Elon Musk, Once Again, Fails To Get His Big Asks From Delaware Chancery Court

from the musk-nonsense-vs.-no-nonsense-judge dept

Chancellor Kathaleen McCormick, who is overseeing the Twitter v. Musk case in the Delaware Chancery Court, has a bit of a reputation as a no-nonsense judge who isn’t one to put up with much crap. And so far, that’s definitely been clear from how she’s handled the case. She isn’t showing favoritism, but every time big decisions come in regarding the case, she seems to shut down Musk’s ridiculous asks, while granting him just small concessions. It happened in the original fight over when the trial would be, in which McCormick scheduled the trial to be just a month after Twitter requested, but three months earlier than Musk had hoped for. It happened again a few weeks ago in a fight over how much data Twitter needed to hand over to Musk in his silly quest to find out how much spam is in the mDAU (something that doesn’t really matter). The judge gave him a much smaller segment of the data he requested, but still gave him some.

None of this seems to be any kind of bias. It’s literally just that Musk’s case is incredibly weak, and his team keeps asking for ridiculous things. Twitter’s case is not a slam dunk, but it clearly holds a much stronger position overall, and both its asks, and the results reflect that.

This week, on Tuesday, there was a never-ending hearing in which Twitter and Musk’s lawyers continually sniped at one another on a variety of topics, with some fairly direct finger pointing, with each side suggesting the other was playing games with the court to avoid providing the other side with information they requested. There were some genuinely eye-opening moments, including the revelation that Elon Musk texted Morgan Stanley that he wasn’t so interested in buying Twitter if we were on the verge of World War III — which completely undermines the claim that his reason for getting out of the deal was sudden concern about spam (which was always obviously a made up excuse). Just as eye-opening: that text wasn’t handed over by Musk, but by Morgan Stanley (suggesting that Musk’s team hasn’t been as forthcoming as they’re supposed to be in responding to discovery requests).

There was also a moment when Musk’s lawyer was talking about Musk doing due diligence, and the court literally chuckled and pointed out “we’ll never know because there was no due diligence,” shooting down Musk’s lawyers’ claim that his information rights are the equivalent of due diligence (they’re not and everyone knows it).

Anyway, there were a bunch of issues at play in the hearing on Tuesday, and as is the nature of the court (and McCormick herself), rulings come fast and furious. The very next day, she issued a bunch of quick rulings, and once again, Musk gets a tiny fraction of what he wanted, but misses out on the bigger, more important requests, which McCormick immediately sees through as gamesmanship.

Let’s walk through the court’s rulings. (On a separate note, if you want to keep up with all of this, you should absolutely follow the @Chancery_Daily Twitter feed, which not only is the first to share all of these documents, but also has produced some fairly fun snarky coverage itself. They have also set up a nicely useful public docket for the case and the major filings in it.)

We’ll start with the “win” for Musk, which is that McCormick is allowing him to file amended counterclaims. This is basically the “we want to bring in a bunch of Mudge’s claims” to the lawsuit. During the hearing, even Twitter’s lawyers admitted that, especially in the Delaware Chancery Court, it’s standard practice to allow such amendments. Twitter made a half-hearted attempt to say “but you shouldn’t allow it here” but basically knew exactly what to expect. The court says Musk can amend.

Defendants’ motion to amend is granted. Court of Chancery Rule 15(a) provides that leave to amend should be “freely given when justice so requires.” This court interprets Rule 15(a) to “allow for liberal amendment in the interest of resolving cases on the merits.” Leave to amend is typically granted unless the non-moving party can establish “undue prejudice, undue delay, bad faith, dilatory motive or futility.” This court rarely declines amendments under Rule 15(a) based on futility. Such arguments require the court to assess the merits of a claim on a highly truncated posture and before such claim has been pled; such arguments are therefore antithetical to the policy of resolving cases on the merits.

The newly published Whistleblower Complaint would be grounds in most instances to permit an amendment under the low bar of Rule 15(a). Twitter argues that the amendment would be futile, but their arguments falter against the exceedingly movantfriendly standard of Rule 15(a). I am reticent to say more concerning the merits of the counterclaims at this posture before they have been fully litigated. The world will have to wait for the post-trial decision

In short, we usually allow such amendments, so we’re going to here, and the court explicitly says there will be no hint at what Chancellor McCormick thinks of all the Mudge stuff until after the trial. Seems reasonable enough.

