a claim under section 10(b) and Rule 10b-5, a plaintiff must show: “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258, 267 (2014) (citations omitted); see In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046, 1051-52 (9th Cir. 2014). “Rule 9(b) applies to all elements of a securities fraud action, including loss causation.” Oregon Pub. Emps. Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598, 605 (9th Cir. 2014). “Even where a plaintiff has properly pleaded all six elements of a Section 10(b) violation, the allegedly false or misleading statement may still be shielded from liability by the ‘safe harbor' provision of the PSLRA.” In re Quality Sys., Inc. Sec. Litig., 865 F.3d 1130, 1141 (9th Cir. 2017).
Plaintiffs allege that Elon Musk and Tesla made 29 false and misleading statements in violation of Section 10(b) of the Exchange Act and Rule 10b-5(b). Defendants move to dismiss the FAC in its entirety. They argue that the statements are not actionable because (1) they are forward-looking statements protected by the PSLRA safe harbor; and (2) they are statements of corporate puffery; and (3) Plaintiffs have not adequately pleaded facts to support the elements of a Section 10(b) claim. As statements protected under the safe harbor are nonactionable, the Court considers that argument first. See, e.g., Weston v. DocuSign, Inc., 669 F.Supp.3d 849, 873 (N.D. Cal. 2023) (“DocuSign”) (considering safe harbor before addressing whether statements are otherwise actionable). Similarly, the Court considers whether the statements are corporate puffery before considering whether the claims are sufficiently pled.
In the motion, Defendants categorize the statements into three types: Timeline, Safety, and Capability. Because Plaintiffs adopt this categorization in their response, the Court does as well.
A. PSLRA Safe Harbor
The PSLRA “safe harbor” rule protects certain “forward-looking” statements from liability. 15 U.S.C. § 78u-5(c). The safe-harbor provision is “designed to protect companies and their officials when they merely fall short of their optimistic projections.” Wochos v. Tesla, Inc., 985 F.3d 1180, 1189 (9th Cir. 2021) (citation and quotations omitted). Plaintiffs argue that Tesla is statutorily prohibited from invoking the safe harbor doctrine. The Court addresses this argument before turning to the elements of the PSLRA safe harbor.
1. Statutory Exclusion from Safe Harbor
The PSLRA Safe Harbor does not protect statements made by an issuer of securities within three years after it has been the subject of an order barring future violations of an antifraud provision of the securities laws. 15 U.S.C. § 78u-5(b). Plaintiffs argue that this exclusion applies to Tesla because a settlement in an SEC action bars Tesla from violating Rule 13a-15. ECF 66 (“Opp.”) at 21 (citing FAC ¶¶ 457, 459); United States Securities & Exchange Commission v. Tesla, Inc., 1:18-cv-8947-LJL (S.D.N.Y Oct. 16, 2018), ECF No. 14. Plaintiffs contend that Rule 13a-15 is an antifraud provision within the meaning of Section 15 U.S.C. § 78u-5(b), as it is aimed at preventing fraud. Opp. at 21. Defendants dispute that Rule 13a-15 is an antifraud provision, as it is a controls and procedures provision and does not contain a scienter requirement. Mot. at 14 (citing Carvelli v. Ocwen Fin. Corp., 934 F.3d 1307, 1325 (11th Cir. 2019) (holding that Rule 12b-20 is not an “antifraud provision” because, among other reasons, it does not contain a scienter requirement, and fraud provisions by their nature involve intentional wrongdoing). Plaintiffs provide no caselaw of any kind considering whether Rule 13a-15 is an antifraud provision. The Court therefore examines the rule and the conduct it regulates.
Plaintiffs do not dispute that the Musk can avail himself of safe harbor as he is not an “issuer” of a security. See Opp. at 21-22.
Rule 13a-15 dictates that issuers of securities must maintain “disclosure controls and procedures” and evaluate their effectiveness every fiscal quarter. 17 C.F.R. § 240.13a-15(a)-(b). The Rule defines “disclosure controls and procedures” to mean controls and procedures “designed to ensure that information required to be disclosed by the issuer . . . is recorded, processed, summarized and reported” in a timely manner. Id. § 240.13a-15(e). The issuer must also evaluate “internal control over financial reporting” every fiscal year, which requires the issuer to provide “reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements[.]” Id. §§ 240.13a-15(c)-(d), (f). The Court does not read this rule to be an antifraud provision as fraud involves intentional wrongdoing. See Prosser & Keeton on Torts 728 (5th ed. 1984) (“[Fraud] entail[s] [a]n intention to induce the [victim] to act or to refrain from action in reliance on the misrepresentation.”). In promulgating Rule 13a-15, the SEC did not discuss any fraud or state of mind requirements for the rule. It explained that “[p]roposed Rule 13a-15 would require a company to maintain sufficient procedures to collect, process and disclose the information required in its periodic and current reports filed with the Commission.” In Re Certification of Disclosure in Companies' Q. & Ann. Reps., SEC Release No. 46079 (June 14, 2002); see also S.E.C. v. Goldfield Deep Mines Co. of Nevada, 758 F.2d 459, 462 (9th Cir. 1985) (differentiating between “registration provisions of the Exchange Act,” including Sections 12(g), 13(b)(2), and Rule 12b-20, recordkeeping provisions of the Securities Act, such as Section 13(b)(2) and “antifraud provisions of the Securities Act, § 17(a), § 10(b)”). Rule 13a-15 does not make any reference to the speaker's state of mind. Therefore, the Court cannot find that Rule 13a-15 is an antifraud provision and Plaintiffs have not shown that Tesla is prohibited from availing itself of the PSLRA safe harbor. The Court thus turns to whether the safe harbor applies to the challenged statements.
Plaintiffs argue that Rule 13a-15 was implemented pursuant to “existing antifraud” rules such as Section 10(b). Opp. at 19 (quoting SEC Release No. 46079, at *2). However, this misquotes the SEC Release, which refers broadly to “existing antifraud and disclosure rules.” SEC Release No. 46079, at *2.
2. Forward-Looking Statements
In determining whether the PSLRA safe harbor applies, the threshold question is whether any of the statements at issue are forward-looking. Relevant here, the provision applies to (1) forward-looking statements that are identified as such and are “accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially,” or (2) forward-looking statements that were not made with “actual knowledge” by the speaker “that the statement was false or misleading.” 15 U.S.C. § 78u-5(c); see Weston Fam. P'ship LLLP v. Twitter, Inc., 29 F. 4th 611, 620 (9th Cir. 2022). The statute defines forwardlooking statements as “any statement regarding (1) financial projections, (2) plans and objectives of management for future operations, (3) future economic performance, or (4) the assumptions ‘underlying or related to' any of these issues.” No. 84 Emp.-Teamster Joint Council Pension Tr. Fund v. Am. W. Holding Corp., 320 F.3d 920, 936 (9th Cir. 2003) (citing 15 U.S.C. § 78u-5(i)). “Whether a statement is forward-looking and protected by the PSLRA's safe harbor ‘turns on particular language' and therefore requires an individualized analysis of each statement.” DocuSign, 669 F.Supp.3d at 874 (citation omitted).
