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Tesla got hit with a $137 million jury verdict: Why the case was 'so important'

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A California jury’s $137 million verdict against Tesla (TSLA) in a racial discrimination case brought by a Black contract worker is notable for its size and because it was a rare employment grievance that played out in public court rather than in a closed-doors arbitration.

“The verdict is designed to do what punitive damages are supposed to do: deter and punish Tesla,” veteran discrimination attorney Nancy Erika Smith told Yahoo Finance.

The award, which the judge could reduce, came down Monday for Owen Diaz, a former elevator operator at Tesla’s Fremont factory who said he was subjected to racially offensive taunts and graffiti. Diaz, a contractor paid by two staffing agencies rather than Tesla itself, said on a daily basis that Tesla employees directed racial epithets at him and other Black workers, including telling him to "Go back to Africa."

FREMONT, CA - SEPTEMBER 29:  Tesla CEO Elon Musk speaks during an event to launch the new Tesla Model X Crossover SUV on September 29, 2015 in Fremont, California. After several production delays, Elon Musk officially launched the much anticipated Tesla Model X Crossover SUV. The  (Photo by Justin Sullivan/Getty Images)
FREMONT, CA - SEPTEMBER 29: Tesla CEO Elon Musk speaks during an event to launch the new Tesla Model X Crossover SUV on September 29, 2015 in Fremont, California. (Photo by Justin Sullivan/Getty Images)

$1 million isn't punishment for Tesla

The case is an unlikely one to see the light of public litigation due to Tesla’s policy — common among large U.S. corporations — requiring workers to agree to arbitrate workplace disputes. Diaz, unlike the vast majority of other Tesla plant workers, could go to trial because he never signed the arbitration agreement. 

Virtually everyone who works at Tesla's Fremont factory has a binding arbitration, J. Bernard Alexander, one of Diaz's attorneys, told Yahoo Finance. These types of agreements "allow companies to litigate and have their dirty laundry stay in the dark," Alexander said, noting the irony of racist conduct occurring at a company with headquarters in liberal Silicon Valley.

"That's why this case was so important," Alexander said. "So there would be a light shined on it through the justice system."

Arbitration is controversial. Those who favor it, largely employers, argue that arbitration is more flexible and efficient than litigation. However, critics say arbitration is opaque, can't be appealed, and tends to offer smaller awards than those granted by juries — something that Diaz’s case suggests could be true. 

A similar dispute brought by former Tesla materials handler Melvin Berry was handled through mandatory arbitration. In August, Bloomberg reported that an arbitrator ordered Tesla to pay $1 million for harassment by company supervisors who called him the “N-word.” Smith, the veteran discrimination attorney, suggested that $1 million is a minor amount for a company like Tesla.

“Tesla is not punished by a $1 million verdict. Tesla is punished by a $137 million verdict,” Smith said.

Tesla could 'tie this up in court for years'

The large verdict is unlikely to stick. Tesla could ask the judge to overturn the verdict or reduce the award, and the electric car giant could also appeal the case to a higher court. David Miklas, an employer-side attorney said the size of the award "absolutely is noteworthy," meaning Tesla will likely appeal.

"Tesla could appeal this and tie this up in court for years," Miklas said, adding that some appeals can span as long as a decade.

Tesla could also offer to settle with Diaz for a lower amount, which Smith said could be the most strategic path given that Tesla's public debate over workplace discrimination isn’t going away just yet. 

On Oct. 7, during Tesla's annual shareholders’ meeting, shareholders are expected to vote on a proposal from activist shareholder Nia Impact Capital that would require Tesla to report on the impact of its use of mandatory arbitration. Tesla’s board has discouraged shareholders from voting in favor of the measure.

Smith suspects that any changes to Tesla's mandatory arbitration policy depend on several factors.

“It depends on how much power the board has, and how much power the activist investors are going to have, and whether it really affects whether people buy Teslas,” she said.

Tesla's Valerie Capers Workman, Tesla’s vice president for people, issued a statement Monday saying that the company believes the facts do not justify the verdict in the Diaz case. However, she suggested that the company has improved since Diaz worked there in 2015 and 2016.

"[W]e do recognize that in 2015 and 2016 we were not perfect. We’re still not perfect. But we have come a long way from 5 years ago. We continue to grow and improve in how we address employee concerns. Occasionally, we’ll get it wrong, and when that happens we should be held accountable.”

Yahoo Finance reached out to Tesla for comment and will update this post with any response we receive.

Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.

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