Tesla Leaders Free for Now of Shareholder ‘Toxic Workplace’ Suit

Tesla Inc. investors can’t proceed with a lawsuit against CEO Elon Musk and other directors and officers alleging they fostered a “toxic workplace culture,” a federal court has ruled.

The shareholders, suing on behalf of Tesla, failed to show that they were excused from first making a demand that the company’s board take legal action, Judge David Alan Ezra said in an opinion docketed Monday in the US District Court for the Western District of Texas. The dismissal on those grounds wraps in a conclusion that at least some of the defendants aren’t likely liable.

But the investors may attempt to fix the deficiencies in a new version of the complaint, Ezra said.

Tesla has been embroiled in legal battles with California regulators. They said in April that the company was obstructing an investigation into alleged harassment and discrimination and are separately pursuing a racial harassment lawsuit. Tesla has dealt with many worker discrimination suits with varying results over the last few years. Some employees have been forced into arbitration, while others have won historic damages. A Black former assembly line staffer asked in June to add more than 200 other workers to his 2017 lawsuit.

In the derivative suit, the investors said company directors and executives caused financial and reputational harm to the automaker by allowing and even encouraging a “toxic workplace culture grounded in racist and sexist abuse and discrimination.”

The work environment issues exposed the company to significant liability risk, stockholders Solomon Chau and Alvin Janklow said in a consolidated complaint.

The defendants asked for dismissal on the basis that the investors hadn’t asked the board to act and hadn’t shown that doing so would have been futile. In July, Magistrate Judge Dustin M. Howell agreed with them and recommended dismissal.

Ezra differed from Howell on some points but dismissed the claims.

To determine whether a demand would be futile, courts consider whether each director “received a material personal benefit from the alleged misconduct"; “faces a substantial likelihood of liability on any of the claims,” or lacks independence from a person who received such a benefit or faces liability, Ezra said. Futility is found if the answer is “yes” for more than half of the board, he said.

Howell was correct that the majority of the board doesn’t face liability for their oversight of corporate activities or their role in issuing a proxy statement, Ezra said.

On the issue of interest and independence, Ezra said fewer directors should be counted than in Howell’s report because some had left the board before the suit was filed. But the investors’ argument that Musk’s dominance of the board affected other directors’ independence still failed because they hadn’t shown Musk’s own likely liability, he said.

Robbins LLP and the Kendall Law Group, PLLC represented the investors. Ewell, Brown, Blanke & Knight LLP and Freshfields Bruckhaus Deringer US LLP represented the defendants.

The case is In re Tesla Inc. S’holder Derivative Litig., 2023 BL 326974, W.D. Tex., No. 1:22-CV-00592, 9/15/23.