Defendants argue that 18 Timeline Statements expressing predictions for when Tesla's “Full Self Driving Capability” or “FSDC” would reach certain benchmarks are forward looking statements protected by the PSLRA safe harbor. Mot. at 12-13; see, e.g., FAC ¶¶ 313-14 (predicting “feature complete for full self-driving” this year); FAC ¶ 327 (“we expect to be feature complete with autonomy by the end of this year . . . I think probably sometime next year, you'll be able to have the car be autonomous without supervision”); FAC ¶ 331 (Tesla “appears to be on track” for fully functional FSD by the end of the year); FAC ¶¶ 343, 349, 351, 357 (expressing confidence that Tesla will achieve full autonomy the following year).
Statements 1-3, 5-6, 8-12, 14-16, 18-20, 23, 29. See FAC ¶¶ 313, 315, 317, 321, 323, 327, 329, 331, 333, 335, 339, 341, 343, 347, 349, 351, 357, 369. The Court refers to the statement numbers in Plaintiffs' Appendix A at ECF 66-1.
Plaintiffs contend that the Timeline Statements are not forward-looking because they omit present facts rendering them misleading. Opp. at 19. For example, Plaintiffs argue that Musk's statements that “I think we will be feature complete full self driving this year” and “I would say that I'm certain of that. That is not a question mark” (FAC ¶ 314) are misleading “by omitting that Tesla was nowhere near releasing Level 4-5 ADT and not even intending to develop that technology over the near term.” Id. However, Plaintiffs misunderstand the caselaw. Statements of the “assumptions underlying or relating to” the “plans and objectives of management for future operations” are forward-looking statements. Wochos, 985 F.3d at 1191-92 (holding that statements that Tesla is “on track” to produce a certain number of vehicles per week were “unquestionably” forward-looking statements). To establish that a challenged statement contains non-forward-looking assertions, a plaintiff must allege that the statement “goes beyond the articulation of ‘plans,' ‘objectives,' and ‘assumptions' and instead contains an express or implied ‘concrete' assertion containing a specific ‘current or past fact.' ” Id. at 1191 (quoting Quality Sys., 865 F.3d at 1142, 1144). Plaintiffs have failed to allege that these challenged statements contain such “concrete” assertions of “current or past fact.” See id.
Plaintiffs also argue that because the statements were framed as guarantees rather than projections, they misrepresent the current condition of Tesla's business. Opp. at 20. They cite only an out of circuit case from 25 years ago that is not persuasive.
The statements here set forth a projected timeline for achieving autonomous driving technology, much like statements of a “projected launch date for [a company's] products” and thus are plainly forward-looking statements of Tesla's plans and objectives. See In re Intel Corp. Sec. Litig., 2023 WL 2767779, at *11 (N.D. Cal. Mar. 31, 2023), aff'd, 2024 WL 1693340 (9th Cir. Apr. 19, 2024).
Defendants also argue that two Safety Statements are forward-looking:
• “We'll probably roll it out later this year. But we'll be able to do traffic lights, stop, turns, troughs, everything pretty much. And then it will be a long march of 9s, essentially, how many 9s of reliability are okay. So it's definitely way better than human . . .” FAC ¶ 341
(Statement 15) (Jul. 22, 2020 Musk on Earnings Call).
• “Tesla Full Self-Driving will work at a safety level well above that of the average driver this year, of that I am confident. Can't speak for regulators though.” FAC ¶ 353 (Statement 21) (Jan. 1, 2021 Musk Tweet).
Defendants describe this statement as both a Timeline and a Safety Statement.
Plaintiffs argue that the statement “it's definitely way better than human” (Statement 15) is not forward-looking because it is a “mixed” statement that represents a present fact. Opp. at 19. Where a defendant makes a mixed statement containing a non-forward-looking statement as well as a forward-looking statement, the non-forward-looking statement is not protected by the safe harbor. In re Quality Sys., 865 F.3d at 1141-42. However, where the statement, “examined as a whole,” challenges “future expectations and performance,” the statement is properly classified as forward-looking. Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., 759 F.3d 1051, 1059 (9th Cir. 2014) (“Intuitive Surgical”). Here, the statement discusses rolling out “4D” later in the year, what Tesla will “be able to do,” and that reliability is “going to be the real work.” FAC ¶ 341. Thus, examined as a whole, the statement is best understood as discussing the “future expectations and performance” possible in the future roll-out. See Intuitive Surgical, 759 F.3d at 1059 (statement that defendant was not “hear[ing] anything that causes us any significant concern . . . no change from last quarter, I guess . . .” was properly understood as “expectations of the future impact of the external economic environment on [defendant]”). Statement 15 (FAC ¶ 341) is thus forward-looking. See In re Splunk Inc. Sec. Litig., 592 F.Supp.3d 919, 936 (N.D. Cal. 2022) (citing Wochos, 985 F.3d at 1190) (“for a challenged statement to be deemed ‘mixed,' the non-forward-looking aspects must be ‘separable' from the forward-looking aspects”). Plaintiffs do not dispute that Statement 21 (FAC ¶ 353) is forward-looking. As the Court has concluded that the above statements are forward-looking, the Court next considers whether Defendants have alleged that they were accompanied with meaningfully cautionary language or Plaintiffs have failed to allege knowledge of falsity.
The parties do not define “4D.”
3. Prong One of the Safe Harbor: Meaningfully Cautionary Language
Defendants argue that the forward-looking statements are protected under the first prong of the PSLRA safe harbor because they provided meaningful cautionary language warning investors that predictions in their forward-looking statements were subject to certain risks. Mot. at 13-14. Forward-looking statements are protected under the first prong of the safe harbor if they were “accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially.” 15 U.S.C. § 78u-5(c)(1)(A)(i). “To be adequate under the cautionary-language prong, the caution must ‘discredit the [allegedly misleading statements] so obviously that the risk of real deception drops to nil.' ” In re QuantumScape Sec. Class Action Litig., 580 F.Supp.3d 714, 737 (N.D. Cal. 2022) (quoting Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1097 (1991)). These factors must be “substantive company-specific warnings based on a realistic description of the risks applicable to the particular circumstances.” Rodriguez v. Gigamon Inc., 325 F.Supp.3d 1041, 1052 (N.D. Cal. 2018) (citations omitted). But the cautionary language “does not need to warn of the ‘exact risk' that transpires.” Bodri v. GoPro, Inc., 252 F.Supp.3d 912, 931 (N.D. Cal. 2017).
The forward-looking statements in Statements 5, 9-12, 15, 18, 23, 26, and 29 (FAC ¶¶ 321, 329, 331, 333, 335, 341, 347, 357, 363, and 369) were made during Tesla earnings calls. At the beginning of each call, Defendants cautioned that “[d]uring this call, we will discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC.” ECF 62-13 (Ex. J) (Apr. 24, 2019 Earnings Call) at 2. The SEC filings discussed hardware for Autopilot and FSD features and stated that “[t]here is no guarantee that we will be able to successfully and timely introduce and scale any such new processes or features” and that Tesla may experience “delays or other complications in launching and/or ramping production of . . . future features and services such as new Autopilot or FSD features and the autonomous Tesla ride-hailing network.” ECF 62-5 (Ex. B) (Dec. 31, 2019 Form 10-K) at 5. Defendants also cautioned that “certain features of our vehicles such as new Autopilot or FSD features [may] take longer than expected to become enabled . . . [.]” Id. at 11.
