Judge: Musk shielded by arbitration clause in Tesla contracts

Tesla CEO Elon Musk can invoke the arbitration clause in his vehicle purchase agreements even though he is being sued in his individual capacity by customers alleging his misrepresentation of the driving ranges for his electric cars, a U.S. District Court judge has ruled.

The case involves a putative class action brought by purchasers of Tesla EVs who allege members of the class have been “swindled” out of billions of dollars by Musk’s allegedly false representations about their vehicles’ driving ranges.

Instead of suing Tesla, the plaintiffs brought their claims against Musk in his individual capacity as well as a trust holding Musk’s shares of Tesla stock.

Musk moved to compel the plaintiffs to arbitrate their claims against him individually in accordance with clauses in the plaintiffs’ purchase agreements with Tesla.

In opposing the motion to compel, the plaintiffs argued that because Musk was not a party to those agreements, he could not avail himself of the contracts’ mandatory arbitration terms.

But Judge Patti B. Saris concluded that Musk “unambiguously” qualified as an “affiliate” of Tesla encompassed by the plain terms of the car manufacturer’s arbitration clauses.

“While the term ‘affiliate’ refers only to business entities in some contexts, the term is ordinarily used to mean a person or organization associated with another, often via a control-based relationship,” Saris wrote. “Under this customary definition, Musk is an affiliate of Tesla because he is the company’s CEO.”

Further, Saris found without merit the plaintiffs’ contention that language in Tesla’s customer privacy policy and purchase orders limit the definition of “affiliate” under the arbitration clauses to companies owned or controlled by Tesla.

“That description, however, is in a part of the privacy policy that explains with what other entities Telsa may share a user’s personal data,” Saris wrote. “Nothing in the privacy policy or the Order and Purchase Agreements suggests that this description of the term ‘affiliates’ provides a definition that applies to the entirely separate question of the scope of the arbitration clauses.”

The 36-page decision is Watkins v. Musk, Lawyers Weekly No. 02-318-25.

‘Frivolous’ argument?

The plaintiffs are represented by Atlanta attorneys Alexander D. Terepka and Ryan D. Watstein. Terepka declined to comment on the record.

However, in his clients’ brief opposing Musk’s motion to compel, Terepka called the defendant’s argument that he is an affiliate of Tesla entitled to the protection of its arbitration clause “frivolous.”

“It is contrary to the express definition of ‘affiliates’ in Tesla’s order agreement, a fact Musk conspicuously fails to mention in his motion,” Terepka wrote. “The agreement incorporates by reference Tesla’s privacy policy. The privacy policy, in turn, defines affiliates only as ‘[c]ompanies that are owned or controlled by Tesla, or where we have a substantial ownership interest.’ This definition of affiliates doesn’t include Musk because he is a person, not a ‘company owned by Tesla.’”

The case might have gone a different way if this case was in state court and [the defendant] was limited to arguing the agency issue.

— Jeffrey S. Morneau, Springfield

Jeffrey S. Morneau, a consumer protection lawyer in Springfield, said the case is an example of a failed effort by plaintiffs’ attorneys to make an “end-run” around an arbitration agreement.

Morneau agreed with the court’s analysis of the affiliate issue.

“It seemed like a very strong position for Elon Musk,” Morneau said.

But he added that Saris had a tougher call to make in concluding that Musk is also entitled to arbitrate the plaintiffs’ claims as an “agent” of the car manufacturer.

“The case might have gone a different way if this case was in state court and [the defendant] was limited to arguing the agency issue,” Morneau said. “A Superior Court judge, in looking at the precedent in state court decisions, may have come to a different conclusion as to whether agency principle applied here or not.”

Morneau added that the case is unique in that it involves a corporate actor with the financial resources to justify a suit against that individual rather than the company itself.

“You may have claims against individuals, but oftentimes those individuals might not have the ability to pay [an award of damages],” Morneau said. “Or you may sue an individual because the company is going under and may not have the ability to pay, but the owners or the bad actors have deep pockets and the ability to pay. Here, clearly, Tesla has the ability to pay, so it was very clear that the whole purpose of the lawsuit [against Musk] was to avoid arbitration in the first place.”

Michael C. Forrest, a consumer protection attorney in Salem, said it was significant that Saris distinguished the 1st Circuit’s 1994 decision in McCarthy v. Azure. The decision refused to allow an agent of a corporation to enforce an arbitration agreement because the agreement failed to clearly evince an intent to protect employees through arbitration.

“We do see the courts enforcing and expanding the reach of these arbitration agreements,” Forrest said. “It’s unfortunate for consumers. I think the court was thoughtful, but at the end of the day the court’s decision does limit the available remedies to individual consumers.”

Defense counsel did not respond to a request for comment.

Inflated driving ranges?

In May 2024, plaintiff Chris Watkins, 11 other individual plaintiffs, and Global Lease Group filed suit in federal court against Musk and the Elon Musk Revocable Trust.

