Elon Musk’s escalating legal dispute with Sam Altman could act as a drag on OpenAI’s rise to the top of the artificial intelligence world.
The two former collaborators are now locked in a simultaneous battle to advance AI and prevail in a court fight over the future of OpenAI, the organization Musk and Altman founded together in 2015 before parting ways.
Musk, who now runs a competing artificial intelligence company called xAI, is trying to convince a federal judge to issue an injunction preventing chatbot creator ChatGPT from becoming 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.
Elon Musk, CEO of Tesla and owner of X, listens as US President-elect Donald Trump speaks during a meeting with House Republicans in Washington, DC, on November 13. ALLISON ROBBERT/Pool via REUTERS/File Photo ·via REUTERS / Reuters
“I think the fact that Musk has requested a preliminary injunction ups the ante,” Rob Rosenberg, former general counsel at Showtime Networks and founder of Telluride Legal Strategies, told Yahoo Finance.
“Because if it were to succeed, it would definitely be a big obstacle to the current plans for OpenAI.”
Altman, OpenAI and its biggest backer, Microsoft, which is also named as a defendant in the case, responded last week to Musk’s request for the judge to intervene emergency, calling his accusations “false” and saying he has no right legal. basis for blocking the for-profit conversion of OpenAI.
The legal fight unfolds as OpenAI and Microsoft (MSFT) argue over how to divide the AI upstart’s spoils when 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. So far, Microsoft has invested $14 billion since 2019.
Altman has said that OpenAI needs to become a for-profit company to help it attract additional investment capital. In September, the charity projected a loss of $5 billion by 2024.
Sam Altman, co-founder and CEO. of OpenAI, speaks during the New York Times’ annual DealBook Summit on December 4 in New York City. (Photo by Michael M. Santiago/Getty Images) ·Michael M. Santiago via Getty Images
Musk’s lawsuit could cause dangerous delays. According to the New York Times, the terms of the charity’s latest investment round require it to abandon its nonprofit status within two years or have those investments converted into debt.
Musk isn’t the only rival who could slow things down for OpenAI. AI competitor Meta (META) sent a letter to California Attorney General Rob Bonta on Thursday, asking the state to block OpenAI from becoming a for-profit company.
He said allowing the change would set a dangerous precedent, as nonprofit donors would simultaneously benefit from government-allowed tax deductions and traditional investment gains.
To understand the current feud between Musk and Altman, it’s helpful to know the origins of their former partnership and how things developed.
The two men founded OpenAI in 2015 as a nonprofit organization under the name OpenAI Inc., a nod to their mission to safely and transparently develop AI to advance humanity rather than seeking profit.
Musk left in 2018. There are now disagreements in the courts about the reasons for that departure and what led to it.
Musk has alleged that Altman “tricked” him into co-founding and funding OpenAI by promising it would remain a nonprofit, and then took steps to illegally enrich himself by associating OpenAI with companies in which he had financial interests, including Reddit (RDDT). . ) and Raya.
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 also accused Altman of forming and operating for-profit companies in multiple parts of the AI market that entered into contractual relationships with OpenAI, including processor maker Rain AI and energy provider Helion Energy, and of attempting to form a company of devices powered by OpenAI. with former Apple design chief Jony Ive.
Musk said in court papers that he wrote Altman and another OpenAI executive with an ultimatum on Sept. 20, 2017: “Either do something on your own or continue OpenAI as a nonprofit.” He left in February 2018.
Musk’s complaint names more than a dozen companies affiliated with OpenAI as defendants.
OpenAI, however, claims that Musk agreed before 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 filed an unsuccessful lawsuit to obtain a majority of the organization’s shares and be named its CEO, according to OpenAI.
Musk resigned as co-chairman of OpenAI after OpenAI rejected his proposal to turn OpenAI into a for-profit company by attaching it to Musk’s electric vehicle maker Tesla (TSLA), OpenAI added in court papers.
In 2019, Altman and his team created a for-profit subsidiary to raise outside venture capital, including the billions they ultimately raised 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 its largest sponsor (Microsoft) He had no seats on the board of directors. and without voting power.
The inherent tension between these two parts of the company is what contributed to a dramatic boardroom clash in 2023, when Altman was ousted by the board and then reinstated five days later.
Microsoft executive Deannah Templeton subsequently took a non-voting observer position on OpenAI’s board of directors, only to resign from that position this year when both OpenAI and Microsoft came under increased regulatory scrutiny.
Musk has alleged that the agreements between OpenAI and Microsoft, which is also an OpenAI competitor, 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 the preservation of competitive markets in this sector of unique importance to the public interest.”
Microsoft has rejected those claims.
Microsoft CEO Satya Nadella stands between the OpenAI and Microsoft logos during the OpenAI DevDay event on November 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 nor agreed to let other investors do so, period,” the company said in a court filing. “Not as part of OpenAI’s latest funding round or at any other time.”
In an interview with the New York Times earlier this month, Altman said that if he had known OpenAI would need so much capital, he would have founded it using a different business structure.
Altman said he was “tremendously sad” about his legal dispute with Musk and said he “grew up with Elon as a mega hero.”
He said he was not concerned that Musk could use his close ties to President-elect Donald Trump to make things difficult for OpenAI once the new administration takes power.
“I firmly believe that Elon will do the right thing and that it would be deeply un-American to use political power to the extent that Elon would harm its competitors and benefit its own businesses,” he said.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on X @alexiskweed.
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