Ex. K (July 24, 2019 Earnings Call) at 2 (same); Ex. L (Oct. 23, 2019 Earnings Call) at 2 (same); Ex. M (Apr. 29, 2020 Earnings Call) at 2 (same); Ex. N (July 22, 2020 Earnings Call) at 2 (same); Ex. C (Oct. 21, 2020 Earnings Call) at 2 (same); Ex. O (Jan. 27, 2021 Earnings Call) (same); Ex. P (Jan. 26, 2022 Earnings Call) at 2 (same); Ex. Q (Oct. 19, 2022 Earnings Call) at 2 (same).
Plaintiffs contend that the cautionary language was inadequate as Defendants failed to disclose risks known to them - namely, that Tesla was not close to developing FSDC. Opp. at 2021. “Risk disclosures that speak entirely of as-yet-unrealized risks and contingencies and do not alert the reader that some of these risks may already have come to fruition can mislead reasonable investors.” In re Alphabet, Inc. Sec. Litig., 1 F.4th 687, 703 (9th Cir. 2021) (citation and quotation marks omitted); see also Glazer Cap. Mgmt., L.P. v. Forescout Techs., Inc., 63 F.4th 747, 781 (9th Cir. 2023) (applying this to the context of the safe-harbor provision and finding that “cautionary language is not ‘meaningful' if it discusses as a mere possibility a risk that has already materialized.”). In November and December of 2020, Tesla's Assistant General Counsel told that California DMV that Tesla's City Streets software was ordinary “Level 2” driving assistance and that Tesla was not expecting any “significant enhancements” or “changes” to the software to render it Levels 3-5. FAC ¶¶ 227-31. The letter also stated that the development of Levels 3-5 will follow Tesla's “iterative process” and will not be released until the company has “fully validated them.” FAC ¶ 230. In 2021, Tesla's Director of Autopilot Software told the DMV that Musk's tweet about reaching Level 5 capacity by the end of the year “does not match engineering reality.” FAC ¶ 232.
Defendants argue that these allegations do not show that Tesla's statements were false or misleading because the DMV letter refers to a specific technology - the City Streets software -and does not indicate that Tesla's goals of completing FSD by the end of the year were not plausible. Mot. at 17-18. Further, the 2021 DMV memo indicates that Tesla “couldn't say if the rate of improvement would make it to L5 [Level 5] by the end of the year” and that Musk was “extrapolating on the rates of improvement when speaking about L5 capabilities.” FAC ¶ 232. The Court agrees with Defendants that Plaintiffs have failed to point to allegations showing that the risk that the FSD technology could not be achieved by the projected timeline had “already come to fruition.” See In re Alphabet, 1 F.4th at 703; cf. Khoja, 899 F.3d at 1016 (holding that a company's warning in its Form 10-Q that share prices “might” be affected by announcements of study results that “may” be inconsistent with interim study results was misleading because the company “allegedly knew already that the ‘new data' revealed exactly that”); DocuSign, 669 F.Supp.3d at 879 (finding that defendant's disclosures that risks related to the pandemic “could” or “may” impact the business were insufficient where defendant was aware that the “pandemicgenerated demand was unsustainable” and knew of “plummeting usage rates . . . and disappointing sales as customers returned to in-person work and refused to renew” their contracts).
Moreover, courts have recognized that language similar to Defendants' is sufficiently cautionary. See, e.g., Intuitive Surgical, 759 F.3d at 1059-60 (finding sufficient cautionary language in disclaimer that “[a]ctual results may differ materially from those expressed or implied, as a result of certain risks and uncertainties. These risks and uncertainties are described in detail in the company's [SEC] filings. Prospective investors are cautioned not to place undue reliance on such forward-looking statements”); In re Cutera Sec. Litig., 610 F.3d 1103, 1112 (9th Cir. 2010) (finding that the following language adequately cautioned investors: “these prepared remarks contain forward-looking statements concerning future financial performance and guidance . . . management may make additional forward-looking statements in response to questions, and . . . factors like Cutera's ability to continue increasing sales performance worldwide could cause variance in the results.”). The cautionary language in the SEC filings mentions potential delays and complications in developing the technology and explains that certain features such as autopilot and FSD may take longer than expected. This precisely addresses the alleged misrepresentations. Indeed, “[t]he PSLRA safe harbor demands only that companies warn of risks that might cause actual results to differ from forward-looking predictions . . . [.]” In re Intel Corp., 2023 WL 2767779, at *14 (citing 15 U.S.C. § 78u-5(c)(1)(A)). As Defendants have done that with respect to Statements 5, 9-12, 15, 18, 23, 26, and 29, the Court finds that those statements are protected under the PSLRA safe harbor.
4. Prong Two of the Safe Harbor: Knowledge of Falsity
This leaves seven statements (Statements 1-3, 14, and 19-21 (FAC ¶¶ 313, 315, 317, 339, 349, 351, 353)), which Defendants contend are protected under the second prong of the PSLRA safe harbor because Plaintiffs have not alleged that the speaker knew that the statements were false or misleading. “Even if a forward-looking statement is not accompanied by adequate cautionary language, it is protected by PSLRA's safe harbor if the speaker did not have ‘actual knowledge' that the statement was false or misleading.” In re Quality Sys., 865 F.3d at 1149; see Cutera, 610 F.3d at 1112-13 (explaining that “actual knowledge” and “cautionary language” safe harbor prongs are disjunctive). Plaintiffs argue that for the same reasons they have sufficiently alleged scienter, they have alleged knowledge of the statements' falsity. Opp. at 20. As discussed in the scienter section below, Plaintiffs have not alleged that Musk had knowledge that his statements were false. Thus, the remaining forward-looking statements, Statements 1-3, 14, and 19-21, are protected under the second prong of the safe harbor.
Defendants also contend that Statements 1-3, 14, and 19-21 (FAC ¶¶ 313, 315, 317, 339, 349, 351, 353), which were not identified as forward-looking or accompanied by forward-looking language, are protected under the “bespeaks caution” doctrine. Mot. at 14-15. The Court cannot agree, as dismissing the pleadings under the bespeaks caution doctrine requires showing that “reasonable minds could not disagree that the challenged statements were not misleading.” In re Atossa Genetics Inc Sec. Litig., 868 F.3d 784, 798 (9th Cir. 2017) (citation omitted). However, the Court need not address whether this doctrine applies, as that Plaintiffs have not adequately alleged knowledge of falsity.
B. Corporate Puffery
Defendants next argue that several Timeline and Safety Statements, Statements 7, 9-11, 13, 16, 18, and 26 (FAC ¶¶ 325, 329, 331, 333, 337, 343, 347, 363), are nonactionable statements of corporate puffery and optimism. Mot. at 15, 19. In the Ninth Circuit, “vague, generalized assertions of corporate optimism or statements of ‘mere puffing' are not actionable material misrepresentations under federal securities laws” because no reasonable investor would rely on such statements. City of Royal Oak Ret. Sys. v. Juniper Networks, Inc., 880 F.Supp.2d 1045, 1063 (N.D. Cal. 2012) (citations omitted); see In re Nimble Storage, Inc. Sec. Litig., 252 F.Supp.3d 848, 854 n.8 (N.D. Cal. 2017), aff'd, 756 Fed.Appx. 779 (9th Cir. 2019) (“[A]lleged optimistic statements indicating that a company is ‘on track' to meet a certain goal are, without more, inactionable puffery.”). This is because “[w]hen valuing corporations, . . . investors do not rely on vague statements of optimism like ‘good,' ‘well-regarded,' or other feel good monikers.” In re Cutera, 610 F.3d at 1111. However, even “general statements of optimism, when taken in context,” may be misleading “when those statements address specific aspects of a company's operation that the speaker knows to be performing poorly.” In re Quality Sys., 865 F.3d at 1143 (citation omitted).