In that same filing regarding the amended counterclaims, however, Musk also… asked that the trial be delayed. Remember, from the beginning, he’s been wanting to delay and delay and delay, and McCormick is not having it, noting that she already explained her reasoning for wanting a trial to take place sooner, rather than later.

Defendants’ motion to extend the case schedule is denied. “A trial judge has broad discretion to control scheduling and the court’s docket.” In arguing that trial should be delayed by at least four weeks, Defendants contend that no external deadline creates any urgency. They observe that the merger agreement’s “termination date of October 24, 2022 is automatically stayed if litigation is commenced, and debt financing has an outside date of April 25, 2023.” They adduce, therefore, that “any prejudice to Twitter can be easily mitigated by . . . continu[ing] the trial date.” But the opposite is true. I previously rejected Defendants’ arguments in response to Twitter’s motion to expedite, making clear that the longer the delay until trial, the greater the risk of irreparable harm to Twitter. Indeed, Twitter has represented that the anticipated risk of harm has materialized over the course of this litigation. Twitter “has suffered increased employee attrition,” which “undermin[es] the company’s ability to pursue its operations goals. The company has been forced for months to manage under the constrains of a repudiated merger agreement, including Defendants’ continued refusal to provide any consents for matters under the operating covenants.” I am convinced that even four weeks’ delay would risk further harm to Twitter too great to justify.

So, once again, Musk gets a little thing that is standard practice, but loses the big ask.

Next, Musk wanted to reargue the issues he lost on discovery last time, where he was demanding a crazy amount of info in his quixotic quest to find out info on the mDAU. The court is not pleased. She trashes their argument that she did not explain the basis for her decision, by quoting the passage where she… explained the basis for her decision. Then basically says “you disagreeing with my decision is not me overlooking anything.”

Defendants next argue that I misapprehended or overlooked facts concerning the timing issue. Not so. Twitter devoted a whole section of its Opposition to Defendants’ “tactical delay.” I credited those arguments. Defendants disagrees with that decision, but disagreement is not a basis for reargument.

Defendants last argue that I overlooked factors mitigating Twitter’s burden. Again, not so. Twitter’s present discovery obligations in this case are substantial and were significantly expanded by this court’s order requiring Twitter to reconstruct a “historical snapshot” of its Q4 2021 audit. In an expedited matter such as this one, the court’s already significant discretion to assess the proportionality of discovery requests is necessarily enhanced.

Then Chancellor McCormick notes that, at the hearing on Tuesday, Musk’s lawyers tried to ask for some sort of compromise on this, and she’s not having any of that either:

In a version of this last argument, during the September 6, 2022 oral argument on this motion, Defendants took the position that I could mitigate Twitter’s burden by ordering Twitter to produce narrow categories of “low hanging fruit” from the expanded date range. But Defendants did not ask for the low-hanging fruit when they argued their Third Discovery Motion. Instead, Defendants overshot and asked for too much. That was a mistake, and I denied their Third Discovery Motion for that reason. Further reflection on the matter is not a reason for reargument; Defendants’ more reasonable requests come too late.

Do not mess with the Delaware Chancery Court. They don’t play games.

Next up: there was a big debate about the production of internal Twitter Slack messages as part of discovery. Without going into all the boring details, Musk asked for basically a shit ton of Slack messages. Twitter argued that this was way too much, way too burdensome, and then also pointed out some game playing by team Musk. Specifically, after negotiating to narrow down how many people’s Slack messages needed to be turned over, there was a point where Musk asked for 42 Twitter employees, but that was later knocked down to eight. However, at some point, Musk went back to demanding 42, after Twitter thought it was negotiating around eight.

At the hearing, Musk’s lawyers insisted — contrary to the evidence — that it had never given up on the request for Slack messages from 42 employees (honestly, given Musk’s penchant for using numbers to make joking references, I almost wonder if the 42 is a reference to the Hitchhiker’s Guide to the Galaxy).

Chancellor McCormick repeats, as she did at the hearing, that the discovery burden on Twitter has been much higher than it has been on Musk throughout this case. And… she’s not a fan of how this played out:

On the issue of burden, I have repeatedly noted the substantial disparity in the discovery burden placed upon the warring factions. I will not repeat all of these observations here, except to say that Plaintiff’s had it far worse, and I am hesitant to impose a large additional discovery burden on Plaintiff at this stage in litigation.

