Musk claims Microsoft’s OpenAI investment a de facto merger. They call Musk’s suit a publicity stunt.
The lawsuit typifying Elon Musk’s acrimonious relationship with OpenAI CEO Sam Altman has grown with last year’s addition of Microsoft Inc. and fresh antitrust allegations, and more recently as federal antitrust enforcers weighed in with commentary that supports Musk on the prohibition of interlocking directorates under Section 8 of the Clayton Act (See our previous story).
A hearing on Musk’s motion for a preliminary hearing scheduled for this week via Zoom was postponed to Feb. 4, after Musk’s attorneys told the court that their offices were among the many buildings destroyed by the Palisades Fire.
Musk and Altman co-founded the AI research organization in December 2015 allegedly to benefit humanity. Musk says Altman turned his back on this altruistic mission for financial gain, including accepting billions in funding from Microsoft in 2019. Offended by the company’s for-profit aspirations, Musk – the richest man in the world (source: Forbes) – says CEO Altman and CTO Gregory Brockman promised that OpenAI would operate transparently and open-source its technology.
Musk initially sued Altman, Brockman, and OpenAI in 2023, dropped the case in early 2024, perhaps as he was ramping up his involvement in then-candidate Donald Trump’s presidential campaign (Musk endorsed Trump in July 2024), refiled on Aug. 5, then filed an amended complaint on Nov. 14 – nine days after Trump’s election victory – to include Microsoft and allegations of antitrust violations (Musk, et al. v. Altman, et al., No. 4:24-cv-04722-YGR, N.D. Calif.).
Musk seeks damages, restitution, and specific performance of the original non-profit mission, as well as a judicial determination that OpenAI’s exclusive license to Microsoft is invalid.
In December 2024, the FTC reportedly opened an investigation into Microsoft’s business practices, focusing on its cloud computing, artificial intelligence, and cybersecurity product lines (See previous story).
OpenAI’s Position, Calls Suit a “Publicity Stunt”
The defendants say Musk’s suit is deficient in many ways.
Failure to Plead a Contract: Musk’s claims of an express or implied contract are not supported by specific, enforceable promises or mutual assent. The alleged agreements are based on vague mission statements and aspirations rather than concrete terms. Additionally, Musk fails to demonstrate that his contributions were part of a bargained-for exchange.
Lack of Consideration: Musk does not provide evidence that his donations to the company were made in exchange for specific promises from OpenAI, which is necessary to establish a contract.
Duplicative and Unsupported Claims: Musk’s claims for breach of the implied covenant of good faith and fair dealing and tortious interference with contract are duplicative of his contract claims and fail for the same reasons. Additionally, the tortious interference claim is incoherent because it targets alleged agents of the contracting party.
Inadequate Fraud Allegations: Musk’s fraud claims, including promissory fraud and aiding and abetting fraud, lack the particularity required by Rule 9(b). He fails to identify specific false promises, demonstrate their falsity, or show intent to defraud at the time the promises were made.
RICO Claims: Musk’s RICO claims are unsupported because he does not adequately plead the predicate act of wire fraud with the necessary specificity. Additionally, he fails to demonstrate that the alleged conduct constituted the operation of an enterprise distinct from the defendants themselves.
Lack of Standing for Fiduciary Claims: Musk lacks standing to assert claims for breach of fiduciary duty under California law, as he is not an officer, director, or party with a reversionary interest in OpenAI’s assets. His attempts to reframe these claims as constructive fraud or under the UCL are similarly flawed.
False Advertising Claims: Musk’s false advertising claims under the Lanham Act and California law fail because he does not identify any commercial advertisements or statements made primarily out of economic motivation. Additionally, he lacks standing to claim commercial injury under the Lanham Act.
Declaratory Relief: Musk’s request for declaratory relief is redundant and unnecessary, as resolving his underlying claims would address the issues for which he seeks a declaration.
Overall, the defendants argue that Musk’s complaint is a publicity stunt lacking legal merit and should be dismissed in its entirety.