Defendants argue that the Timeline Statements that FSDC technology “appear[ed] to be on track,” would be available “aspirationally by the end of the year,” and Tesla was “aiming to release [it] this year,” Statements 10, 11, and 18 (FAC ¶¶ 331, 333, 347), were nonactionable statements of corporate puffery and optimism. Mot. at 15. Plaintiffs contend that the statements provided a “concrete description” of the state of Tesla's technology in a way that misled investors. Opp. at 18 (citing In re Okta, Inc. Sec. Litig., 2023 WL 2749193, at *13 (N.D. Cal. Mar. 31, 2023)). These statements about Tesla's aims and aspirations to develop Tesla's technology by the end of the year and Musk's confidence in the development timeline are too vague for an investor to rely on them. See Nimble Storage, 252 F.Supp.3d at 854 n.8. Thus, in addition to being protected under the PSLRA safe harbor, Statements 10, 11, and 18 are nonactionable puffery.
Defendants also point to Statements 9 and 16 (FAC ¶¶ 329, 343) in a footnote. Mot. at 15 n.9. The Court does not address arguments relegated to footnotes. See Est. of Saunders v. Comm'r, 745 F.3d 953, 962 n.8 (9th Cir. 2014) (“Arguments raised only in footnotes . . . are generally deemed waived.”).
Defendants also assert that several Safety Statements are corporate puffery. For example, statements that safety is “paramount” (FAC ¶ 325), Tesla cars are “absurdly safe” (id.), autopilot is “superhuman” (FAC ¶ 337), and “we want to get to as close to perfection as possible” (FAC ¶ 363). Mot. at 19. Plaintiffs respond that “super” in “superhuman” is not puffery because it represents that ADT is safer than human and “absurdly safe” conveys greater-than-human safety. Opp. at 12. However, these vague statements of corporate optimism are not objectively verifiable. See In re Cutera, 610 F.3d at 1111; see, e.g., Bodri, 252 F.Supp.3d at 924 (statement that the company was “enjoying terrific momentum” which was a “testament to the strength of the GoPro brand” was corporate optimism even though plaintiffs alleged that sales were weak and within days GoPro had cancelled orders). Accordingly, Statement 13 (FAC ¶ 337) is not actionable. Similarly, in Statement 26 (FAC ¶ 363), Tesla states that it wants to get “as close to perfection as possible” and that being safer than a human is a low standard. FAC ¶ 363. As Statement 26 is not objectively verifiable, it is mere puffery. However, Statement 7 (FAC ¶ 325) cannot be dismissed as mere puffery. While describing safety as “paramount” is not objectively verifiable, the rest of the statement explains that safety “bears out in the statistics,” describes the “objective numbers” of the low probability of injury, and states “it's really hard to have a serious injury in a Tesla, . . . it's quite rare.” FAC ¶ 325. Such a statement is more than simply corporate optimism and addresses a “specific aspect[] of [Tesla's] operation.” See In re Quality Sys., 865 F.3d at 1143. It thus cannot be dismissed on this basis. Similarly, Statement 27 (FAC ¶ 365) (that deploying the technology is “clearly safer than not deploying it”) is not mere corporate optimism as it can be objectively verified.
Defendants also argue in a footnote that the statement that Full-Self Driving “will work at a safety level well above that of the average driver this year” is a forward-looking statement. Mot. at 19 n.12 (quoting FAC ¶ 353). The Court does not address arguments made in footnotes. See Est. of Saunders, 745 F.3d at 962 n.8.
To recap, Statements 10, 11, 13, 18, and 26 (FAC ¶¶ 331, 333, 337, 347, and 363) constitute nonactionable puffery and the Court dismisses the claims based on those statements. However, the Court does not find that Statements 7, 9, 16, 21, and 27 (FAC ¶¶ 325, 329, 343, 353, 365) are corporate puffery.
C. Elements of Section 10(b) Claim
Having assessed which statements are sheltered by the PSLRA safe harbor or are non-actionable statements of corporate puffery, the Court turns to Defendants' challenge of the sufficiency of Plaintiff's pleadings for each element of the Section 10(b) claim. The Court examines whether Plaintiffs have adequately the elements of Section 10(b) for the remaining 11 statements, Statements 4, 6, 7, 8, 16, 17, 22, 24, 25, 27, and 28.
To state a claim under section 10(b) and Rule 10b-5, a plaintiff must show: “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Halliburton, 573 U.S. at 267 (citations omitted). “Rule 9(b) applies to all elements of a securities fraud action, including loss causation.” Oregon Pub. Emps. Ret. Fund, 774 F.3d at 605.
1. False or Misleading
Defendants argue that the remaining 11 statements regarding the safety of autopilot and FSDC features (“Safety Statements”) and the capabilities of FSDC technology (“Capability Statements”) are not actionable because Plaintiffs have not alleged that they are false or misleading. For a statement to be actionable under the PSLRA it must be false or misleading as well as material. “Under Rule 10b-5, . . . a fraudulent omission is a failure to ‘state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.' ” Wochos, 985 F.3d at 1188 (quoting 17 C.F.R. § 240.10b-5(b)). A statement is misleading “if it would give a reasonable investor the ‘impression of a state of affairs that differs in a material way from the one that actually exists.' ” Berson v. Applied Signal Tech., Inc., 527 F.3d 982, 985 (9th Cir. 2008) (quoting Brody v. Transitional Hosps. Corp., 280 F.3d 997, 1006 (9th Cir. 2002)). An omitted fact is material if there is a “substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix' of information made available.” TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). “The inquiry into materiality is ‘fact-specific.' ” In re Alphabet, 1 F. 4th at 700 (quoting Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 43 (2011)). As such, “resolving materiality as a matter of law is generally appropriate ‘only if the adequacy of the disclosure or the materiality of the statement is so obvious that reasonable minds could not differ.'” Id. (citation omitted).
The Court does not address Defendants' arguments for dismissing the Timeline Statements here as the Court has already dismissed the claims based on these statements. Supra Section A.
The Court considers whether Plaintiffs have alleged that the statements are false or misleading, analyzing the Safety Statements and Capability Statements in turn.
a. Safety Statements
Defendants argue that several Safety Statements (Statements 4, 7, 13, 15, 21, 24, and 26 28, FAC ¶¶ 319, 325, 337, 341, 353, 359, 363, 365, 367) were not false or misleading. Mot. at 18-20.
Defendants also raise this argument for Statements 13, 15, 21, and 26. The Court does not engage the argument because it has already concluded the claims based on these statements should be dismissed. Supra Sections II A(3) and B.
• “[W]e publish accidents per mile every quarter, and what we see right now is that autopilot is about twice as safe as a normal driver on average. And we expect that to increase quite a bit over time.” Statement 4 (FAC ¶ 319) (Apr. 22, 2019 Musk at Tesla Autonomy Investor Day) (emphasis in original).
• “I think safety especially, I think we -- it is paramount for us -- it's like the absolute primary thing is to maximize the safety of the car. So it's like -- and this bears out in the statistics. So it's really hard to have a serious injury in a Tesla, like it's not - it's quite rare. And when you do look at objective numbers like the NHTSA probability of injury, which is you could get on the Internet, the Teslas have the lowest probability of injury of any car tested. So like if it was possible to have a sixth star, we would have a sixth star. It's like -- literally it's absurdly safe.” Statement 7 (FAC ¶ 325) (Jun. 11, 2019 Musk at Annual Meeting).
