Video Transcript
Elon Musk vs. OpenAI: The Legal Battle
The lawsuit between Elon Musk and OpenAI provides critical lessons for CEOs and business leaders navigating the complex interplay between legal agreements, organizational missions, and ethical considerations. By understanding the nuances of this case, business leaders can better equip themselves to face legal challenges, ensuring their companies remain aligned with their foundational principles while adhering to legal and ethical standards.
Insights from the Elon Musk and OpenAI Lawsuit
Elon Musk versus Sam Altman and OpenAI. This is a huge lawsuit, and I actually think it is a fascinating lawsuit for CEOs who want to better understand some of these really important corporate and business issues, specifically as it relates to contracts, the plans that founders make in the beginning if later the organization goes a different direction, and one of the biggest reasons I am doing this video today is because I have watched some commentaries on this. And frankly, I think most commentators are getting it wrong. YouTuber attorneys rarely practice business law. A lot of them are criminal attorneys, constitutional law attorneys, or some category.
But my perspective here is as a business attorney and a nonprofit attorney. I have years of experience in both of those areas. And for that reason, I have a unique perspective on the issues here. And as you will find out, I actually think Elon Musk has a very strong case.
I have heard commentators who are attorneys, saying, “Oh, there is no contract here.” You know, the fact that the founders had original plans and Elon Musk gave millions of dollars for those plans. That is not a contract. There is nothing in writing. I couldn’t disagree more. There is a contract here, in my opinion, and I will explain why.
Second, some doctrines don’t come up very often. They are obscure legal doctrines that are vital to the legal analysis here, and all the commentators are missing this, you are not going to know these doctrines unless you work in charitable law or nonprofit law. And so because of these important doctrines, like the doctrine of donor intent and charitable trust doctrine, Elon Musk has very strong arguments against OpenAI and Sam Altman.
Now, I only have one document in this case, and there is this old saying, “The person who shares an idea first always seems right until another comes along and shares a different perspective of events.” So on one hand, take this analysis with a grain of salt because we are only today looking at the lawsuit complaint.
The complaint is the document filed by Elon Musk to get a lawsuit started. A lawsuit includes a summons and a complaint. The summons says, “Hey, you have to show up in court. You now have a case against you.” That is what summons means. It is another way of saying, “Come here, come to court.” So that is a summons. It is normally a one- to two-page document. The complaint involves two big sections. Section number one is the story. It is the narrative. Normally, it is in chronological order, and it explains the explanation of what happened. The complaint starts with the story about Elon Musk and his involvement with OpenAI.
The second part of the complaint is the claims. The claims are not required, but usually, the claims are there as guidance for the court so that a court understands what exactly the claims that are being brought.
So coming up, I am going to analyze the complaint brought by Elon Musk, but we don’t yet have a response from Sam Altman and OpenAI. So we don’t have the benefit of that. We are kind of taking as true the claims that are brought in here and the facts that are alleged. But we all know that certain facts are going to be disputed and denied.
So let’s just go through it, and I will explain how I would analyze a complaint if I were getting this as a judge and hadn’t yet looked at the answer from the other side. I worked for a judge appointed by Ronald Reagan. I was an extern. I wasn’t paid, but I had a fascinating experience working with this judge, understanding how he analyzed issues like this, and seeing how he approached very complex legal doctrines.
You are going to see, as we get into this, a few big issues. First, there is a question of whether there was a contract. And you will find out this isn’t a simple written contract. It is not like you have a standard contract written up where each side signs it at the end. No, this is plans and discussions by founders about what the organization will look like in the future.
Elon Musk is essentially claiming that that constitutes a contract. We will wrestle with that issue, and you will hear my conclusion that it does constitute a contract under law.
The next big issue is, can you start a business as a nonprofit to avoid taxes?
Essentially, what has happened here is that OpenAI started as an open-source AI nonprofit, and then they moved into a business. And now they are actually in a partnership with Microsoft, who is bringing a lot of money to the table and benefiting significantly.
