Hansen v. Musk

1

KARL HANSEN, Plaintiff-Appellant, v. ELON MUSK; TESLA MOTORS, INC.; U.S. SECURITIES ASSOCIATES, INC., Defendants-Appellees.

No. 23-15296

United States Court of Appeals, Ninth Circuit

December 10, 2024

Argued and Submitted May 14, 2024 Pasadena, California

Appeal from the United States District Court for the District of Nevada D.C. No. 3:19-cv-00413-LRH-CSD Larry R. Hicks District Judge, Presiding

George W. Thomas (argued) and Robert L. Sirrianni, Jr., Brownstone PA, Winter Park, Florida, for Plaintiff-Appellant.

Robin E. Largent (argued) and Alex A. Smith, Martenson Hasbrouk & Simon LLP, Sacramento, California; Christopher F Robertson (argued), Seyfarth Shaw LLP, Boston, Massachusetts Dora V. Lane, Holland & Hart LLP, Reno, Nevada; Matthew T. Cecil, Holland & Hart LLP, Las Vegas, Nevada; for Defendants-Appellees.

Before: Daniel P. Collins, Holly A. Thomas, and Anthony D. Johnstone, Circuit Judges.

SUMMARY^[*]

Sarbanes-Oxley Act

The panel affirmed the district court's order dismissing a complaint alleging whistleblower retaliation claims.

Karl Hansen sued Tesla, Inc., its CEO, and U.S. Security Associates, alleging that they retaliated against him for reporting misconduct at Tesla. The district court ordered most of Hansen's claims to arbitration, except his claim under the Sarbanes-Oxley Act of 2002 (SOX). The district court confirmed the arbitration award disposing of the non-SOX claims, and granted defendants' motion to dismiss the entire suit-including the SOX claim-because the arbitrator's findings precluded Hansen from relitigating issues from arbitration that were also key to the SOX claim.

Affirming the district court's dismissal of the complaint, the panel held that, although an arbitrator's decision can never preclude a SOX claim, which is not subject to mandatory predispute arbitration agreements, a confirmed arbitral award can sometimes preclude relitigation of the issues underlying a SOX claim. In this case, relitigation of the dispositive issues underlying Hansen's SOX claim is precluded by the confirmed arbitral award that also conclusively resolves Hansen's other claims.

Judge Collins concurred in the judgment in part and dissented in part. Judge Collins concurred in the judgment to the extent that the majority affirmed the district court's rejection of all of Hansen's claims other than his SOX retaliation claim. Judge Collins dissented from the majority's decision affirming the district court's holding that the arbitral award collaterally estopped Hansen from litigating his SOX claim in the district court. He would reverse the dismissal of that claim and remand for further proceedings.

OPINION

H.A. THOMAS, CIRCUIT JUDGE

The plain language of the Sarbanes-Oxley Act of 2002 (SOX) prevents SOX claims from being subject to mandatory predispute arbitration agreements. 18 U.S.C. § 1514A(e). This case raises the question whether a federal-court order confirming an arbitrator's decision can nevertheless have a preclusive effect in a SOX suit filed in federal court.

We hold that, although an arbitrator's decision can never preclude a SOX claim, a confirmed arbitral award can sometimes preclude relitigation of the issues underlying such a claim. And, in this case, we hold that relitigation of the dispositive issues underlying Karl Hansen's SOX claim is precluded by a confirmed arbitral award that also conclusively resolves Hansen's other claims. We therefore affirm the district court's order dismissing Hansen's complaint.

I.

A.

On July 19, 2019, Karl Hansen brought this lawsuit claiming that Tesla, Inc., Tesla's CEO Elon Musk, and U.S. Security Associates (USSA) (collectively, Defendants) retaliated against him for reporting misconduct at Tesla to Tesla's management and the Securities and Exchange Commission (SEC).^[1] As alleged in Hansen's complaint, Hansen was hired as a protection associate by Tesla in March 2018, and in subsequent months was assigned to work as an investigations case specialist at Tesla's Nevada Gigafactory. While in those roles, Hansen investigated what he believed to be thefts at the Gigafactory costing Tesla tens of millions of dollars, as well as narcotics trafficking at the Gigafactory conducted in connection with Mexican drug cartels. Hansen also investigated contracts that he believed senior management at Tesla had improperly awarded. And he expressed concerns over the monitoring of employee communications by Tesla's Senior Manager of Global Security, including wiretapping and hacking. Hansen reported the findings of his investigations to Tesla's management. His reporting eventually reached Musk.