• “Essentially, passive Autopilot (car intervenes only when crash probability is high) cuts crashes in half. Active Autopilot (car is driving itself) cuts crashes in half again. Doesn't mean there are no crashes, but, on balance, Autopilot is unequivocally safer.” Statement 24 (FAC ¶ 359) (Apr. 17, 2021 Musk Tweet); see also Statement 26 (FAC ¶ 363).
• “[W]ith respect to autopilot . . . we see steady improvements all along the way. And you know, sometimes there's this dichotomy of, you know, should you wait until the car is like, I don't know, three times safer than a person before deploying any technology. But I think that's that's [sic] actually morally wrong at the point at which we believe that that adding autonomy reduces injury and death, I think you have a moral obligation to deploy it, even though you're going to get sued and blamed by a lot of people, because the people whose lives you saved don't know that their lives are saved.... And it's not going to be perfect. But what matters it is, is that it is very clearly safer than not deploying it.” Statement 27 (FAC ¶ 365) (Sept. 30, 2020 Musk at Tesla Autonomy Investor Day).
• “So the safety that we're seeing when the car is in FSD mode is actually significantly greater than the safety we're seeing when it is not, which is a key threshold for going to a wide Beta.” Statement 28 (FAC ¶ 367) (Oct. 19, 2022 Musk on Earnings Call).
Plaintiffs allege that the high rate of driver interventions demonstrates that Tesla's ADT was not safer than humans, as humans had to take control to avoid crashes. Opp. at 11 (citing FAC ¶ 212). In addition, Plaintiffs reference research showing thousands of deficiencies in Tesla's ADT where it fails to safely complete basic driving tasks, FAC ¶ 210, and note that Tesla has more incidents, more severe crashes, and certain types of crashes (such as accelerating on an exit-ramp) than previously reported. FAC ¶¶ 204-05, 217-19. Plaintiffs allege that Musk's recent statements indicate that ADT is not yet safer than humans (e.g., Musk would be “shocked if we do not achieve full self-driving safer than a human this year,” and after the Class Period that “I think we'll be better than human by the end of this year,” FAC ¶ 188). Plaintiffs allege that various articles show that Autopilot and self-driving technology led to crashes in Teslas. FAC ¶¶ 191-203. For example, a June 10, 2023, Washington Post article (from after the Class Period) indicates that Tesla's autopilot had “far more” crashes than previously reported and that a NHTSA Senior Safety Advisor commented that “Tesla is having more severe - and fatal - crashes than people in a normal data set.” FAC ¶ 204.
Plaintiffs also detail the large gap between Tesla's current autonomous driving technology and what is required to achieve a Level 4-5 system. FAC ¶¶ 260-302.
Defendants argue that articles from after the Class Period about general safety issues do not show that the Safety Statements were false when made. Mot. at 20. In order to satisfy the PSLRA's “exacting requirements for pleading ‘falsity,” a plaintiff must plead “specific facts” indicating why a statement is false. Metzler, 540 F.3d at 1070. Plaintiffs allege that there were safety issues with the technology, “people looked away from the road 18% more often” with autopilot, FAC ¶ 197, and autopilot features caused at least ten car accidents during an unspecified period, FAC ¶¶ 204-05. However, Plaintiffs fail to provide “contemporaneous reports or data” showing that the statement was false or misleading when made. Nursing Home Pension Fund Local 144 v. Oracle Corp., 380 F.3d 1226, 1230 (9th Cir. 2004). Even if this data existed at the time the statements were made, the fact that there were safety issues with the technology does not suggest that it was false or misleading to assert that the technology was safer than regular human driving. See Xiaojiao Lu v. Align Tech., Inc., 417 F.Supp.3d 1266, 1275 (N.D. Cal. 2019) (dismissing claims where plaintiff “fail[ed] to connect the statements with factual allegations that show how the statements were false or misleading when made”). For example, Plaintiffs allege that the NTSB found that Tesla's autopilot was a “probable cause” of a deadly March 2018 crash and an August 2019 crash. FAC ¶ 206. However, such findings do not contradict statements that Autopilot cut crashes in half or that using it was safer than not using it. Accordingly, Plaintiffs have not alleged that the Safety Statements were false or misleading, and the Court dismisses with leave to amend the claims based on Statements 4, 7, 13, 15, 21, 24, 26, 27, and 28 (FAC ¶¶ 319, 325, 337, 341, 353, 359, 363, 365, 367).
Indeed, Statement 24 states that Autopilot “cuts crashes in half” but that “[d]oesn't mean there are no crashes . . . [.]” Statement 24 (FAC ¶ 359).
b. Capability Statements
Defendants next argue that Plaintiffs have not alleged that the Capability Statements about the FSDC technology, Statements 6, 16, 17, 18, 20, 22, 23, 25, and 29 (FAC ¶¶ 323, 343, 345, 347, 351, 355, 357, 361, 369), were false or misleading. Mot. at 20-21. Musk stated that the Full Self-Driving software is “almost getting to a point where I can go from my house to work with no interventions” (FAC ¶ 343), “[t]he latest build is capable of zero intervention drives” (FAC ¶ 345), the “car should still be able to drive, just like a person. That is the system that we are developing and aiming to release this year” (FAC ¶ 347), Musk drives the alpha build of the latest fully self-driving software and “many times I can go through a very complicated series of intersections and narrow roads, without ever touching any of the controls” (FAC ¶ 351), it is “very common for me to have no interventions on drives that I do, including drives to a place that I've never been to” (FAC ¶ 355), and “I think we'll also have an update next year to be able to show regulators that the car is safer, much safer than the average human” (FAC ¶ 369); see also FAC ¶¶ 323, 357, 361. Plaintiffs allege that these statements are materially misleading because numerous safety issues demonstrate that Tesla did not possess Level 4-5 autonomy, Tesla disclosed to regulators that it remained “firmly” at Level 2, the confidential witness allegations show that Tesla's ADT had not reached Level 4-5 autonomy, and Tesla faced functionality and dependability problems. Opp at 13 (citing FAC ¶¶ 222-34, 236-47, 260-84). However, “the reasons Plaintiffs offer as to why the statements are false or misleading bear no connection” to the substance of the Capability Statements, and do not allege that the software was not capable of no intervention drives. See Jui-Yang Hong v. Extreme Networks, Inc., 2017 WL 1508991, at *15 (N.D. Cal. Apr. 27, 2017). The only factual allegations that are connected to the Capability Statements are CW-2's statements that it was “absolutely” known within the autopilot department that Musk's statements about the viability of autopilot and FSD technologies were “exaggerations.” FAC ¶¶ 243-44. However, such allegations are too vague to show that Musk's statements were false or misleading. See Intuitive Surgical, 759 F.3d at 1063. Accordingly, the Court dismisses the claims based on the Capability Statements.
Confidential witnesses are identified in the FAC as CW-1, CW-2, CW-3, and CW-4. FAC ¶ 235 n.8.
