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Greenberg v. Sunrun Inc.

United States District Court, N.D. California

February 9, 2017

CAROLE LEE GREENBERG, Individually and on Behalf of All Others Similarly Situated, Plaintiff,
SUNRUN INC., et al., Defendants.



         Defendant Sunrun, Inc. (“Sunrun”) is a company that leases rooftop solar panels to homeowners. When Sunrun conducted its initial public offering (“IPO”) on August 5, 2015, its future looked bright. But with a series of regulatory setbacks, things quickly went dark. After she and other investors took heavy losses on Sunrun stock, Plaintiff Carole Greenberg brought this class action against Sunrun, its officers, directors, and underwriters for violations of the Securities Act of 1933.

         I. BACKGROUND

         A. Sunrise

         Centralized sources of conventional energy, like coal-fired power plants, have traditionally dominated American energy markets. Class Action Compl. (“CAC”) ¶ 34. These facilities produce energy far from the point consumption and then transmit it to households and business over an interconnected network known as the electrical grid. CAC ¶ 34. Centralized sources of renewable energy, like dams or solar farms, have also played a role. CAC ¶ 34. More recently decentralized sources of renewable energy, like rooftop solar panels, have taken off. CAC ¶¶ 35-36.

         While utilities in general are highly regulated, solar energy production of all stripes is also often heavily subsidized. CAC ¶¶ 37-38. In addition to federal tax credits, some states incentivize the installation of rooftop solar panels through a policy called net metering. CAC ¶¶ 37-38. Net metering allows homeowners to sell their excess solar energy back to utility companies, often at full retail rates. CAC ¶ 42. But because this arrangement imposes a burden on utility companies, states often cap the number of customers who may participate. See CAC ¶¶ 42, 51-54, 60.

         To compete with utilities, companies that sell or lease solar panels to homeowners often rely on net metering. CAC ¶ 43. That means their fortunes depend on state regulatory choices. CAC ¶¶ 44, 48. Defendant Sunrun, Inc. (“Sunrun”) is no exception. The company does not, and likely could not, operate in states without favorable net metering rules. CAC ¶ 44. For that reason, in 2015 Sunrun operated only in Arizona, California, Colorado, Connecticut, Delaware, Hawaii, Maryland, Massachusetts, Nevada, New Hampshire, New Jersey, New York, Oregon, Pennsylvania, South Carolina, and Washington, D.C. CAC ¶ 44. Most of its business was in California but, over only a few quarters, Nevada went from zero to 20% of Sunrun's overall deployment. CAC ¶¶ 50, 59. Still, even in friendlier markets regulatory fights do not always go Sunrun's way. CAC ¶ 48.

         B. Sunset

         Despite the best efforts of Sunrun's lobbying arm, net metering subsidies came under attack in Nevada, California, Arizona, and Hawaii. See CAC ¶¶ 48-72. Nevada historically allowed net metering subsidies but capped the number of consumers who could take advantage of them. CAC ¶ 51. Nevada had raised the cap from 1% to 3% but ultimately refused go up to 10%. CAC ¶ 52. It then passed Nevada Senate Bill 374 (“SB 374”), allegedly with “the aim of ending unreasonable subsidies for rooftop solar customers.” CAC ¶ 54. Among other things, the bill dictated that energy utilities “shall . . . offer net metering to customer-generators” but gave a state commission discretion to iron out the details. SB 374 § 2.3(1) (dkt. 62-2).[1] For example, under SB 374 the commission “[m]ay establish terms and conditions for the participation by customer-generators in net metering, including, without limitation, limitations on enrollment in net metering” and “authorize a utility to establish just and reasonable rates and charges to avoid, reduce, or eliminate an unreasonable shifting of costs from customer-generators to other customers.” Id. §§ 2.3(2)(b), (d). The bill also made clear that the commission “[s]hall not approve any tariff”-which in this context means a document that defines the relationship between a utility and its customers[2]-or “authorize any rates or charges for net metering” that “unreasonably shift costs from customer-generators to other customers.” Id. § 2.3(2)(e). What is more, another important subsidy in Nevada was scheduled to sunset at the close of 2015. CAC ¶ 58.

         Changes were on the horizon in California as well. The state legislature passed a bill that would have the state's net metering regime lapse once certain caps were reached, which was expected to be no later than July 2017. CAC ¶ 60. It directed the state's utility commission to propose a successor by the end of 2015, though this arrangement meant that the final details of the new net metering regime could not be known before that time. CAC ¶ 60. In April 2015, an administrative judge noted that, in light of “increased deployment of solar” in California, “more cost-based rates are appropriate.” CAC ¶ 62.

         In 2013, Arizona approved a surcharge of $0.70 per kilowatt on rooftop solar panel owners, which comes out to roughly $5.00/month for an average user. CAC ¶ 63. In late 2014, several members of Congress-many of whom represented Arizona-publicly expressed concerns about deceptive sales practices in the solar panel industry. CAC ¶¶ 66-67. And in 2015, the Arizona legislature passed a consumer protection law “aimed at curbing deceptive practices in the market of residential solar leases.” CAC ¶ 69. Later that year, many of the state's major utility companies submitted proposals that challenged net metering practices in the state. CAC ¶ 70. The state commission deferred making any decisions on the proposals, but Plaintiffs maintain that the message was clear: “solar subsidies in Arizona were under attack.” CAC ¶ 70.

