The Law Responds: How North Carolina Law Protects Consumers After Hurricane Florence

Written by Tyler Sankes

 

As Hurricane Florence continues its path along the eastern United States, a temporary law is in effect in North Carolina that aims to clean up the hurricane’s destruction. Although the statute cannot remove debris or fix powerlines, it has succeeded in affording hundreds of consumers an avenue to voice their concerns in a time of need.

The law, North Carolina General Statutes Chapter 75 Article 38, prohibits producers of goods and services to charge unreasonably excessive prices and requires violators to refund the consumer and pay up to $5,000 per violation. But before your inner curiosity questions the generality of the statute and/or its market interventionist nature, there are constraints and language that act as guideposts to insure the law is used as intended.

Timing

The statue can only be in effect for 45 days from the triggering event and cannot continue beyond the threshold unless renewed by the Governor. In North Carolina, the triggering event was not Florence’s landfall, but rather occurred when the state declared a State of Emergency on September 7th, 2018. Therefore, the law is currently projected to be in place until at least October 22, 2018.

Triggering Event

An event must take place that causes the statute to come into effect. In addition, the event is only ‘triggering’ when North Carolina declares a State of Emergency or when it causes a significant market disruption. Market disruptions, whether actual or imminent, are considered significant when goods or services that are needed by consumers as a direct result of an emergency or are used to protect one’s self or property. Some examples include natural disasters, strikes, civil disorders, war, and terrorist attacks.

Intent

The characteristic and price of the good or service, by itself, cannot show that the price gouging law was violated; consumers are required to show intent. Not only must the goods be consumed as a direct result of the emergency, but the producer must possess knowledge and intent to charge unreasonably excessive prices.

Excessive

To help determine if a producer is charging excessive prices, the law provides several characteristics that should be considered. Increases in supply cost, price compared to previous sales or local competition, greater macroeconomic forces (such as inflation or interest rates), and increased business risks are factors that may be analyzed to help determine whether a price is excessive.

Results So Far

Over 500 complaints have been received by Attorney General Josh Stein’s office. Although these are only complaints and have not been proven in a court of law, the resounding response by North Carolina citizens show that there is a need and the law is responding.


 

Sources

Christina Maxouris, There have been more than 500 reports of price gouging in North Carolina after Florence, CNN (Sep. 17, 2018).

N.C. Gen. Stat. § 75-38

Photo courtesy of AP Photo.

Understanding Securities Laws: Why Elon Musk Might Be in Hot Water after Tweeting About Taking Tesla Private

Written By Nolan Kokkoris

 

Background

On September 6, 2018, prominent short-seller Andrew Left filed a class action complaint against Tesla, Inc. and its Chief Executive Officer Elon Musk for alleged violations of Rule 10b-5 of the Securities Exchange Act of 1934 (SEA). Left claims that Musk “artificially manipulated the price of Tesla securities to damage [Tesla’s] short-sellers . . . by issuing materially false and misleading information.” Short-sellers are those who sell stocks they believe will go down in price, in order to later purchase them back at the lower price to gain a net profit. This lawsuit is the most recent development following an August 7, 2018 tweet, in which Musk announced that he was “considering taking Tesla private” once shares reached $420, and that funding to do so had been secured. Musk’s tweet caught investors off guard and led to a surge in Tesla share prices, which saw an increase of more than 13 percent by the end of the day. Ultimately, Tesla’s board of directors concluded that it would not turn Tesla into a privately-owned company. As Musk discussed in a blog post on August 24, despite his belief that there is more than enough funding to take Tesla private, the board determined, and investors agreed, that Tesla is better suited as a public company. Despite this reversal by Tesla, the company, which was already under investigation by the S.E.C., could be on the hook for the losses suffered by short-sellers in the wake of Musk’s tweet. Left estimates that Musk’s tweet cost short-sellers upwards of $1.3 billion in one day.

The Legal Standard

Rule 10b-5 creates two bases for liability in connection with the purchase or sale of any security: (1) making any untrue statement, or (2) omitting any material fact necessary to keep a statement from becoming misleading. Actions under either of these avenues of liability require plaintiffs to establish that the defendant made the false or misleading statement either consciously or recklessly. In applying Rule 10b-5, courts have held that companies may be liable for statements of opinion by top corporate officials, but only if they are made without a reasonable basis.

