Tesla Inc. (NASDAQ:TSLA) is no stranger to lawsuits. Hundreds of disgruntled customers have filed individual and class-action suits alleging faults in its electric vehicles, as well as in its solar panels. However, these lawsuits pale in comparison to the latest legal complaint targeting the would-be leader of the world's transition to renewable energy: Walmart Inc. (NYSE:WMT).
On Aug. 20, Walmart filed a lawsuit against Tesla alleging negligence and breach of contract. The core of the complaint revolves around a large number of solar panel arrays installed by Tesla across a host of Walmart stores.
If Walmart's allegations are true, then the company could face catastrophic legal and business risks.
Walmart goes for the throat
According to Walmart, slipshod installation and negligent maintenance resulted in seven separate fires. The retail giant's anger was readily apparent in its detailed filing:
"The number of defects, however, is overwhelming and plainly indicative of systemic, widespread failures by Tesla to meet the standard of care, as set forth in the governing contracts, as to the solar systems installed at Walmart's stores...Tesla complied, conceding that de-energization of all the sites was 'prudent' and recognizing that it could provide no assurances that the deficiencies causing its systems to catch fire were confined to particular sites or particular components."
One might think that was bad enough, yet the story gets even grimmer. According to Walmart, de-energizing the solar panels was not sufficient to prevent fires:
"Unfortunately, even de-energization was not enough to prevent an additional fire. In November 2018, Walmart discovered that yet another fire had occurred at a Walmart store in Yuba City, California-even though the solar panels at this store had been de-energized since 6/18."
Worse still, Walmart alleges Tesla also deliberately neglected to report potentially dangerous faults:
"Visits revealed that Tesla had engaged in widespread, systemic negligence and had failed to abide by prudent industry practices in installing, operating, and maintaining its solar systems -- conduct that greatly increased the risk of fire at Walmart sites. Many of these defects were either visible to the naked eye or readily identifiable with the proper use of standard equipment, indicating either that Tesla had not been inspecting the sites or that its inspection protocols were woefully deficient."
Not everything is better with fire
Walmart's complaint is absolutely devastating. Its filing is aggressive and unequivocal in its contention that Tesla was totally negligent in its behavior, and that said negligence resulted in widespread fire risk as well as multiple actual damaging fires. Walmart is one of the largest corporations in the world and has a vast cash reserve to deploy.
The sheer animosity of Walmart's tone in its opening legal salvo suggests it is willing to fight this to the finish. It is publicly extremely embarrassing for Tesla, which has witnessed a considerable degradation in its solar energy business over the past several years. An effort to re-energize interest with renewed promises of the long-awaited solar roof product, as well as now offering the option to rent solar panels, already seemed fairly weak.
With a massive company alleging systemic failures, the prospect of Tesla's solar deployments accelerating now seems highly unlikely. After all, if Walmart, a household name with a market capitalization of more than $300 billion, cannot get satisfactory service from Tesla, an ordinary consumer can hardly expect better treatment. Many would-be buyers will probably consider looking elsewhere. After all, solar panels are essentially a commodity business. There is little in the way of price or quality arbitrage for customers. If they are going to pay the same amount, they will likely opt for providers with better customer service profiles, such as Sunrun Inc. (NASDAQ:RUN).
Worse still, the specter of fire risk will likely have a significant chilling effect on Tesla solar installations. It is hard to see how this new and highly publicized risk could have less impact on consumer action than the prospect of slightly cheaper rental options.
Catastrophic legal risk
The Walmart suit does far more than undermine Tesla's solar business. It also exposes the company to potentially existential legal risk. This goes beyond the tens of millions in damages being sought by Walmart itself.
The retail giant's allegations lend significant weight to the dozens of individual complaints by consumers alleging physical damage, poor installation and contract-breaching service on their solar arrays. Such complaints might be dismissed by a judge unwilling to court the significant publicity attached to ruling against such a high-profile company. With Walmart adding its voice to the complaints, all of these other suits are likely to gain a boost.
Worst of all, however, is the impact Walmart's complaint may have on Tesla's ongoing legal battle concerning its 2016 SolarCity merger. The retail leviathan addresses the issue of the merger in its filing:
"On information and belief, in a heavily criticized deal entered into on August 1, 2016, Tesla, Inc. acquired SolarCity for approximately $2.6 billion in stock, converting it into its wholly owned subsidiary Tesla, and assumed nearly $3 billion in SolarCity's net debt, nearly doubling Tesla, Inc.'s debt load. A Wall Street Journal columnist, referring to the financial difficulties plaguing both companies, wrote: 'Tesla latching on to SolarCity is the equivalent of a shipwrecked man clinging to a piece of driftwood grabbing on to another man without one.' That diagnosis turned out to be accurate, if not charitable."
Currently, a class-action lawsuit alleges that Tesla took over SolarCity, including the billions of dollars in liabilities accrued by the failing residential solar installer, in order to bail out Tesla CEO Elon Musk, as well as his cousins, who happened to be the top executives of SolarCity. Walmart's filing makes it very clear which side the global retailer is on. The retailer adding its muscle to the SolarCity class-action lawsuit will make dismissal far more difficult. Should the judge in the class-action suit ultimately rule in favor of the plaintiffs, it would cost Tesla at least hundreds of millions -- and potentially billions -- of dollars.
Despite having raised capital recently, Tesla remains severely cash-constrained thanks to its continued money-losing electric vehicle business. It lacks a strong in-house legal team to confront Walmart's legal action. A punishing legal fight would be costly to both Tesla's bank account and its reputation. A judgment in favor of Walmart would represent a significant blow.
However, the real existential threat comes from the SolarCity class-action suit. Tesla has done its best to backfill and justify the merger with its recent promises of ramped-up solar panel production and rental deals. Yet, for all its words, Tesla's solar business has been shrinking at a precipitous rate. With Walmart adding its weight to the class-action complaint, it appears increasingly likely that Tesla will come out the loser. If it does, it could result in legal costs it simply cannot afford to pay.
Investors banking on Tesla's bright future assume monumental growth. Yet sales have stalled in its electric car business, while its solar energy division has degraded severely. With billions of dollars in unfunded future capital expenditures and billions more owed in purchasing obligations to suppliers, adding more legal liability will only diminish the hope that Tesla can one day become sustainably profitable.
Disclosure: Author is short Tesla.
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