Several months after it became clear that there have been no meaningful settlement talks between JPMorgan and Tesla in a lawsuit evolving around Elon Musk’s tweets, JPMorgan has filed a motion for judgment on the pleadings.

On July 18, 2022, JPMorgan filed a set of documents with the New York Southern District Court. The plaintiff moves for judgment in its favor on the pleadings in lawsuit accusing Tesla Inc of breach of contract.

This is a breach of contract action that JPMorgan Chase Bank, National Association, London Branch brought in response to the alleged failure by Tesla, Inc. to fulfil its contractual obligations. In 2014, JPMorgan and Tesla entered into a series of warrant transactions, under which Tesla was required to deliver either shares of its stock or cash to JPMorgan if Tesla’s share price was above the contractual strike price when the Warrants expired.

The warrant agreements permitted JPMorgan to adjust the strike price if certain public announcements were made about potential significant Tesla transactions. Two such announcements occurred in August 2018: first, when it was publicly announced that Tesla was considering going private and, second, when it was publicly announced that those plans were being abandoned.

Based on readily observable and direct market reactions to those announcements, JPMorgan made corresponding adjustments to the strike price of the Warrants. When the Warrants expired, Tesla refused to settle the Warrants in full at the adjusted strike price.

JPMorgan brought this action to compel full payment, and Tesla counterclaimed based on the same facts. By asserting a mirror-image counterclaim, Tesla assumed an obligation to plead not only what adjustments JPMorgan made, but also facts plausibly establishing that they were made in bad faith and in a commercially unreasonable manner. By failing to allege any reasons why JPMorgan’s chosen methodology was wrong, and instead relying on alternative methodologies and after-the-fact events in asserting its counterclaims, Tesla has allegedly failed to meet its pleading burden and the undisputed facts demonstrate that JPMorgan is entitled to judgment as a matter of law.

According to JPMorgan, the undisputed August 2018 going-private announcements constituted two “Announcement Events” under the unambiguous contract language. An Announcement Event is defined as a public announcement of (1) “any Merger Event or Tender Offer,” (2) “any intention to enter into a Merger Event or Tender Offer,” (3) “an intention to solicit or enter into, or to explore strategic alternatives or other similar undertaking that may include, a Merger Event or Tender Offer,” or (4) the abandonment of any such announced transaction or intention.

The announcement on August 7, 2018 that Tesla’s Chief Executive Officer and then-Chairman, Elon Musk, planned to take the company private is an Announcement Event under any of the first three definitions. Tesla admits that Mr. Musk tweeted on a designated official channel that he was “considering taking Tesla private at $420. Funding secured.”

Tesla further admits that other Tesla officers and directors publicly confirmed that Mr. Musk intended to take Tesla private and the board was exploring this strategic alternative. Consequently, an Announcement Event occurred on August 7, 2018. The announcement on August 24, 2018 that those plans were being abandoned explicitly constituted a second Announcement Event under the fourth definition.

Tesla argues that no Announcement Event occurred because going private was Mr. Musk’s suggestion that Tesla never seriously considered. That revisionist characterization is at odds with the plain language of the August 7, 2018 announcement, the market’s real-time reaction, and Tesla’s own contemporaneous statements confirming that both Mr. Musk and the company were seriously considering the proposal.

JPMorgan notes the announcement and its withdrawal 17 days later were so material to the market that the Securities and Exchange Commission immediately brought civil enforcement actions against Mr. Musk for securities fraud and against Tesla for failing to appropriately monitor Mr. Musk’s public statements; both cases quickly settled for $20 million each and injunctive relief.

Indeed, contrary to Tesla’s apparent position in this lawsuit, Mr. Musk recently moved to vacate his consent decree with the SEC because, “my August 7, 2018 tweet was written at a time when I was in fact considering taking Tesla private at $420 a share, funding was secured, and there was investor support.” Mr. Musk has made similar public statements.

Second, when an Announcement Event occurs, the contract grants JPMorgan broad discretion to make adjustments to account for the resulting economic effects on the Warrants, subject only to its duty to act in good faith and in a commercially reasonable manner. When ISDA provisions grant broad “discretion and flexibility,” as they do here, they are intended to promote the “clarity, certainty, and predictability” necessary to the efficient operation of the derivatives markets, where values can fluctuate drastically on a daily basis, and stave off the very type of second-guessing that Tesla attempts here.

There is no dispute that JPMorgan made the adjustments based on the change in the average implied volatility that occurred in the market before and after each Announcement Event. This methodology is permitted by the contract and thus per se commercially reasonable.

According to JPMorgan, Tesla’s allegations that JPMorgan designed its adjustments to obtain a windfall and was motivated by animosity toward Tesla do not conjure any material dispute of fact on these issues. Even accepting those allegations as true, which they are not, JPMorgan’s motives are irrelevant to the determination of good faith under Second Circuit precedent if JPMorgan’s actions were permitted by the contract, which they were.

JPMorgan says:

“Tesla’s griping that JPMorgan could have calculated more favorable adjustments if it had used different inputs is insufficient to show that the inputs JPMorgan used and the adjustments it made were unreasonable. If such allegations sufficed, every disappointed counterparty would be encouraged to litigate these types of adjustments, which would eviscerate the Announcement Event protection they granted to dealers like JPMorgan and make it impossible for such dealers to dynamically hedge the transactions on a daily basis”.

JPMorgan adds that Tesla should not be allowed to drag this into a years-long litigation when it cannot even plead facts plausibly alleging bad faith or unreasonableness on the part of JPMorgan.

The plaintiff concludes that Tesla is the Defaulting Party and liable for the full Early Termination Amount, plus interest and indemnification of JPMorgan’s costs and attorneys’ fees. For all of the above reasons, JPMorgan says it is entitled to judgment in its favor on all claims.