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As SolarCity prepares to release its financial statement for the first quarter of 2013 next Monday, we came across a couple of interesting items - actually one is interesting the other is more sickening - about litigation involving SolarCity. The first of these was discussed in their last filing - it will be interesting to see how the second is treated in Monday’s.
We wrote back in February 2012 about a lawsuit filed against SolarCity by SunPower. In that suit SunPower alleged that a number of its former employees were hired by SolarCity and that they took SunPower’s trade secrets to their new employer. In addition to naming SolarCity as a Defendant, SunPower also sued the former employees, including Tom Leyden. According to the Complaint:
35. LEYDEN connected at least three personal USB storage devices within days of leaving SUNPOWER. At least one of these devices was a portable external hard drive with 2 terabytes of storage capacity.
36. The forensic evidence indicated that LEYDEN copied at least thousands of files containing SUNPOWER confidential information and non-confidential proprietary information to these devices. These files included hundreds of quotes, proposals, and contracts, as well as files containing market analysis, forecast analysis, and business analysis.
37. LEYDEN also copied highly confidential data from the SUNPOWER database on www.salesforce.com. This data included information about major SUNPOWER customers accounting for over $100 million of sales throughout 201 I. The data also contained the name of the SUNPOWER employee that was responsible for these major sales. SUNPOWER is informed and believes, and thereon alleges, that this information allowed LEYDEN to recruit SunPower employees, including [others].
We wrote at the time that this sounded like pretty damning evidence against the individual defendants, but far less clear the degree to which SolarCity was liable, if at all.
SolarCity’s 10K, filed in March, in the section concerning Legal Proceedings, provides the conclusion to this saga:
On February 13, 2012, SunPower Corporation filed an action in the United States District Court for the Northern District of California (Civil Action No. 12-00694). The complaint asserts 12 causes of action against six defendants: SolarCity, Thomas Leyden, [others], although only the following six causes of action are asserted against SolarCity: trade secret misappropriation; conversion; trespass to chattels; interference with prospective business advantage; unfair competition; and statutory unfair competition.
Each of Messrs. Leyden, [others], or the Individual Defendants, are former SunPower employees, and at the time SunPower filed the complaint, each was a SolarCity employee…
In September 2011, we hired Mr. Leyden as our vice president of commercial sales; subsequently, his title was changed to vice president, project development. Mr. Leyden’s employment with us ceased on March 2, 2012.
The parties reached a confidential agreement to settle the action on December 31, 2012, and the lawsuit was dismissed with prejudice on January 28, 2013. The terms and amount of the settlement are not material to the Company’s financial position or results of operation.
(SolarCity 10K, filed March 27, 2013 at 36-37; emphasis added.)
Interestingly, while it is easy to find a SolarCity press release announcing Mr. Leyden’s hiring in September 2011, his subseqent departure - less than three weeks after the SunPower suit was filed - appears to have gone unreported. As for the lawsuit itself, it dragged on for nine more months - until shortly after SolarCity’s IPO on December 13, 2012.
So much for the interesting update. The far more troubling story appears in today’s Wall Street Journal under the title: Solar Installer Sues for U.S. Grant Funds. While we had written before about how the U.S. Treasury was investigating SolarCity’s accounting practices - particularly as to how it was valuing its leased systems for purpose of claiming federal tax benefits - this was the first that we had heard that SolarCity had filed a suit of its own, claiming that the grant payments that it had received were not big enough!
Wow! Proof of the old adage that the best defense is a good offense. Let it never be said that the folks running SolarCity - and their lawyers - are timid. Confronted with an existential threat to their business model - a well deserved threat in the eyes of some observers - SolarCity is turning the tables and suing to get even more money from the Treasury.
Curiously, there is no press release regarding this lawsuit to be found on the SolarCity website. But there can be no dispute that the outcome of this suit - as opposed to the hushed-up settlement with SunPower - is material to the Company’s ongoing operations. As we reported last October, in its IPO filing SolarCity acknowledged as much, saying:
If it [i.e., the U.S. Treasury] were successful in asserting this action [i.e., that SolarCity was overstating the value of its systems], we could then be required to pay damages and penalties for any funds received based on such misrepresentations (which, in turn, could require us to make indemnity payments to certain of our fund investors). Such consequences could have a material adverse effect on our business, liquidity, financial condition and prospects.
This means that Monday’s filing of quarterly financial results will have to comment on this litigation and it will be interesting to see if the subsequent investor conference call extracts more information from management. Should make for an interesting news day.