2. Strong Inference of Scienter
Defendants also challenge the sufficiency of Plaintiffs' allegations with respect to scienter. Scienter is the intent to deceive, manipulate or defraud. Tellabs, 551 U.S. at 319. To establish scienter, the complaint must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u- 4(b)(2)(A). The required state of mind is “a mental state that not only covers ‘intent to deceive, manipulate, or defraud,' but also ‘deliberate recklessness.' ” Schueneman v. Arena Pharms., Inc., 840 F.3d 698, 705 (9th Cir. 2016) (internal citations omitted). Deliberate recklessness is “ ‘an extreme departure from the standards of ordinary care,' which ‘presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.' ” In re Alphabet, 1 F. 4th at 701 (emphasis in original) (quoting Nguyen v. Endologix, Inc., 962 F.3d 405, 414 (9th Cir. 2020)).
The “strong inference” required by the PSLRA “must be more than merely ‘reasonable' or ‘permissible'-it must be cogent and compelling, thus strong in light of other explanations.” Tellabs, 551 U.S. at 324. “Facts showing mere recklessness or a motive to commit fraud and opportunity to do so provide some reasonable inference of intent, but are not sufficient to establish a strong inference of deliberate recklessness.” In re VeriFone Holdings, 704 F.3d at 701. “A court must compare the malicious and innocent inferences cognizable from the facts pled in the complaint, and only allow the complaint to survive a motion to dismiss if the malicious inference is at least as compelling as any opposing innocent inference.” Zucco Partners, 552 F.3d at 991 (9th Cir. 2009); see Nguyen, 962 F.3d at 415 (9th Cir. 2020). In evaluating whether a complaint satisfies the “strong inference” requirement, courts must consider the allegations and other relevant material “holistically,” not “scrutinized in isolation.” In re VeriFone Holdings, 704 F.3d at 701-02 (citing Tellabs, 551 U.S. at 323, 326). If no individual allegation is sufficient, the court “conducts a ‘holistic' review to determine whether the allegations combine to give rise to a strong inference of scienter.” Glazer, 63 F.4th at 766 (citation omitted). Because scienter is a subjective inquiry, “the ultimate question is whether the defendant knew his or her statements were false, or was consciously reckless as to their truth or falsity.” Gebhart v. S.E.C., 595 F.3d 1034, 1042 (9th Cir. 2010).
Plaintiffs allege scienter based on: (1) confidential witness accounts; (2) Musk's access to data about Tesla's Autonomous Driving Technology; (3) the core operations doctrine; (4) Musk's motives to inflate the stock price; and (5) Musk's history of fraud. The Court addresses each below. At their core, the allegations do not allege a strong inference of scienter because they fail to show that Defendants knew the statements were false, or indeed that there existed contemporaneous data about the capability and safety of the technology at the time the statements were made.
a. Confidential Witness Accounts
Plaintiffs allege that confidential witness statements raise a strong inference of scienter. “Where the plaintiff relies upon statements by confidential witnesses, the complaint must also pass two additional hurdles.” In re Quality Sys., 865 F.3d at 1144. “First, the confidential witnesses whose statements are introduced to establish scienter must be described with sufficient particularity to establish their reliability and personal knowledge.” Zucco Partners, 552 F.3d at 995. “Second, those statements which are reported by confidential witnesses with sufficient reliability and personal knowledge must themselves be indicative of scienter.” Id. Defendants argue that none of the confidential witnesses offer sufficiently specific testimony to raise a strong inference of scienter. Mot. at 24-26. The Court addresses the confidential witness allegations, and whether they support an inference of scienter.
CW-1 only worked for Tesla for six months, and thus did not have “personal knowledge” about the FSDC technology for the majority of the Class Period. FAC ¶ 236. CW-1 alleges that “accident and safety data was reviewed by Tesla” and full-self driving was in beta and faced errors such as phantom braking. FAC ¶¶ 237, 240-41. While these allegations show that Tesla faced issues in its development of the technology, they are not “indicative of scienter,” see Zucco Partners, 552 F.3d at 995, as they do not show that Defendants knew their statements about auto safety were false or misleading, see Gebhart, 595 F.3d at 1042.
CW-2 alleges that it was “absolutely” known within Tesla's “autopilot department” that Musk's statements about the viability of FSD and autopilot were “exaggerations,” and “everyone” knew the vehicles were not close to being full self-driving. FAC ¶ 244. CW-2 does not explain how he knew such information. Indeed, CW-2 does not explain how or why “everyone” knew that the technology was not close to full self-driving. Such “unreliable hearsay and . . . conclusory assertions of scienter” are too lacking in factual allegations to support an inference of scienter. See Zucco Partners, 552 F.3d at 996.
CW-3 states that there were issues with the FSDC prototypes that needed to be worked out, and Musk received regular reports and updates regarding the engineering team's work. FAC ¶¶ 248-53. Defendants argue that there is no detail about what the reports reflected, who attended the meetings, when they occurred, or what was said. Mot. at 25. The Court agrees that without more specificity, it cannot find that Musk's receipt of unspecified reports and updates from the engineering team are indicative of a strong inference of scienter. See In re Silicon Storage Tech., Inc., 2006 WL 648683, at *11-12 (N.D. Cal. Mar. 10, 2006) (no scienter where plaintiffs failed to cite specific report, mention date or contents of report, or allege sources of information on report); Intuitive Surgical, 759 F.3d at 1063 (witness statements lacked foundation where they did “not detail the actual contents of the reports the executives purportedly references or had access to”). CW-3 also stated that “if there was a major regression regarding safety, operations, or driver comfort,” it would have been reported to certain individuals who reported to Musk. FAC ¶ 255. However, CW-3 does not allege that any such regression occurred. “[N]egative characterizations of reports relied on by insiders, without specific reference to the contents of those reports, are insufficient to meet the heightened pleading requirements of the PSLRA.” Intuitive Surgical, 759 F.3d at 1062-63 (rejecting “impressions of witnesses who lacked direct access to the executives”) (quoting Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1036 (9th Cir. 2002)). Accordingly, these vague allegations do not support scienter.
b. Musk's Access to Information
Plaintiffs next argue that Musk's access to information about Tesla's autonomous driving technology establishes a strong inference of scienter. Opp. at 24-25; see FAC ¶¶ 252, 256, 40506, 419. While “detail-oriented management style” supports scienter, Nursing Home Pension Fund, 380 F.3d at 1234 (statements that “I love getting involved in every detail of the business” and that executive monitored portions of the global database supported scienter), Plaintiffs fail to connect Musk's hands-on management with any information that he allegedly learned rendering his statements false or misleading. For example, Plaintiffs allege that Tesla employees declined to test the ADT because they did not want to be “test dummies” and that Tesla had access to video feeds from its vehicles which it used to track problems (FAC ¶¶ 241, 248-56, 414, 416). However, there is no indication that Musk viewed these videos or that they rendered his statements false or misleading.
Plaintiffs also repeatedly reference the DMV letter that Tesla was not developing City Streets above a Level 2 autonomy and that Musk's Level 5 tweet did not match engineering reality (but that Tesla could not say whether it was possible by the end of the year). These allegations are not enough to rise to the level of a strong inference of scienter because Plaintiffs have not alleged that statements about City Streets technology applied to all of Tesla's ADT, and Tesla was equivocal in whether it could achieve Level 5 autonomy by the end of the year. FAC ¶¶ 28-29. See Wochos, 985 F.3d at 1194 (statements from former Tesla employees who told Musk that they believed Tesla's goal of producing 5,000 Model 3s per week by the end of 2017 was impossible did not show that Tesla or Musk “shared,” “adopted,” or “accepted those employees' views that the goal was impossible”). In addition, as discussed above, allegations that “everyone” knew about problems with the technology and that its viability was an “exaggeration” (FAC ¶¶ 243-44, 415) are not “particularized allegations” showing that Musk knew that Tesla could not achieve its goals in the timeline it projected. See City of Dearborn Heights Act 345 Police & Fire Ret. Syst. v. Align Tech., 856 F.3d 605, 620 (9th Cir. 2017). Accordingly, Plaintiffs have not raised a strong inference of scienter.