Government Weighs In
However, what caught the eye of the Antitrust Division of the Department of Justice and the Federal Trade Commission is OpenAI’s argument regarding board members. Reid Hoffman simultaneously served on the boards of directors for OpenAI and Microsoft from March 2017 to March 2023, and Deannah Templeton served as Vice President of Partnerships and Operations in the Technology & Research division at Microsoft and as a non-voting member of OpenAI’s board of directors from November 2023 until July 2024. Both are defendants in the case.
OpenAI argues that there is no live “case or controversy” because Hoffman and Templeton are no longer affiliated with OpenAI’s board in any capacity. The issue is moot since the interlocking directorates – prohibited by Section 8 of the Clayton Act – have been resolved by their resignations, the defendants maintain.
The government argues in its statement of interest, however, that simply ending such interlocks does not moot claims if there is a risk of ongoing harm. The Antitrust Division and FTC explain that interlocking directorates are unfair methods of competition under federal antitrust laws and the FTC Act. The statement of interest explains the following laws and concepts:
Section 8 of the Clayton Act: This section prohibits interlocking directorates, where the same person serves as a director or officer in two competing corporations, to prevent potential conflicts of interest and anticompetitive practices.
Mootness of Section 8 Claims: Simply ending an interlocking directorate by having a person resign is not sufficient to moot a claim under Section 8. The risk of future violations or ongoing harm through the retention of competitively sensitive information must be considered.
Unfair Methods of Competition: Interlocking directorates are considered an unfair method of competition under federal antitrust law, including the FTC Act. This can include practices that violate the spirit of antitrust laws even if they do not violate the letter of the law.
Group Boycotts Under Section 1 of the Sherman Act: Group boycotts involving competing firms can be analyzed under the per se rule, meaning they are inherently anticompetitive. This applies even if the boycott has a vertical aspect or is organized by a non-competitor.
Legal Standards for Preliminary Injunction: The court should decide the motion for a preliminary injunction based on the proper application of Section 8, California’s Unfair Competition Law, and group boycotts under Section 1, considering the potential for ongoing harm and the need to prevent anticompetitive practices.
The leading authorities cited by the government in support of its argument include:
- TRW, Inc. v. FTC, 647 F.2d 942 (9th Cir. 1981) – This case is frequently referenced to support the interpretation of Section 8 of the Clayton Act and the prohibition on interlocking directorates.
- United States v. W. T. Grant Co., 345 U.S. 629 (1953) – Cited to argue that voluntary cessation of allegedly illegal conduct does not moot a case.
- Protectoseal Co. v. Barancik, 484 F.2d 585 (7th Cir. 1973) – Used to support the argument that Section 8 violations do not require proof of actual anticompetitive effect.
- Square D Co. v. Schneider S.A., 760 F. Supp. 362 (S.D.N.Y. 1991) – Cited to argue against evading Section 8 liability through formalistic tactics.
- Reading Int’l, Inc. v. Oaktree Cap. LLC, 317 F. Supp. 2d 301 (S.D.N.Y. 2003) – Cited to support the argument that Section 8 should not be interpreted in a way that elevates form over substance.
- United States v. Concentrated Phosphate Export Ass’n, 393 U.S. 199 (1968) – Referenced to argue that voluntary cessation does not moot a case involving antitrust violations.
- Cel-Tech Commc’ns, Inc. v. Los Angeles Cellular Tel. , 20 Cal. 4th 163 (1999) – Used to interpret California’s Unfair Competition Law in light of federal antitrust principles.
- Epic Games v. Apple, 67 F.4th 946 (9th Cir. 2023) – Cited to discuss the relationship between state unfair competition claims and federal antitrust claims.
- Trade Comm’n v. Motion Picture Advertising Service Co., 344 U.S. 392 (1953) – Used to support the argument that the FTC Act’s prohibition on unfair methods of competition supplements the Sherman and Clayton Acts.
