In order to escape the wrath of the Securities and Exchange Commission in 2018, Elon Musk agreed to a settlement that required an attorney from Tesla’s compliance team look over his future Tweets. The SEC signs agreements where folks agree to never violate securities laws again every day, and while Musk had to commit his company to exercise some compliance oversight to sweeten the deal, the core of the agreement aligned with standard practice.
Musk is trying to get the entirely reasonable agreement that he entered at arm’s length to avoid enforcement tossed out. He drapes this in some new age pro-free speech anti-government argle-bargle, but people are overlooking his practical needs. The man is having so many legal staffing problems across all his companies that he can’t even commit to having a compliance person anymore!
Whatever the motivation, Musk’s outside counsel Alex Spiro of Quinn Emanuel wrote the court this week, offering the jury verdict in the recent shareholder suit absolving Musk of liability over the behavior underlying the SEC settlement. If Musk isn’t liable to the shareholders for a securities law violation, then how can he be held to an agreement he made to avoid SEC enforcement?
Given that the SEC’s interest in the consistent application of securities laws to protect the sanctity of the market differs from whether or not an individual shareholder lost money, the proper answer to the above question is “pretty easily, actually.” Remember, the jury essentially let Musk off after determining that no one should take him seriously. In fact, Spiro said at the time that the shareholder suit was the product of investors “gambling and looking for lawsuits as insurance.” But that’s exactly what the SEC exists to prevent by imposing rules on the leadership of publicly traded entities blasting out gambling opportunities that aren’t backed by reality.
But the letter makes a game effort at it anyway, deploying a curious precedent:
Now, in light of the jury’s finding that Mr. Musk’s tweets did not violate Rule 10b-5, the SEC lacks support both for the consent decree itself and for its arguments on appeal. The jury’s verdict provides further reason why the public interest in avoiding unconstitutional settlements easily subsumes the SEC’s purported stake in the consent decree.Likewise, the jury’s verdict confirms the propriety of applying the unconstitutional conditions doctrine, which prohibits deals achieved “through gimmickry, which converted a valid [settlement] into ‘an out-and-out plan of extortion,’” Dolan v. City of Tigard, 512 U.S. 374, 387 (1994) (citation omitted), to excise the unconstitutional prior restraint from the consent decree.
Now… I’m from the “City of Tigard,” so this specific Supreme Court precedent sticks in my memory a bit. The word “settlement” is in brackets because the case has nothing to do with settlement agreements. The replaced phrase is “regulation of land use” and dealt with the downtown plumbing supply store asking for a permit to develop more of its property and the city granting the request on the condition that part of that development become a public use bike path. The Supreme Court decided that a land use permit contingent upon ceding land to public use amounted to an unconstitutional taking without any nexus to the reasonable justification of limiting the expansion for drainage issues. Now… the fact that the city had every legitimate reason to deny it unless the owner ceded some land to the city for the purpose of controlling drainage, the bike path was incidental to the clearly valid drainage issue, and that granting the expansion at all amounted to some degree of compensation and no one in the record bothered to calculate the value of any of this stuff, rendering the whole opinion largely divorced from the lived reality of Tigard and just a vehicle for a right-wing Court to handcuff local governments from catering to those granola-eating, bike-riding hippies in Oregon and around the country.
But I digress.
The point is, how does this relate to a settlement agreement? Expanding takings analysis to apply to any impairment of constitutional rights, Musk is arguing that… what? The government granting the benefit of a concluding an enforcement action contingent on Musk giving up a constitutional right? THAT’S EVERY SETTLEMENT AGREEMENT EVER. Can someone plea to manslaughter and then toss the agreement if the wrongful death suit comes up short?
Giving the argument more benefit of the doubt, perhaps it’s that the specific concession to require a compliance monitor to lacked a nexus to an agreement to settle with the SEC. But “I will take steps to guarantee that I don’t violate securities laws” seems pretty directly related to “a settlement agreement over violating securities laws.”
Also, how does the verdict play into this at all? His argument seems to be that because he won the shareholder action, agreeing to a monitor is now unconstitutional, but those things aren’t related. This generous reading of Dolan would suggest that if the provision was an unconstitutional ask, it was an unconstitutional ask from jump, regardless of whether shareholders were personally damaged.
Unless the SEC defrauded a billionaire with access to sophisticated counsel, it would seem that Musk’s opportunity to get out of this settlement agreement was to never agree to it in the first place.
But I think all of us 1L Property heads appreciate Dolan getting jammed into an SEC challenge. This is why ChatGPT will never replace lawyers… AI would never come up with that.
Joe Patrice is a senior editor at Above the Law and co-host of Thinking Like A Lawyer. Feel free to email any tips, questions, or comments. Follow him on Twitter if you’re interested in law, politics, and a healthy dose of college sports news. Joe also serves as a Managing Director at RPN Executive Search.