JPMorgan Chase Bank, National Association, London Branch v. Tesla, Inc.

Background

JPMorgan held warrants issued by Tesla under agreements executed in 2014. The warrants gave JPMorgan the right to purchase Tesla shares at a designated strike price during periods ending in June and July 2021. The original strike price was $560.6388. The agreements allowed JPMorgan, acting as the calculation agent, to adjust the warrants’ terms after an “Announcement Event,” including an announcement concerning a possible merger, tender offer, or other strategic transaction. The agreements did not specify a particular adjustment method, but required JPMorgan’s determinations to be made in good faith and in a commercially reasonable manner.

In August 2018, Elon Musk and Tesla made public statements about possibly taking Tesla private. JPMorgan treated those statements as an Announcement Event and reduced the strike price to $424.66. After Musk later announced that Tesla would remain public, JPMorgan increased the strike price to $484.35. The warrants expired in 2021 when Tesla’s stock price exceeded the adjusted strike price. Tesla provided shares calculated using the original strike price, but refused to provide the additional shares JPMorgan claimed were owed based on the $484.35 strike price. JPMorgan alleged that the additional shares had a market value of approximately $162.2 million.

JPMorgan sued Tesla for breach of contract. Tesla asserted its own breach-of-contract counterclaim and sought a declaration that JPMorgan breached the warrant agreements. Tesla alleged, among other things, that JPMorgan acted in bad faith and in a commercially unreasonable way when it adjusted the strike price.

JPMorgan’s Motion

JPMorgan moved for judgment on the pleadings under Federal Rule of Civil Procedure 12(c). This procedure permits judgment when the pleadings show that no material factual issue remains and the moving party is entitled to judgment as a matter of law. Because JPMorgan was the moving party, the court accepted Tesla’s well-supported factual allegations and denials as true and drew reasonable inferences in Tesla’s favor.

JPMorgan argued that it was entitled to judgment on its own contract claim and on Tesla’s counterclaims. It also asked the court, at a minimum, to decide that Musk’s statements and Tesla’s related statements constituted Announcement Events under the agreements.

Analysis

The court concluded that JPMorgan had not shown that it was entitled to judgment as a matter of law. To prevail on its own contract claim at this stage, JPMorgan would have had to establish both that the relevant statements constituted an Announcement Event and that its strike-price adjustments were made in good faith and in a commercially reasonable manner.

The court found that the agreements gave JPMorgan discretion to adjust the strike price, but that discretion was subject to the contractual requirements of good faith and commercial reasonableness. Under the law applied by the court, when a contract does not define those terms, commercial reasonableness is measured against the practices of the particular industry. The court characterized that inquiry as fact-intensive and stated that expert testimony would be required concerning the applicable industry standard.

The pleadings showed a dispute over JPMorgan’s methodology. JPMorgan relied on changes in Tesla’s implied volatility over selected periods before and after Musk’s August 7, 2018 statement. Tesla argued that JPMorgan used unsupported, self-serving, and selectively chosen periods; overstated the economic effect of the statements; and should have reversed or more substantially reduced the first adjustment after Tesla decided to remain public. The court held that this dispute could not be resolved on the pleadings.

The court also rejected JPMorgan’s request for partial judgment concerning whether the statements were Announcement Events. Rule 12(c) judgment may resolve an entire claim or defense, but it does not allow a court to enter judgment on only part of a claim, such as one element. The court therefore denied that request as well.

Disposition

Judge Paul G. Gardephe denied JPMorgan’s motion for judgment on the pleadings. The denial covered JPMorgan’s breach-of-contract claim, Tesla’s breach-of-contract counterclaim and declaratory-judgment request, and JPMorgan’s request for partial judgment on the Announcement Event issue. The court did not resolve the parties’ ultimate contract claims.