Plaintiffs also point to an expert analysis showing that Tesla still faces many obstacles to releasing Level 4-5 ADT. Opp. at 9 (citing FAC ¶¶ 260-302). However, Plaintiffs do not indicate that such information was learned by Tesla or Musk at the time the statements were made.
c. Core Business
Plaintiffs also contend that Tesla's autonomous driving technology was core to its business, raising a strong inference of scienter. The “core operations” doctrine allows the knowledge of certain facts that are critical to a business's “core operations” to be attributed to a company's key officers. Webb v. Solarcity Corp., 884 F.3d 844, 854 (9th Cir. 2018). “Proof under this theory is not easy. A plaintiff must produce either specific admissions by one or more corporate executives of detailed involvement in the minutia of a company's operations, such as data monitoring . . . or witness accounts demonstrating that executives had actual involvement in creating false reports.” Intuitive Surgical, 759 F.3d at 1062. “[C]orporate management's general awareness of the day-to-day workings of the company's business does not establish scienter-at least absent some additional allegation of specific information conveyed to management and related to the fraud.” Metzler, 540 F.3d at 1068. Musk's admitted importance of the self-driving technology (describing self-driving technology as the “difference between Tesla being worth a lot of money or basically worth zero,” FAC ¶ 56) coupled with Musk's involvement in the minutiae of Tesla's ADT supports an inference of Musk's awareness of relevant facts. See S. Ferry LP, No. 2 v. Killinger, 542 F.3d 776, 785 (9th Cir. 2008). As with the previous scienter arguments, however, Plaintiffs do not show what information showed that Musk knew that his predictions about the timeline of FSD development, its capabilities, or its safety were false or misleading.
d. Motive Allegations from Stock Sales
Plaintiffs also highlight Musk's financial motives to mislead investors. Although “evidence of a personal profit motive on the part of officers and directors . . . is insufficient to raise a strong inference of scienter,” Glazer Cap. Mgmt., LP v. Magistri, 549 F.3d 736, 748 (9th Cir. 2008), “personal financial gain may weigh heavily in favor of scienter.” Tellabs, 551 U.S. at 325. “[S]tock sales by corporate insiders [are] suspicious only when [they are] dramatically out of line with prior trading practices at times calculated to maximize the personal benefit from undisclosed inside information.” Dearborn Heights, 856 F.3d at 621 (internal quotation marks and citation omitted). When analyzing insider trading, courts look to “(1) the amount and percentage of shares sold by insiders; (2) the timing of the sales; and (3) whether the sales were consistent with the insider's prior trading history.” Id. (citations omitted).
Here, Plaintiffs allege that during the Class Period, Musk sold over 141 million Tesla shares, collecting nearly $34 billion in profit. FAC ¶¶ 33, 425-26. These sales were 239% greater in volume, and 6,345% greater in value, than Musk's trading over the same timespan prior to the Class Period. FAC ¶¶ 430-31. The average price of his sales was 70% higher than the Class Period average, and Musk sold 44.8% of the stock he had available for sale. FAC ¶¶ 429, 432-33. The fact that Musk sold a substantial number (141 million) and percentage (44.8%) of shares, and that the sales were not consistent with prior trading history, supports an inference of scienter. See Dearborn Heights, 856 F.3d at 621; cf. Intuitive Surgical, 759 F.3d 1063-64 (significant profits did not raise inference of scienter because the complaint did not contain allegations regarding the defendants' prior trading history).
However, as Defendants emphasize, the stock sales (over a four-year period) were not linked to any purported misstatement or corrective disclosure, and the timing of sales undermines any inference of scienter. Mot. at 28-29. For example, Plaintiffs do not allege that Musk sold any stocks until more than two years after the first alleged misstatement, and he sold his first stocks after the two alleged corrective disclosures. See ECF 57-1, FAC ¶¶ 313, 315 (first alleged misstatements in February of 2019 and first alleged stock sale in November of 2021). This timing does not support an inference of scienter. See Hoang, et al., v. Contextlogic, Inc., et al., 2023 WL 6536162, at *26 (N.D. Cal. March 10, 2023) (“[s]ales after corrective disclosures do not support an inference of scienter.”). Plaintiffs do not respond to this argument apart from reiterating that the sales were “suspiciously timed” because the average price of the sales over the four-year Class Period was 70% higher than the Class Period average. Opp. at 29 (citing FAC ¶¶ 432-33). Given the timing of the sales, any inference of scienter from the higher sale of stocks is not a strong inference and Plaintiffs have failed to carry their burden. See In re Hansen Natural Corp. Sec. Litig., 527 F.Supp.2d 1142, 1160 (C.D. Cal. 2007) (“Because Plaintiff has failed to meet his burden of demonstrating that the stock sales are related to the alleged misstatements, he has failed to demonstrate a strong inference of scienter based upon” the sales).
e. History of Fraud
Plaintiffs also allege that Musk has a history of making misrepresentations to investors with scienter, and that staged videos from 2014 and 2016 support an inference of Musk's scienter. A summary judgment order in a different case held that Musk's 2018 tweet about securing funding for Tesla was misleading and made with scienter. FAC ¶ 423 (citing In re Tesla, Inc., Sec. Litig., No. 3:18-cv-04865-EMC (N.D. Cal. Apr. 1, 2022), ECF No. 387). A 2016 video shows a Tesla driving itself while a driver sat with their hands on their lap and the video stated that the person in the driver's seat “is only there for legal reasons. He is not doing anything. The car is driving itself.” FAC ¶ 69. In January 2023, it came to light that Musk was directly involved in creating the 2016 video, which was staged using 3D mapping on a predetermined route. FAC ¶ 69. Plaintiffs offer no authority to explain why such allegations are relevant here or why a video from before the Class Period is relevant. Thus, the summary judgment order and videos cannot support a strong inference of scienter.
f. Holistic Review
Finally, the Court holistically reviews the scienter allegations, as required by Tellabs, 551 U.S. at 322-23. Plaintiffs' allegations show that Tesla's vehicles face numerous limitations that they need to overcome to achieve full self-driving and that Defendants were generally aware that various issues existed. FAC ¶¶ 260-84. However, the FAC lacks allegations describing with particularity the documents to which Musk had access or the documents he received indicating that the software was not capable of no-intervention drives, that full self-driving was not possible within the projected timeframe, or that autopilot was not safer than humans.
In Nguyen v. Endologix, Inc., 962 F.3d 405 (9th Cir. 2020), the Ninth Circuit held that plaintiffs' theory that defendants promised FDA approval that they knew would not be possible because of migration problems “does not make a whole lot of sense,” and relies on the “supposition that defendants would rather keep the stock price high for a time and then face the inevitable fallout” when the migration problem was revealed. Id. at 415. The Court reasoned that if defendants had “sought to profit from this scheme in the interim, such as by selling off their stock or selling the company at a premium, the theory might have more legs,” but there were no such factual allegations. Id. Here, Plaintiffs' profit motive theory makes little sense given that there are no allegations that Musk sold significant amounts of stock right after a purported misstatement, and in fact the allegations show that he sold stock months after corrective disclosures. Moreover, like in Nguyen, Plaintiffs' theory that Defendants knew that the software was not safe, not capable of what they alleged, and would not be achieved in the projected timeframe would have inevitably been revealed when Defendants missed their development timeline. Accordingly, the Court finds that Plaintiffs have failed to allege a strong inference of scienter and the Court dismisses the Section 10(b) claim.