In June 2018, Tesla terminated Hansen's employment, citing internal restructuring. Hansen accepted an offer to work at USSA, with which Tesla contracted to provide security services. Hansen continued his investigations of alleged thefts and ties to criminal organizations at Tesla. He requested coordination with local, state, and federal law enforcement due to what he saw as the complexities of the case and informed his supervisors about a possible cover-up by senior management. On August 9, 2018, Hansen also filed an SEC report about Tesla's alleged misconduct.

On August 30, 2018, Musk saw Hansen stationed at an entrance to the Gigafactory and demanded that he be removed from his post. USSA subsequently told Hansen that his position at the Gigafactory had been eliminated and that he would be trained for a different position unrelated to Tesla. Hansen alleges that he was removed in retaliation for reporting misconduct at Tesla to his supervisors and the SEC.

B.

After Hansen filed his complaint, Defendants filed motions to compel arbitration of most claims on the ground that Hansen's employment agreement with USSA contained a provision mandating arbitration of disputes arising out of his assignment at Tesla. Defendants, however, did not move to compel arbitration of Hansen's SOX claim, which federal law states may not be subject to any "predispute arbitration agreement." 18 U.S.C. § 1514A(e)(2).

The district court granted the motions, ordering most of Hansen's claims to arbitration. Hansen v. Musk, No. 19-cv-00413, 2020 WL 4004800, at *3-4 (D. Nev. July 25, 2020). The district court stayed proceedings with respect to Hansen's SOX claim, finding that it "ar[o]se from the same conduct" as his other claims. Id. at *8.

C.

Before the arbitrator, Hansen brought multiple new claims, including claims for violations of the federal and Nevada Racketeer Influenced and Corrupt Organizations (RICO) Acts, and violation of the Dodd-Frank Wall Street Reform and Consumer Protection Act's (Dodd-Frank) protections for whistleblowers. The arbitrator disposed of Hansen's RICO claims in two interim awards, holding that Hansen had failed to adequately allege either a pattern of racketeering activity or a cognizable injury. The arbitrator granted summary judgment to Defendants on Hansen's claim for breach of contract and one of his claims for tortious interference with his contractual relationship with USSA, finding that Hansen had no contractual right to continue working at the Gigafactory.

The arbitrator issued a final award on June 8, 2022, rejecting Hansen's remaining claim of tortious interference with contract and his claim of retaliation under Dodd-Frank. The arbitrator found the tortious interference claim failed because Hansen had no contractual right to be assigned to work at the Gigafactory. As to the Dodd-Frank claim, the arbitrator explained that Hansen had been transferred from Tesla to USSA because Tesla outsourced the work of all employees with Hansen's job position to USSA. And the arbitrator found that Hansen's position at the Gigafactory had not been terminated because of his complaint to the SEC, but rather because Hansen had emailed significant amounts of confidential information to third parties, and then attempted to cover his tracks by deleting the emails from his "sent" folder. The arbitrator also found that USSA could not have retaliated against Hansen for any protected activity because USSA had never been made aware of the activity that Hansen claimed was protected.

Explaining that, to be entitled to Dodd-Frank's whistleblower protections, Hansen must further prove that a reasonable person would have believed that the activities he reported violated securities laws, the arbitrator concluded that Hansen could not have reasonably held such a belief. The arbitrator explained that Hansen's complaints referenced only "[g]arden variety theft and drug violations[,] . . . matters governed by state and local law, not Dodd-Frank." The arbitrator noted that Hansen had not provided any argument to the contrary, and that Hansen had indeed testified that he was not even aware of what was reported to Tesla's shareholders or included in its financial statements.

D.

After the arbitrator's decision, Defendants filed a motion before the district court to lift the stay of proceedings, including the stay of the SOX claim, and to confirm the arbitration award. Hansen did not oppose the motion, which the district court granted on July 25, 2022. Defendants then filed motions to dismiss the entire suit, arguing that the arbitrator's findings precluded Hansen from relitigating the questions whether he engaged in protected activity, whether USSA knew about any protected activity, and whether USSA took adverse action against Hansen on the basis of protected activity-issues that were also key to Hansen's SOX claim.

The district court granted Defendants' motions and dismissed the case. The district court first cited our decision in Clark v. Bear Sterns & Co., 966 F.2d 1318 (9th Cir. 1992), for the proposition that an arbitral award can have a preclusive effect on...