However, the law differentiates between different types of statements. Where liability arises out of a forward-looking statement, courts look at whether there was actual knowledge that the statement was false or misleading. Under certain circumstances, section 230.175 of the SEA gives “safe harbor” to forward-looking statements and protects issuers of such statements from incurring liability. As defined by statute, forward-looking statements may include statements of management’s plans and objectives for future operations, as well projections of capital structure. Capital structure is most frequently understood as “the mix of debt and equity by which a business finances its operations” and includes both short-term and long-term debts, as well as capital stocks. Under these circumstances, plaintiffs bear a greater burden of proof and can only prevail by showing that the forward-looking statement “was made or reaffirmed without a reasonable basis or was disclosed other than in good faith.”

Finally, if a defendant makes a statement that was reasonable at the time it was made, but the statement is later proven to be misleading after new factual developments, the defendant can still avoid 10b-5 liability by correcting the previous statement. Under these circumstances, the defendant has a duty to correct their previous statement in a timely manner, preferably through the same medium through which the initial error was disseminated.

What Happens Next

A major focus of the class action suit against Tesla will likely be whether Elon Musk knew his statements were false or made such statements with a highly reckless disregard for the potential that they were untrue or misleading. Because this determination requires more than mere conclusions of law, Left must include a detailed factual record which indicates Musk’s statement of opinion was made without a reasonable basis or in bad faith. The complaint provides detailed allegations that Musk knew that he did not have the funds to take Tesla private, as well as his possible bad faith intentions for making such an announcement. Although Musk has clashed with short-sellers in the past, and in one instance sent a hedge fund manager shorts as a consolation for the firm’s losses in betting against Tesla, Left is still likely to face an evidentiary hurdle in demonstrating that this particular tweet by Musk was motivated by bad faith.

The safe harbor protection given to forward-looking statements will likely provide another challenge for Left’s case. The complaint makes alternate arguments on the issue of safe harbor—both that the “funding secured” portion of Musk’s tweet was not a forward-looking statement, and that even if it is a forward-looking statement, safe harbor does not apply because Musk knew that it was false. Since the statutory definition of a forward-looking statement includes future plans and projections regarding capital structure, Left faces an uphill battle on his first argument. In the event that the district court treats Musk’s tweet as a forward-looking statement, Left will have the added burden of establishing that the safe harbor does not apply.

Finally, even if Left succeeds in demonstrating that Musk’s announcement was misleading, that does not guarantee a slam dunk for his class action suit. Tesla may still be able to sidestep liability by arguing that Musk’s statement on August 24 of Tesla’s decision to remain public constituted a timely correction of Musk’s initial error.

Conclusion

From the outset, neither side has a clear path to victory in this lawsuit. Though federal law provides protections for issuers of forward-looking statements, it only does so on the conditions that such statements are made on a rational basis and in good faith. Depending upon how the facts are presented, Left could offer a compelling incentive for Tesla to swiftly settle, even given Musk’s public history of disdain towards Tesla’s short-sellers. Although this case is not likely to reach the trial stage, it remains an important lesson in thinking before tweeting.


Sources

17 CFR 230.175 (2018).

17 CFR § 240.10b-5 (2018).

Brittany De Lea, Elon Musk taunts Tesla short seller David Einhorn, sends shorts, Fox Business (Aug. 10, 2018).

Capital Structure, Black’s Law Dictionary (10th ed. 2014).

Complaint, Left v. Tesla, Inc. et al, No. 3:18-cv-05463 (N.D. Cal. Sept 06, 2018).

Elon Musk, Staying Public, Tesla Blog (Aug. 24, 2018).

Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976).

In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410 (3d Cir. 1997).

Jonathan Stempel & Sweta Singh, Tesla, Musk sought to ‘burn’ Citron, other short-sellers – lawsuit, Reuters (Sept. 6, 2018, 1:42 PM).

Neal E. Boudette, Tesla Will Not Go Private, Elon Musk Says, Capping Month of Turmoil, N.Y. Times, (Aug. 24, 2018).

Neal E. Boudette & Matt Phillips, Elon Musk Says Tesla May Go Private, and Its Stock Soars, N.Y. Times, (Aug. 7, 2018).

Peter J. Henning, How the S.E.C. May Pursue a Case Against Elon Musk and Tesla, N.Y. Times, (Aug. 24, 2018).

United States v. Schiff, 602 F.3d 152 (3d Cir. 2010).

Photo courtesy of YouTube.