Because the Court finds that the Section 10(b) claims fail for lack of scienter, it does not address the parties' arguments regarding loss causation.
III. SECTION 11 CLAIM UNDER ITEMS 105 AND 303
Plaintiffs also bring a claim under Section 11 for failure to comply with Items 303 and 105. Defendants moves to dismiss this claim. Item 303 requires disclosure of any known material “trends or uncertainties,” 17 C.F.R. § 229.303 (“Item 303”). Item 105 requires affirmative disclosure of the “material factors” that made investment “risky,” 17 C.F.R. § 229.105 (“Item 105”). See Steckman v. Hart Brewing, Inc., 143 F.3d 1293, 1296-97 (9th Cir. 1998) (an Item 303 violation automatically states a claim for a Section 11 violation); Sundaram v. Freshworks Inc., 2023 WL 6390622, at *7 (N.D. Cal. Sept. 28, 2023) (citing cases) (treating violations of Items 105 and 303 as a violation of Section 11).
“To state a Section 11 claim for failing to adhere to Item 303, Plaintiffs must plausibly allege: (1) the existence of a trend or uncertainty; (2) known to management; (3) that is reasonably likely to have a material effect on the registrant's financial condition or results of operation.” Sundaram, 2023 WL 6390622, at *7 (citing Steckman, 143 F.3d at 1296-97); see 17 C.F.R. § 229.303(b)(2)(ii) (requiring disclosure of any “known trends or uncertainties that have had or that are reasonably likely to have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations”). Plaintiffs allege that a 2023 article claimed that Tesla's Autopilot was involved in more crashes than previously reported and allege that Teslas were involved in a handful of crashes over a four-year period. FAC ¶¶ 204-05. However, Plaintiffs fail to allege that the safety issues represented a pattern or “trend” requiring disclosure as opposed to isolated incidents. See In re Restoration Robotics, Inc. Sec. Litig., 417 F.Supp.3d 1242, 1263 (N.D. Cal. 2019) (“A trend under Item 303 requires an ‘observed pattern that accurately reflects persistent conditions of the particular registrant's business environment.' ”) (citation omitted). Accordingly, Plaintiffs' Item 303 claim fails.
Defendants argue that Plaintiffs' Item 105 claim fails for the same reason the Item 303 claim fails - that Tesla adequately disclosed the risks it faced. Mot. at 22. Item 105 requires a “discussion of the material factors that make an investment in the registrant or offering speculative or risky.” 17 C.F.R. § 229.105(a). A company's risk disclosures may be misleading where the “risk factors” reported have already materialized. See Bos. Ret. Sys. v. Uber Techs., Inc., 2020 WL 4569846, at *6 (N.D. Cal. Aug. 7, 2020) (company's financial affairs were materially different than what it represented in its Registration Statement).
Here, the Form 10-K disclosures explain that Tesla vehicles “have been involved and we expect in the future will be involved in accidents resulting in death or personal injury, and such accidents where Autopilot or FSD features are engaged are the subject of significant public attention. We have experienced and we expect to continue to face claims arising from or related to misuse or claimed failures of such new technologies that we are pioneering.” ECF 62-8 (Ex. E) at 9. Plaintiffs argue that the “boilerplate” risk disclosures about the possibility of crashes and regulatory action did not apprise investors of risks. Opp. at 22. However, this language warned investors of the risks Tesla faced, and this type of language has been found in similar cases to constitute sufficient disclosure. See Golubowski v. Robinhood Mkts., 2023 WL 1927616 at *8 (N.D. Cal. Feb. 10, 2023); see also Sundaram, 2023 WL 6390622, at *9 (risk disclosures sufficiently warned that the company may experience deterioration in revenue growth, listing potential risks such as the COVID-19 pandemic, level of product demand, errors in forecasting product demand, and a reduction in customer renewal rates). Plaintiffs have not alleged facts that plausibly demonstrate that Tesla's car safety was materially different from what was represented in its risk disclosures. Accordingly, Plaintiffs have not plausibly alleged an Item 105 violation.
IV. RULE 10B-5(A), (C) CLAIM AND SECTION 20(A)
Plaintiffs also allege a scheme or course of conduct liability against Defendants under Ruel 10-5(a) and (c). FAC ¶¶ 475-83; see 17 C.F.R. § 240.10b-5(a), (c) (declaring it unlawful “[t]o employ any device, scheme, or artifice to defraud” or “[t]o engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security”). Defendants state that they are not liable for any such violation as the theory rests on the same facts and purported misstatements as the Rule 10b-5(b) claim and fails for the same reasons. Mot. at 11 n.3. A scheme liability claim can depend on misstatements that also violate Rule 10b-5(b). See Lorenzo v. Sec. & Exch. Comm'n, 587 U.S. 71, 80 (2019) (explaining that subsection (b) and subsections (a) and (c) of Rule 10b-5 do not govern “mutually exclusive[ ] spheres of conduct”).
Here, Plaintiffs do not adequately allege a violation of subsections (a) and (c) under either the Lorenzo dissemination of fraud theory or a scheme liability theory. Under Lorenzo, Plaintiffs must allege that Defendants disseminated “false or misleading information to prospective investors with the intent to defraud.” 587 U.S. at 79. For the same reasons discussed above, Plaintiffs have not adequately alleged any false or misleading statements or scienter, and thus may not proceed under that theory. See Sneed v. AcelRx Pharms., Inc., 2022 WL 4544721, at *6 (N.D. Cal. Sept. 28, 2022). Under scheme liability, which Plaintiffs seem to be pursuing, see FAC ¶ 477 (“Defendants engaged in a fraudulent scheme, practice, or course of business . . .”), Plaintiffs argue that they are focusing on Defendants' “course of business” in which they persuaded investors that Tesla was close to releasing fully autonomous cars based on the collective totality of the false and misleading statements. Opp. at 23; FAC ¶¶ 72-74. However, Plaintiffs fail to allege sufficient facts showing that Defendants engaged in such a fraudulent scheme to mislead investors. See Kang v. PayPal Holdings, Inc., 620 F.Supp.3d 884, 902 (N.D. Cal. 2022). Accordingly, the Court dismisses this claim with leave to amend.
V. SECTION 20(A) CLAIM
Plaintiffs bring a claim for a violation of Section 20(a) of the Exchange Act against Musk. FAC ¶¶ 484-490. A Section 20(a) claim requires an underlying violation of securities law. In re Rigel Pharms., Inc. Sec. Litig., 697 F.3d 869, 886 (9th Cir. 2012). Because Plaintiffs failed to adequately plead a violation under Section 10(b), the Section 20(a) claim also fails. See id.
Defendants only raise the arguments about Section 20(a) in a footnote. Mot. at 11 n.3. The Court does typically not address arguments relegated to footnotes. See Est. of Saunders, 745 F.3d at 962 n.8.
CONCLUSION
For the foregoing reasons, the Court GRANTS Defendants' motion to dismiss with leave to amend. Any amended complaint must be filed by October 30, 2024. No additional parties or claims may be added without leave of Court or stipulation of Defendants.
IT IS SO ORDERED.