The plaintiffs assert claims alleging violations of various consumer protection statutes in Massachusetts and other states, as well as common law claims of fraud and unjust enrichment.

According to the plaintiffs, “Musk falsely represented Tesla driving ranges, instructed that other key facts about vehicle driving ranges be withheld from consumers, took steps to manipulate vehicles’ dashboard range meters to display false driving ranges, and then, to further avoid accountability, diverted consumer complaints about their vehicles’ inability to get the displayed range.”

In particular, the plaintiffs point to social media posts in which Musk proclaimed that certain Tesla vehicles have driving ranges in excess of 300 miles per charge. According to the plaintiffs, market studies show most consumers will not consider buying an EV with a range of less than 300 miles.

But the plaintiffs claim that few if any Tesla EVs are able to travel 300 miles on a single charge under real-world driving conditions.

The plaintiffs purchased Tesla’s Model X, Model Y or Model 3 between 2018 and 2024. The purchases occurred in California, Florida, Illinois, Kentucky, Maine, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Pennsylvania and Washington.

The plaintiffs allege that their EVs’ driving ranges are “far less” than the ranges advertised by Tesla. Moreover, the plaintiffs claim that the actual driving ranges of their vehicles are far less than the range displayed on their vehicles’ dashboard meter after charging.

Arbitration clauses in the plaintiffs’ purchase agreements with Tesla state: “[Y]ou agree that any dispute arising out of or relating to any aspect of the relationship between you and Tesla will not be decided by a judge or jury but instead by a single arbitrator in an arbitration administered by the American Arbitration Association (AAA) under its Consumer Arbitration Rules. This includes claims arising before this Agreement, such as claims related to statements about our products. meter when fully charged.”

Motion to compel granted

Addressing the question as to whether Musk as non-signatory could invoke the arbitration clauses in the Tesla purchase agreements with the plaintiffs, Saris wrote that while the general rule may be that a contract cannot bind a non-party, there are exceptions.

In addition to finding that Musk qualifies as an affiliate of Tesla under the agreements in question, Saris concluded that Musk is also entitled to arbitrate the plaintiffs’ claims as an “agent” of the car manufacturer.

“Under California, Illinois, and New York law, which govern some of the named plaintiffs’ Order and Purchase Agreements, an agent may enforce his principal’s arbitration agreement when the claims against the agent concern conduct undertaken within the scope of the agency relationship,” Saris wrote.

On the other hand, Saris noted that the Supreme Judicial Court in a 2020 decision in Landry v. Transworld Systems Inc. rejected the argument that a non-signatory to an arbitration provision can enforce the provision solely based on agency status. Instead, the Landry court recognized an agent can enforce a principal’s arbitration agreement if the claim against the agent arose under the contract in question because it is an agent of a signatory.

In addition, Saris found guidance in the 2014 decision by the 1st U.S. Circuit Court of Appeals in Grand Wireless, Inc. v. Verizon Wireless, Inc. In that case, the court recognized a federal rule designed to protect the federal policy favoring arbitration as entitling an agent to the protection of their principal’s arbitration clause when the claims against them are based on their conduct as an agent.

“This case warrants application of the widely accepted rule that an employee may enforce an arbitration agreement signed by his employer when his allegedly unlawful conduct was within the scope of his employment,” Saris wrote. “While the arbitration clauses at issue here do not specifically mention ‘employees’ or ‘agents,’ they evince the parties’ intent that claims of the sort Plaintiffs assert would be subject to arbitration…. Fundamentally, Plaintiffs’ claims are all disputes with Tesla about the company’s marketing of its EVs, and they relate to the relationship between Plaintiffs and Tesla.”

Saris also pointed to the fact that Tesla’s arbitration clauses expressly encompass claims related to statements about Tesla’s products.

“Given this clear intent to require arbitration of claims relating to Tesla’s marketing of its EVs, it is illogical to think that the parties to the Order and Purchase Agreements intended for a purchaser to be able to sue whichever Tesla employee made the statement at issue,” Saris wrote.

Moreover, in granting Musk’s motion to compel arbitration, the judge pointed to the facts showing that the plaintiffs’ claims stem from conduct that falls within the scope of Musk’s employment as Tesla’s CEO.

“Here, Plaintiffs allege that Musk made misrepresentations about the driving ranges of Tesla EVs on company earnings calls and in company product announcements,” Saris wrote. “Other misrepresentations occurred on Musk’s personal X page, which Plaintiffs claim is a primary platform for Tesla marketing. And Plaintiffs describe other aspects of the allegedly fraudulent scheme that Musk took in his capacity as CEO, including directing Tesla to make misrepresentations about its EVs’ driving range and to rig its EVs’ dashboard meters to conceal the scheme. The facts underlying Plaintiffs’ claims make clear that they are suing Musk for acts he took within the scope of his employment with Tesla.”