As to Defendants’ prior representations, the correspondence between counsel attached to the parties’ motions bears out Plaintiff’s account that Defendants effectively abandoned their initial demand of 42 custodians in favor of a request only eight. The backand-forth between counsel is tedious, but I recount it here for completeness.

Following Plaintiff’s August 5 offer to provide text messages from three custodians, Defendants countered on August 16 with a list of 42 “Messaging Platform Custodians.” Defendants’ proposal “govern[ed] the review of any messages sent or received by Plaintiff’s document custodians on any messaging device and/or messaging platform” used by each of the Messaging Platform Custodians and identified “Slack” as a “Messaging Platform.”

Plaintiff rejected the counterproposal, and Defendants responded with a new proposal on August 18. Defendants’ counsel stated that their new proposal “limits the number of Messaging Platform Custodians,” and the proposal did indeed trim the initial list of 42 individuals down to eight. The August 18 proposal also preserved the “Messaging Platform Custodians” language from Defendants’ August 16 proposal, including the specific reference to Slack as a “Messaging Platform.”

In response to the August 18 proposal, Plaintiff countered with an offer of six custodians, and Defendants responded again by demanding eight. Both of these proposals included the same language explicitly including Slack in the Messaging Platforms at issue. On August 23, Defendants changed tack and demanded that Plaintiff produce Slack messages from all 42 custodians.

Defendants argue that they always wanted 42 Slack custodians. They contend that Plaintiff represented that Plaintiff was collecting and reviewing Slack messages from a broader set of custodians, and that was true early in the process. But Plaintiff’s representations came before Defendants proposed and negotiated a protocol for Messaging Platform Custodians demanding a far narrower set of Slack custodians. Defendants’ explanation for those later communications was that they “inadvertently failed to remove” the language.

In other words, Musk’s team really had bargained down to 8 employees messages but is pretending it never gave up on the 42. McCormick ain’t having it:

Even if Defendants’ representations were inadvertent, Defendants cannot be permitted to re-trade now. To be sure, generally, parties should be able to offer compromise positions without prejudicing their right to move for the full scope of relief to which they are entitled. That is not what happened here. Defendants gave Plaintiff the impression that they were seeking limited Slack custodians, only to then say that they never meant it. In this highly expedited case, there is no time for “just kiddings.” Parties must be able to rely upon one another’s good faith proposals for the discovery process to function. Defendants are therefore held to their proposal seeking Slack messages from the eight custodians identified in their proposals.

McCormick does allow for discovery of Slack messages from board member Egon Durban, and chief legal officer Vijaya Gadde, but it’s a far cry from the 42 Musk demanded. Ah, the meaning of life.

Finally, Twitter sought sanctions against Musk, in particular for failing to hand over relevant documents during discovery (highlighted by that text to Morgan Stanley mentioned above). Again, see if you notice some, well, snark coming from the court:

Plaintiff’s Fourth Discovery Motion identifies clear deficiencies in Defendants’ document production. Third parties produced text messages with Musk that Musk himself did not produce, and Musk’s own production of text messages revealed glaring deficiencies. As just one example, Defendants produced two texts sent to Musk from Robert Steel of Parella Weinberg Partners on June 17 at 9:57 a.m. and 10:15 a.m. The 9:57 a.m. text asks a question. The 10:15 a.m. text—stating “Ok. Got it. . . .”—implies that Musk responded. Assuming that Musk’s response was not telepathic, one would expect some evidence of it in Defendants’ document production. But Defendants provided none by the deadline for substantially completing document discovery.

Defendants’ approach to answering interrogatories also left much to be desired. As one example, on August 23, I ordered Defendants to respond to interrogatories that required Defendants to identify persons with knowledge of relevant facts. Defendants supplemented their responses on August 26, but they did a bad job of it, identifying only a handful of people about whom Twitter was already aware. Defendants supplemented their responses again on August 31, this time identifying 491 people with knowledge. Because the August 31 response was based on a review of Musk’s texts collected on August 1,8 it could have been provided much earlier.

