Tesla's Founder Sues Tesla's CEO

Chuck Squatriglia
Wired

June 11, 2009

Tesla Motors founder Martin Eberhard is suing current CEO Elon Musk, accusing Musk of taking control of the company, orchestrating his ouster in 2007 and attempting to "rewrite history" to take credit for developing the pioneering electric Roadster the two men worked together to create.

The suit accuses Musk of a litany of complaints including libel, slander and breach of contract in alleging that Eberhard was pushed out of the company, wrongfully denied his severance and forced to watch as Musk publicly disparaged him and "compromised Tesla Motors' financial health."

"In his zeal to appropriate Eberhard's legacy, Musk has instead sullied Tesla Motors' integrity and blemished Tesla Motors' reputation and prosperity," the suit states.

What's more, the suit states, after pushing Eberhard out of the company he founded in 2002 and withholding his severance because of a blog post, Tesla wrecked his car.

Tesla Motors calls the suit a work of fiction and says it will not only vigorously defend itself, but file a countersuit.

"This lawsuit is an unfair personal attack and, more importantly, paints an inaccurate picture of Tesla's history," the company said Wednesday night in a statement. "This lawsuit is a fictionalized account of Tesla's early years — it's twisted and wrong, and we welcome the opportunity to set the record straight. As the media have already chronicled extensively, the board of directors unanimously fired Martin, largely over the fact that the cost of the car was more than twice what Martin portrayed it to be at the time. Incidentally, Tesla will also be filing counterclaims and in the process present an accurate account of the company's history."

Eberhard's 22-page suit, which was filed May 26 in San Mateo County (Calif.) Superior Court and seeks unspecified damages, provides a glimpse — albeit a one-sided one — into the circumstances surrounding his abrupt departure from Tesla on Nov. 28, 2007.

Musk had been involved with the company for three years by then, having signed on as one of its first investors in early 2004. "As a result of his increasing financial interest at Tesla Motors," the suit states, Musk exercised his right to appoint people to Tesla's board of directors. By the spring of 2007, he'd named three of the seven members.

By that point, the board was well into its search for a CEO to take over for Eberhard, who wanted to devote more time to developing the Roadster. The search continued for several months until, the suit states, Eberhard on Aug. 7, 2007, received a call from Musk stating that Michael Marks would be taking over as CEO.

"At that time, Marks had not been interviewed or approved for the CEO position by either the (board of directors) or the CEO search committee," the suit alleges. "Prior to this telephone call, Eberhard had not received any notice that he would be expected to step down from the CEO position at this time."

Four days later, the suit states, the board told Eberhard he was being named president of technology. He would earn $200,000 a year, the same salary he earned as CEO.

"Eberhard agreed to this proposal in order to ensure the continuity of the company," the suit states.

Five weeks later, on Oct. 22, "Marks informed Eberhard that Eberhard's position with Tesla Motors was unsustainable due to Musk's persistent calls for Eberhard's termination," the suit states. Marks allegedly offered Eberhard the opportunity to resign. In exchange, he would receive six month's pay and medical benefits in addition to 62,500 shares of Tesla Motors common stock. Eberhard refused.

Marks didn't last long. He was replaced by Ze'ev Drori as CEO on November 27. According to suit, Musk approached Eberhard on that same day and told Eberhard he had to go. Musk allegedly threatened to convert enough of his preferred stock options to common stock to give him control of three more seats on the board — and the ability to terminate Eberhard.

According to the suit, Musk offered Eberhard the same deal Marks had — take the money and resign. He allegedly sweetened the deal the next day, offering Eberhard $100,000 to be paid in six monthly payments, six months of health insurance, an option to buy 250,000 shares of Tesla Motors common stock and a seat on the company's board of advisors. Musk gave him until the end of the day to sign the deal.

"With virtually no choice, Eberhard signed the severance agreements that same day," the suit states. "At the time he was asked to resign, Eberhard was never informed of any reason for the resignation demand, other than Musk's preference for such."

Eberhard left on Nov. 28, 2007.

The entrepreneur started a blog some time after that, and on Jan. 10, 2008, wrote a post commenting on "the large number of employees" who had been terminated from Tesla and saying he believed they had been treated unfairly. Four days later, Drori allegedly met with Eberhard and told him he'd violated the non-disparagement clause of his severance agreements by writing the post. Eberhard disagreed but deleted the post.

Tesla apparently wasn't satisfied. According to the suit, the company's general counsel e-mailed Eberhard on Jan. 28 to say the company was terminating his severance package and dismissing him from the advisory board. The suit accuses Musk of breach of contract.

Eberhard's complaints don't stop there. He claims Musk has "persistently and continuously made defamatory, disparaging, negative and harmful statements" about him in public and within the company while portraying himself as the "founder" and "creator" of Tesla Motors. The suit also says Musk has "made false statements that Eberhard had been terminated from Tesla Motors because of performance and management issues, despite the fact Eberhard had in fact resigned."

The 22-page suit is followed by 143 pages of exhibits, which include 31 news stories and blog posts in which Musk is identified as the founder of Tesla Motors or Musk allegedly makes disparaging remarks about Eberhard. They include a Wired magazine interview with Musk on Jan. 4, 2007 that states "[Musk] has created Tesla Motors and Space X," Musk's aerospace startup.

So what about the car that Tesla allegedly wrecked?

Eberhard claims he was to receive the first Roadster to roll off the assembly line, but Musk allegedly insisted it was his. The suit says Eberhard agreed to take the second car — which he says would be worth far less as a collectible — and got the deal in writing, only to see Musk allegedly sell the car to a friend in February, 2008.

At about that time, Tesla allegedly told Eberhard his car was on its way but would have to undergo "endurance testing." Several months later, according to the suit, Eberhard learned an unnamed Tesla employee "had driven Eberhard's Roadster into the back of a truck, almost completely totaling the vehicle." The damage was so bad, the suit states, that the car "required the replacement of no fewer than 75 different parts."

Eberhard finally got his Roadster on July 19, 2008.