Elon Musk’s escalating legal feud with Sam Altman could hinder OpenAI’s rocket-like climb to the top of the artificial intelligence world.
The two former employees are now locked in a simultaneous battle to advance AI, triumphing in a courtroom battle over the future of OpenAI, the organization Musk and Altman co-founded in 2015 before parting ways.
Musk, who now runs a competing AI company called xAI, is trying to convince a federal judge to issue an injunction that would prevent chatbot maker ChatGPT from transitioning to a for-profit company.
The lawsuit, which Musk filed in August, also accuses OpenAI of putting profits ahead of its original nonprofit mission to advance AI in ways that benefit all humanity.
“I think the fact that Musk has asked for a preliminary injunction raises the bar,” Rob Rosenberg, former general counsel of Showtime Networks and founder of Telluride Legal Strategies, told Yahoo Finance.
“Because if he were to be successful, it would certainly 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, fired back last week at Musk’s request for a judge to intervene on an emergency basis, calling his accusations “false” and claiming that he had no legal rights. basis for blocking OpenAIs for profit conversion.
The legal battle is unfolding as OpenAI and Microsoft (MSFT) discuss how to split the artificial intelligence startup’s spoils 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 has invested $14 billion so far since 2019.
Altman has said OpenAI should become a for-profit to attract additional investment capital. In September, the charity predicted a $5 billion loss by 2024.
Musk’s lawsuit could lead to dangerous delays. According to the New York Times, the terms of the charity’s latest investment round require the charity to give up its nonprofit status within two years or else these investments will have to be converted into debt.
Musk isn’t the only rival that 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 prevent OpenAI from becoming a for-profit company.
It said allowing the change would set a dangerous precedent, with nonprofit 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 one-time partnership and how things developed.
The two men started OpenAI in 2015 as a nonprofit organization under the name OpenAI Inc., a nod to the company’s mission to securely and transparently develop AI to advance humanity rather than pursue profit.
Musk left in 2018. There are now disagreements in court 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 unlawfully enrich himself by partnering OpenAI with companies in which he had financial interests, including Reddit (RDDT). ) and Stripe.
Musk has also accused Altman of setting up and operating for-profit companies in multiple parts of the AI market that have entered into contractual relationships with OpenAI – including processor maker Rain AI and energy supplier Helion Energy – and of trying to build an OpenAI-powered device company aim. with former Apple chief designer Jony Ive.
Musk said in court documents he wrote to Altman and another OpenAI executive with an ultimatum on September 20, 2017: “Either do something yourself or continue with OpenAI as a non-profit.” He left in February 2018.
Musk’s complaint names more than a dozen OpenAI affiliates as defendants.
However, OpenAI claims that before leaving the startup, Musk agreed that profitability status was the next step to complete OpenAI’s mission, according to a blog post last week.
Musk even made an unsuccessful demand to acquire a majority stake in the organization and be named CEO, according to OpenAI.
Musk resigned as co-chairman of OpenAI after OpenAI rejected its proposal to turn OpenAI into a profitable company by linking it with Musk’s EV maker Tesla (TSLA), OpenAI added in court filings.
In 2019, Altman and his team founded a for-profit subsidiary to attract outside venture capital, including the billions ultimately made from Microsoft.
It was structured so 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 the largest funder (Microsoft) was denied board seats . and no voting rights.
The inherent tension between these two parts of the business contributed to a dramatic boardroom clash in 2023, when Altman was ousted by the board and brought back five days later.
In the aftermath, Microsoft CEO Deannah Templeton took a non-voting observer position on OpenAI’s board, but gave up that seat this year as both OpenAI and Microsoft came under increased scrutiny.
Musk has claimed that agreements between OpenAI and Microsoft, which is also a competitor of OpenAI, violated federal and state antitrust laws. Other claims include breach of contract, breach of fiduciary duty, unlawful self-dealing and unfair business practices.
The contracts, Musk said, threaten fair competition in the market for AI products, particularly 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 has profound implications for society, making maintaining competitive markets in this sector uniquely important to the public interest.”
Microsoft has denied these claims.
“Microsoft has never agreed to avoid financing OpenAI’s competitors, nor has it agreed that other investors would do so,” 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 that if he had known OpenAI would require so much capital, he would have founded it with a different business structure.
Mr. Altman said he was “tremendously sad” about his legal dispute with Musk and said that “I grew up with Elon as a mega-hero.”
He said he was not concerned that Musk could use his close ties to newly elected President Donald Trump to make things more difficult for OpenAI once the new administration comes into power.
“I feel quite strongly that Elon will do the right thing and that it would be completely un-American to use political power to the extent that Elon would harm competitors and benefit his own companies,” he said.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on X @alexiskweed.
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