Section 8 has been a focus of the Antitrust Division during the Biden administration and was listed as a priority in the first Trump administration. It’s anyone’s guess whether it will remain important in the second Trump administration. Most recently, the Antitrust Division announced that two directors of Epic Games Inc., who had been appointed by Tencent Holdings Ltd., resigned from the Epic board after the Antitrust Division expressed concerns that their positions on both boards violated Section 8. Tencent owns a minority interest in Epic. The interlock was created because Tencent also is the parent company of a gaming competitor to Epic, Riot Games Inc.
Microsoft Invests, Musk Cries Foul
Microsoft has invested heavily in OpenAI, including a significant outlay of $13 billion, and has integrated OpenAI’s technology into its own products and services. Musk calls Microsoft’s investment a “de facto merger.” In January 2024, it was reported that Open AI topped $1.6 billion in annualized revenue. It generated on $28 million in 2022, with a net loss of $540 million, according to reports.
Here are some key points about the OpenAI / Microsoft relationship:
Investment and Partnership: Microsoft owns roughly 49% equity in OpenAI and has a strong partnership with the company. This partnership allows Microsoft to integrate OpenAI’s advanced AI models, such as GPT-4, into its products and services, including Azure, Microsoft 365, and Copilot.
Azure OpenAI Service: Microsoft provides access to OpenAI’s models through the Azure OpenAI Service, enabling businesses to leverage these powerful AI tools within the Azure cloud platform.
Integration into Microsoft Products: OpenAI’s technology is embedded in various Microsoft products, such as Microsoft 365 and Copilot, enhancing their capabilities with advanced AI features.
While Microsoft and OpenAI collaborate closely, they also operate in a competitive landscape where other companies offer similar AI technologies and services. However, the partnership between Microsoft and OpenAI is designed to be mutually beneficial, leveraging each other’s strengths to advance AI technology and its applications.
OpenAI faces competition from several companies in the AI and generative AI space. They include:
Google DeepMind: Known for its advanced AI research and development, particularly in machine learning and reinforcement learning.
Anthropic: Focuses on AI safety and developing AI systems that are aligned with human values.
Cohere: Specializes in natural language processing and large language models.
Stability AI: Works on generative AI models and applications.
Inflection AI: Develops AI technologies aimed at improving human-computer interaction.
Aleph Alpha: Focuses on AI research and development with an emphasis on European markets.
AI21 Labs: Known for its work in natural language processing and AI-driven content generation.
Reka: Develops AI solutions for various industries, including healthcare and finance.
EleutherAI: An open-source AI research organization focused on creating large language models.
Hugging Face: Provides tools and models for natural language processing and machine learning.
Character.AI: Specializes in creating AI-driven characters for interactive applications.
Tencent AI: A major player in the AI space, particularly in China, with a wide range of AI applications.
Child Safety
This week, a non-profit organization filed a brief in support of Musk’s position. Encode is a youth-led organization advocating for safe and responsible AI. It is a network of more than 1,000 volunteers across 40 countries task with sharing the voices of younger generations in critical conversations about how AI impacts society. Encode works on issues such as deepfakes, children’s safety online, and oversight of algorithmic weapons systems, while also preparing for emerging challenges like transformative AI.
Encode filed an amicus brief arguing that that OpenAI’s proposed restructuring into a for-profit enterprise would undermine its commitment to developing and deploying AI technology in a way that is safe and beneficial to the public. Encode supports Musk’s motion for a preliminary injunction to prevent this restructuring, emphasizing that the public interest in AI safety is paramount and that OpenAI’s current nonprofit structure is essential to maintaining its focus on safety and public benefit.
Conclusion
The case will straddle what promise to be two very different presidential administrations. One difference is perhaps best illustrated by plaintiff Musk’s highly influential role in the second Trump administration which begins in a few days. He has already had an impact on the direction of the Republican Party and in communicating his positions to millions of his followers on his X social media platform.