Musk responded to all this by insisting no harm, no foul. Even if they screwed up, by the time of the hearing on Tuesday, they’d fixed everything. The court is, well, less than impressed.

Defendants have now cured many of the deficiencies about which Plaintiff complained in its Fourth Discovery Motion. They accuse Plaintiff of jumping the gun and seeking sanctions prematurely, but I do not see it that way. I can understand why Plaintiff requires relief. Plaintiff has born the bulk of the burden of discovery. In addition to the onerous “historical snapshot” that was the subject of Defendants’ Second Discovery Motion, Plaintiffs collected, reviewed, and produced documents from 42 custodians. Defendants agreed to produce from just two custodians. Defendants had less to do but still fell short in their obligations. Defendants’ prior deficiencies have left Plaintiff wondering whether there are other deficiencies and scrambling in third-party discovery.

That said, while the court is scolding team Musk, that doesn’t mean that Twitter gets all that it asked for either:

Despite the imbalance in burden and Defendants’ suboptimal conduct, the relief that Plaintiff seeks through it Fourth Discovery Motion taken as a whole is too extreme. Granting the relief as requested would be an overreaction. Plaintiff asks for all text messages from Defendants’ two custodians for the negotiated period regardless of whether such text messages are relevant, but that is an intrusive request. Plaintiff asks for sworn statements regarding Defendants’ collection efforts and other issues, but the representations made by Defendants’ counsel to date are extensive, and I am not convinced that further lawyer-crafted explanations will shed greater light on the issues in any event. Plaintiff asks for an immediate custodial deposition of Musk, but Plaintiff will be deposing Musk quite soon given the case schedule. For the avoidance of doubt, Plaintiff may ask Musk whatever custodial questions it would like to ask during his deposition, but there is no need to conduct a separate custodial deposition. These requests are denied.

But Twitter does get something:

Two of Plaintiff’s requests are granted. Plaintiff asks the court to suspend thirdparty discovery deadlines as to Plaintiff. This request is reasonable, and it is granted, but trial is still on, and so third-party discovery must happen promptly. Plaintiff may not use this relief to gain any tactical advantage and must act in good faith to move forward with third-party discovery as quickly as possible. Plaintiff also asks Defendants to obtain and produce phone company records concerning the text messages that Musk and Birchall sent or received during the relevant period. This too is reasonable, and it is granted, as it will allow Plaintiff to confirm whether Defendants’ representations that Musk did not text about Twitter during key periods are accurate.

As you can see, there’s quite the same pattern emerging over and over again:

  • Twitter makes aggressive, but non-crazy requests, and gets most (but definitely not all) of what it’s asking for.
  • Musk makes extreme, somewhat unbelievable requests, and keeps getting pushback from the court.
  • The Chancellor keeps things moving with clear, crisp, no nonsense rulings that do not mince words.

Again, from everything I’ve seen the court is handling this very much fairly and by the book. It’s just that one side is being a lot more unreasonable than the other. That may change by trial time, and who knows how that will go, but from the outset, we noted that Twitter had the much stronger hand heading into this case, and that remains so from everything that’s happened to date.

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Comments on “Elon Musk, Once Again, Fails To Get His Big Asks From Delaware Chancery Court”

Subscribe: RSS Leave a comment
Anonymous Coward says:

Not a good sign when the judge says...

“I am reticent to say more concerning the merits of the counterclaims at this posture before they have been fully litigated.”

Is it just me or is the judge carefully implying that she thinks the counterclaims will be bullshit but she’s willing to give Musk’s lawyers the benefit of doubt?

netlawyer (profile) says:

Re: Adding Mudge...

As was widely reported at the time, both Mudge and Sethi left Twitter in January 2021, 15 months before the Merger Agreement.

The judge didn’t do Elon any favors by allowing him to add counterclaims even though it’s being touted as a win for him. The time for the trial is already set (5 days) and the judge is like:

“OK if you want to spend your trial time trying to prove a bunch of counterclaims that don’t have anything to do with the terms of the Merger Agreement, you do you, I guess.”

Christenson says:

Re: Musk owning twitter

LOL, There’s no chance of Musk not owning twitter —
Either he wins the case, in which case he’s messed with twitter something awful
Or he loses the case and twitter owns him in court, in which case he has to buy a lot of twitter stock at a high price, thus also owning twitter.

Presumably you meant the latter case.

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