         Hawaii's largest electric utility company submitted a proposal to end net metering in 2015. CAC ¶ 71. A few months later, a former chair of the energy committee in the state house of representatives published a report urging the same. CAC ¶ 72.

         On August 4, 2015, Sunrun's pre-IPO Registration Statement and Prospectus (“Prospectus”) became effective[3]-one day before the company went public. CAC ¶ 77. The Prospectus included few specifics about these regulatory developments. See CAC ¶ 78. It mentioned that Nevada would soon reach its net-metering cap and that new legislation in Nevada (SB 374) required the state commission to approve “an uncapped program” by the end of 2015-but said nothing about the particular provisions designed to curb unreasonable cost-shifting.[4] See Prospectus (dkt. 62-1) at 18; CAC ¶¶ 81, 83.

         The Prospectus also said that Sunrun focused on markets with “favorable policy environments, ” Prospectus at 5, 96; CAC ¶ 81, and noted that 58% of its customers were in California, Prospectus at 23; CAC ¶ 84. It therefore warned that its business was “particularly susceptible” to adverse policy changes there, as well as in “other markets that may become similarly concentrated.” Prospectus at 23-24. It did not single out high growth and increasing concentration of business operations in Nevada. CAC ¶ 84.

         A graphic near the front of the Prospectus also boasted that Sunrun customers “lock-in long term savings, ” while its overview section touted “simple, predictable pricing for solar energy that is insulated from rising retail electricity prices.” Prospectus graphic #3; Prospectus at 1; CAC ¶ 86. And as required by law, the Prospectus alerted investors to ongoing legal proceedings in which Sunrun was involved. CAC ¶ 87. Although it discussed investigations by the Treasury and Justice Departments into a 2012 solar energy grant program, a 2013 California consumer class action about contractor licensing laws, and Sunrun's own effort to challenge a tax decision in Arizona, the Prospectus did not discuss (1) Sunrun's efforts to obtain information under Nevada public record laws about Governor Brian Sandoval's “cronyism, ” (2) interventions in several proceedings before state public utility commissions, and (3) litigation conducted by its lobbying arm in states in which Sunrun did not operate, like Wisconsin.[5] CAC ¶ 87.

         Finally, the Prospectus warned that the “expiration, elimination or reduction of . . . rebates and incentives could adversely impact” Sunrun's business. Prospectus at 18. Specifically, the Prospectus observed that “changes to net metering policies may significantly reduce demand for electricity from our solar service offerings, ” and that utility companies and other special interests were “currently challenging solar-related policies to reduce the competitiveness of residential solar energy.” Id. And, as a result, it warned that the market price of Sunrun stock “may be volatile” and that investors could “lose all of part” of their investment. Id. at 37-38; see also id. at 8, 15-19, 63, 105-06 (further warnings about regulatory risk). Nevertheless, investors bought 17.9 million shares of Sunrun stock for some $250.6 million during the company's IPO on August 5, 2015. CAC ¶ 89.

         C. Midnight

         On October 12, 2015, Hawaii did away with net metering. CAC ¶ 93. On December 22, Nevada's Public Utilities Commission allowed utilities to buy back excess solar energy for less, significantly reducing the incentive that net metering had provided-even for existing homeowners.[6] CAC ¶ 94; NV Comm'n Order (dkt. 62-6) ¶ 108. Two weeks later, Sunrun ceased all Nevada operations. CAC ¶ 95. And on January 28, California changed its net metering scheme in a way that “slashed” demand for the company's services. CAC ¶ 96. Sunrun's stock plummeted, and now trades at less than half its IPO value. CAC ¶ 99.

         Plaintiff Carole Greenberg filed a class action lawsuit against Sunrun, its officers, directors, and underwriters on May 6, 2016 under sections 11, 12(a)(2), and 15 of the Securities Act of 1933. See Compl. (dkt. 1) at 1-6 (listing parties); 32, 34-35 (causes of action). Several other related class actions were filed in federal court and consolidated with Greenberg's.[7] See Order Relating Case (dkt. 23); Minute Order (dkt. 50). Plaintiffs filed a consolidated class action complaint on October 21, 2016. See CAC. The proposed class consists of “all those who purchased Sunrun common stock pursuant or traceable to Sunrun's August 5, 2015 initial public stock offering.” CAC ¶ 1. They maintain that Sunrun misled investors by (1) telling them in its Prospectus that the company focused on “favorable policy environments, ” (2) omitting crucial details about Nevada's SB 374, (3) glossing over high growth and increasing concentration in Nevada, (4) boasting about “long term savings” and “predictable pricing, ” and (5) failing to disclose ongoing legal proceedings as required by law. CAC ¶¶ 81-88.

         II. ...

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