Elon Musk’s escalating legal feud with Sam Altman could act as a drag on OpenAI’s rocket-like ascent to the top of the artificial intelligence world.
The two one-time collaborators are now locked in a simultaneous battle to advance AI and prevail in a courtroom fight over the future of OpenAI, the organization Musk and Altman founded together in 2015 before parting ways.
Musk, who now is running a competing AI company called xAI, is trying to convince a federal judge to issue an injunction that would stop the creator of chatbot ChatGPT from converting to a for-profit company.
The lawsuit Musk filed in August also accuses OpenAI of putting profits before its initial nonprofit mission of advancing AI in a way that benefits all of humanity.
Tesla CEO and X owner Elon Musk listens as US President-elect Donald Trump speaks during a meeting with House Republicans in Washington, DC, on Nov. 13. ALLISON ROBBERT/Pool via REUTERS/File Photo ·via REUTERS / Reuters
I think the fact that Musk has asked for a preliminary injunction ups the ante,” Rob Rosenberg, former general counsel for Showtime Networks and founder of Telluride Legal Strategies, told Yahoo Finance.
“Because if he were successful it would definitely throw a major wrench into the current plans for OpenAI.”
Altman, OpenAI and its biggest backer Microsoft, which is also named as a defendant in the case, last week shot back at Musk’s request for the judge to step in on an emergency basis, calling his allegations “false” and claiming he has no legal basis for blocking OpenAI’s for profit conversion.
The legal fight is unfolding while OpenAI and Microsoft (MSFT) discuss how to divide up the spoils of the artificial intelligence upstart when and if OpenAI becomes a for-profit company.
OpenAI and Microsoft hired Wall Street investment banks Goldman Sachs (GS) and Morgan Stanley (MS) to advise them on these discussions after OpenAI closed a $6.6 billion funding round valuing it at $157 billion. Microsoft thus far has invested $14 billion since 2019.
Altman has said OpenAI needs to become a for-profit to help it attract additional investment capital. In September, the charity projected a $5 billion loss for 2024.
Sam Altman, co-founder and CEO. of OpenAI, speaks during the New York Times annual DealBook summit on Dec. 4, in New York City. (Photo by Michael M. Santiago/Getty Images) ·Michael M. Santiago via Getty Images
Musk’s suit could introduce perilous delays. According to the New York Times, the terms of the charity’s latest investment round require it to shed its non-profit status within two years, or have those investments convert to debt.
Musk is not the only rival that could slow things down for OpenAI. AI competitor Meta (META) on Thursday sent a letter to California’s Attorney General Rob Bonta asking the state to block OpenAI from becoming a for-profit business.
It said that allowing the change would set a dangerous precedent, with non-profit donors simultaneously benefiting from government-allowed tax deductions and profits from traditional investments.
To understand the current feud between Musk and Altman it helps to know the origins of their onetime partnership and how things unraveled.
The two men started OpenAI in 2015 as a nonprofit under the name OpenAI Inc., a nod to its mission of safely and transparently developing AI to advance humanity instead of pursuing profits.
Musk left in 2018. There are now disagreements in court about the reasons for that departure and what led up to it.
Musk has alleged that Altman “deceived” him into co-founding and funding OpenAI by promising that it would remain a non-profit, then took steps to unlawfully enrich himself by partnering OpenAI with companies in which he held financial interest, including Reddit (RDDT) and Stripe.
Elon Musk and Sam Altman speaking in 2015, the year they co-founded OpenAI. (Photo by Michael Kovac/Getty Images for Vanity Fair) ·Michael Kovac via Getty Images
Musk has also accused Altman of forming and operating for-profit businesses in multiple parts of the AI market that entered into contractual relationships with OpenAI — including processor manufacturer Rain AI and energy provider Helion Energy — and of seeking to form an OpenAI-powered device company with former Apple chief designer Jony Ive.
Musk said in court documents that he wrote to Altman and another OpenAI executive with an ultimatum on September 20, 2017: “Either go do something on your own or continue with OpenAI as a non-profit.” He left in February 2018.
Musk’s complaint names more than a dozen OpenAI-affiliated companies as defendants.
OpenAI, however, claims Musk agreed prior to leaving the startup that for-profit status was the next step to completing OpenAI’s mission, according to a blog post last week.
Musk even made a failed demand to gain majority equity in the organization and to be named its CEO, according to OpenAI.
Musk stepped down as OpenAI’s co-chair after OpenAI rejected his proposal to turn OpenAI into a for profit by attaching it to Musk’s EV maker Tesla (TSLA), OpenAI added in court filings.
In 2019 Altman and his team did create a for-profit subsidiary to raise outside venture capital — including the billions eventually gained from Microsoft.
It was structured in such a way that the for-profit subsidiary, technically owned by a holding company owned by OpenAI employees and investors, remained under the control of the nonprofit and its board of directors while giving its biggest backer (Microsoft) no board seats and no voting power.
The inherent tension between these two parts of the enterprise is what contributed to a dramatic boardroom clash in 2023 when Altman was ousted by the board and then brought back five days later.
In the aftermath, Microsoft executive Deannah Templeton took a non-voting observer position on OpenAI’s board, only to relinquish that seat this year as both OpenAI and Microsoft came under more regulatory scrutiny.
Musk has alleged that agreements between OpenAI and Microsoft, which is also a competitor to OpenAI, violated federal and state antitrust laws. Other claims include breach of contract, breach of fiduciary duties, unlawful self-dealing, and unfair business practices.
The contracts, Musk said, threaten fair competition in the market for AI products, specifically, by requiring investors not to fund the companies’ mutual competitors, including xAI.
“Plaintiffs, consumers, investors, and the generative AI market will suffer irreparable harm if defendants’ conduct continues unabated,” Musk said in his request for an injunction.
The development of generative AI technology presents profound implications for society, making preservation of competitive markets in this sector uniquely important to the public interest.
Microsoft has rejected those claims.
Microsoft CEO Satya Nadella stands between logos for OpenAI and Microsoft during the OpenAI DevDay event on Nov 6, 2023 in San Francisco. (Photo by Justin Sullivan/Getty Images) ·Justin Sullivan via Getty Images
“Microsoft never agreed to avoid funding OpenAI’s competitors or agreed that other investors would do so — full stop,” the company said in a court document. “Not as part of the latest round of OpenAI funding, nor at any other time.”
In an interview with the New York Times earlier this month, Altman said had he known OpenAI would need so much capital he would have founded it using a different business structure.
Mr. Altman said he was “tremendously sad” about his legal dispute with Musk, saying that “I grew up with Elon as like a mega hero.”
He said he was not concerned that Musk could use his close ties with President-elect Donald Trump to make things more difficult for OpenAI once the new administration takes power.
“I believe pretty strongly that Elon will do the right thing and that it would be profoundly un-American to use political power to the degree that Elon would hurt competitors and advantage his own businesses,” he said.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on X @alexiskweed.
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