Background

In August 2018, Elon Musk tweeted to his then over 22 million Twitter followers that he could take Tesla private at $420 per share (a substantial premium to its trading price at the time), that funding for the transaction had been secured, and that the only remaining uncertainty was a shareholder vote. The tweet allegedly was false: Musk had not discussed specific deal terms with any potential financing partners, and he knew the potential transaction was uncertain and subject to numerous contingencies. His tweets caused Tesla's stock price to jump by over six percent and led to significant market disruption.

As a result of Musk’s tweet, the SEC entered into consent judgments with Musk and Tesla. The consent judgments required Musk and Tesla to comply with a series of undertakings, one of which required Musk to obtain pre-approval from Tesla’s counsel for any written communications that contain, or reasonably could contain, information material to Tesla or its shareholders (at 1-2).

On November 6, 2021, Musk tweeted several times about his potential sale of a large portion of his holdings in Tesla without obtaining pre-approval for the tweets. As a result, the SEC served subpoenas on Musk and Tesla seeking, among other things, information about the tweets and the process that was employed before they were disseminated to the public (at 3-4).

In United States Sec. & Exch. Comm'n v. Musk, No. 18-cv-8865 (LJL) (S.D. N.Y. 2022), Musk moved for (among other relief) an order terminating the consent order (at 5). The Court declined to grant the relief.

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Musk’s Position

Musk argued that the consent decree should be terminated because: (at 15-16)

1. it intrudes on Musk's First Amendment right to be free of prior restraints;
2. it has been misused to launch endless, boundless investigation of his speech; and
3. it was extracted from Musk through the exercise of economic duress.

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The Law

The United States District Court for the Southern District of New York ruled that “[n]one of the arguments hold water.”

The Court noted that Fed. R. Civ. P. 60(b)(5) permits a court to relieve a party from a final judgment if “applying it prospectively is no longer equitable.” It does not permit a court to relieve a party of the burden of a consent decree on the theory that it is no longer convenient to live with the terms of a consent decree. Accordingly, a party seeking modification of a consent decree bears the burden of establishing that a significant change in circumstances warrants revision of the decree (at 14).

The party seeking relief must establish either a significant change in factual conditions or in law such as (at 15):

1. changed factual conditions that make compliance with the decree substantially more onerous;
2. a decree which proves to be unworkable because of unforeseen obstacles; or,
3. a circumstance in which enforcement of the decree without modification would be detrimental to the public interest.

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Application of the Law to the Consent Order

1. Free Speech

The Court held that Musk’s free speech rights do not permit him to engage in speech that is or could be considered fraudulent or otherwise violative of the securities laws. Therefore, the consent decree does not impose obligations that have become impermissible under federal law. Further, the Court noted that parties may waive their First Amendment rights in consent decrees and other settlements of judicial proceedings (at 16).

2. Harassment

The Court ruled that Musk's argument that the SEC used the consent decree to harass him and to launch investigations of his speech was meritless and “particularly ironic”. The Court explained that modification should not be granted where a party relies upon events that actually were anticipated at the time it entered into a decree and explained that Musk could hardly have thought that at the time he entered the decree he would have been immune from non-public SEC investigations. The Court noted that it was unsurprising that the SEC would have some questions when Musk tweeted that he was thinking about selling ten percent of his interest in Tesla and that he planned to relinquish control over that decision to voters on a Twitter poll (at 17-18).

3. Economic Duress

The Court also rejected Musk's claim that he was the victim of economic duress. The Court appeared skeptical of Musk’s argument that, at the time he signed the consent order, Tesla was in no position to weather a fight with the SEC. However, the Court noted that even if Tesla was truly worried that engaging in protracted litigation with the SEC would be financially ruinous, that does not establish a basis for economic duress such that he could escape a consent order that he voluntarily signed (at 19).