Texas judge who bought Tesla shares won’t throw out X case

Judge dismisses Tesla/X link, accuses Media Matters of seeking “backdoor recusal.”

A federal judge who bought more than $15,000 worth of Tesla stock has rejected a motion that could have forced him to recuse himself from a lawsuit that Elon Musk’s X Corp. filed against the nonprofit Media Matters for America.

US District Judge Reed O’Connor of the Northern District of Texas bought Tesla stock valued between $15,001 and $50,000 in 2022, a financial disclosure report shows. He was overseeing two lawsuits filed by X and recused himself from only one of the cases.

Media Matters argued in a July court filing that Tesla should be disclosed by X as an “interested party” in the case because of the public association between Musk and the Tesla brand. O’Connor rejected the Media Matters motion in a ruling issued Friday.

O’Connor wrote that financial interest “means ownership of a legal or equitable interest, however small, or a relationship as director, adviser, or other active participant in the affairs of a party.” His ruling said the standard is not met in this case and accused Media Matters of gamesmanship:

Defendants failed to show facts that X’s alleged connection to Tesla meets this standard. Instead, it appears Defendants seek to force a backdoor recusal through their Motion to Compel. Gamesmanship of this sort is inappropriate and contrary to the rules of the Northern District of Texas.

Judge should exit case, law professor writes

O’Connor made the ruling three days after recusing himself from a similar lawsuit filed by X. In that case, X sued the World Federation of Advertisers (WFA) and several large corporations that it accuses of an illegal boycott. Antitrust law professors have described X’s claims as weak.

O’Connor didn’t explain why he recused himself, but it seems clear that it wasn’t because of his Tesla stock. O’Connor also invested in Unilever, one of the defendants in X’s advertising lawsuit. Since Unilever is directly involved in the case, that’s likely what drove O’Connor’s recusal decision.

Musk’s case against Media Matters is also related to X’s problem with advertisers fleeing the platform formerly named Twitter. Media Matters published research on ads being placed next to pro-Nazi content on X, and the lawsuit blames the group for X’s advertising losses.

The federal code of judges’ conduct says that “a judge shall disqualify himself or herself in a proceeding in which the judge’s impartiality might reasonably be questioned.” This includes cases in which the judge has a direct financial interest, and cases where the judge has “any other interest that could be affected substantially by the outcome of the proceeding.”

Harvard Law School Professor Noah Feldman argued that O’Connor should recuse himself from X v. Media Matters. While X and Tesla are legally separate entities, Feldman wrote in a Bloomberg Opinion piece last week that O’Connor should exit because of that “impartiality might reasonably be questioned” rule.

“The basic idea is that a judge should recuse himself if a reasonable person in possession of the relevant facts would believe that the judge has reason for bias. And there is good reason to think that this rule covers O’Connor,” Feldman wrote. “Because Musk is so closely identified with both X and Tesla, Tesla share prices are arguably affected by the performance of X.”

Prof: X forum-shopping boosts case for recusal

Feldman emphasized that the legal test is whether it would be “reasonable” to question a judge’s impartiality:

To be clear, I am not claiming the value of the two companies are demonstrably related. Rather, the appropriate measure is whether someone could reasonably think that Tesla’s business is affected by the vicissitudes of Musk’s X adventure.

And it seems clear that a reasonable person could think so. My Bloomberg Opinion colleague Matt Levine, my guru on matters corporate, has pointed out that Musk shifts employees, resources and money between the companies. Levine notes that Musk also apparently demanded that Nvidia ship chips destined for Tesla to X instead. And Bloomberg Opinion’s Liam Denning has explained that Musk’s X-related behavior (such as giving fawning two-hour interviews to Donald Trump) may be discouraging left-leaning Tesla buyers who don’t want to give Musk their business. That’s enough to create a perception that Musk’s different business endeavors are closely interrelated, such that the success of one could impact be success for another.

The fact that Musk appears to have been forum-shopping strengthens the case for recusal, Feldman wrote. X’s lawsuit claimed that Texas is an appropriate venue because X has advertisers and users located in Texas.

This justification is “meager, but perhaps less absurd than those used in some other forum-shopping situations,” Feldman wrote. “However, the fact that Musk’s lawyers appear to have sought a way to appear before O’Connor strengthens the case for recusal. Forum-shopping never looks good, but it looks especially bad when a plaintiff has sought out a judge who owns stock in one of his companies.”

Judge dismisses Tesla/X link as “speculative”

O’Connor’s ruling against Media Matters said, “there is no evidence that shows Tesla has a direct financial interest in the outcome of this case… Defendants merely point to news articles that report some blurred lines between Tesla and X that do not rise to the level of financial interest… The mere assertions that Musk owns a constellation of companies, some former Tesla employees now work at X, and that Tesla leased workspace from X do not support a finding that Tesla and X are not separate legal entities or that they share a financial interest.”

O’Connor called assertions that the value of Tesla and X are linked because of Musk “speculative” and said there is no indication that Musk’s involvement or the outcome of the case will impact Tesla’s share price.

“Moreover, businesses often have connections with others without holding a legal or equitable interest,” O’Connor wrote. “Consider the endless number of interested parties that would have to be disclosed if Defendants disclosure theory prevailed. Every corporation with a shared founder, board member, or known minority shareholder would have to be disclosed under Defendants’ reporting standard.”

O’Connor’s ruling also said the court “will award attorney’s fees on this matter” because Media Matters’ motion “is not substantially justified.” X was directed to file a motion for attorney’s fees.

This isn’t the first time O’Connor ruled against Media Matters in the case, which began in November 2023. In April, he denied a Media Matters motion to delay discovery until its motion to dismiss is resolved. Media Matters complained that “X’s discovery requests are extremely broad and unduly burdensome.”

The Media Matters motion to dismiss, which is still pending, argues in part that the Northern District of Texas is an improper forum for the dispute. “X is organized under Nevada law and maintains its principal place of business in San Francisco, California, where its own terms of service require users of its platform to litigate any disputes,” the motion said.

Musk recently said that X will move its headquarters from San Francisco to Austin, Texas.