And I think Elon Musk is not too happy about that, especially since he is competing. So, does it matter that Elon Musk is competing? He has his own AI software. And can businesses start as a nonprofit to get those tax benefits and then later convert to a corporation? The short answer to that is no, and I think OpenAI is running very close to the line, perhaps has crossed the line, and has some very serious legal issues.
And I will talk about guidance for founders and CEOs who might think, “Hey, I want to start my business as a nonprofit, take all the benefits of the tax breaks, and then later, when we have developed something of value, we will move that over to a business and we will make money from that.” The short answer is, it doesn’t work. You can’t do it that way.
The other big question here is, is this a PR stunt by Elon Musk, or does he have a chance to win this case? In my opinion, he has a chance to win it. And for that reason, I think this is going to go on for a while until we get a settlement. Now, it is something like 99 percent of cases are resolved by settlement, not by a trial.
And even if you win a case in trial, often there are appeals, and so you might settle at that point. And even when there are no further appeals, then there is the collection phase, and so you might have a settlement at that point. So virtually all cases settle at some point. I think that this is highly likely to settle before trial, but it is not going to be because Elon Musk’s case is frivolous or is going to get thrown out of court.
I think as long as the judge is aware of these legal issues, this is going to continue to move forward in the court until either a trial or, more likely, a very significant settlement that is agreed by all parties.
All right. So that is enough of a preview. Let’s take a look at the complaint, and I will explain the key parts here, including some of the formalities. So not only will you be learning about this case, but you will also learn a little bit about how a lawsuit works, some of the key documents that are there, and how an attorney will take a look at this.
All right. In this particular jurisdiction, in the upper left corner here, the law firm and relevant attorneys who are filing it put their names. That is not done in every jurisdiction, but it is in this one. In the upper right corner is a spot where the court can stamp it as filed once it has been filed.
Then you have the name of the court. It is the Superior Court of California in the County of San Francisco. Then you have it stamped with a case number. You see this little spot for a case number here. The case number is written up here. A lot of times it gets put in the right spot. A lot of times it doesn’t. It doesn’t matter, but in subsequent documents that are filed in this case, the case number will be put by the lawyers right down after this case number.
All right, we see the plaintiff, the party in this case that is bringing the lawsuit is Elon Musk. Individually, not as CEO, not as some corporate entity, him individually, that matters because a lot of times you are dealing with different entities and fiduciary duties of those different entities. Here it is quite simply Elon Musk as an individual.
The next question is, “Okay, who is he suing?” We have Sam Altman as an individual. Greg Brockman as an individual. And then we have OpenAI Inc., which is a corporation. We have got a limited partnership here, with various other entities. And then we have done. DOEs are like John Doe or Jane Doe. It means people are yet to be determined.
So, those are the parties. That is important because we are looking at what claims can be brought towards different parties. Then we have the title of the document right here. It is a complaint. Sometimes it just says complaint. Sometimes it lists what it is for. This one lists what it is for. Breach of contract. That is number one. Number two is promissory estoppel. Number three is a breach of fiduciary duty. Number four, unfair competition, and then a statute is cited. And then number five is for accounting. These are just some different legal doctrines.
Let me just give a brief preview of what they are. Breach of contract. That means there is a contract. There was an offer and acceptance by both parties. There was an exchange of consideration. That means both parties were getting something out of the deal, and then somebody didn’t do what they were supposed to do, what they had promised to do. That is the breach. As a result of that breach, the plaintiff was damaged. In other words, Elon Musk had some sort of harm or consequence to him. So that is a breach of contract.
Promissory Estoppel: Understanding Legal Promises
Promissory estoppel is where there is a promise, and it would be unjust not to enforce that promise because the plaintiff, Elon Musk, relied on that promise. This is in the category of equitable claims. So even though there may not be a statute and a specific law that says you can’t promise something to somebody and then not follow through with it when they are counting on it, it doesn’t matter. There is a common law claim or an equitable claim in this case, which says, “Look, if it is unfair, if it is unjust, the court can enforce the promise.” So even if there is not a contract, a promise can be enforced. Usually, promissory estoppel is a backup for a breach of contract claim. And here is why: if there weren’t technically all the elements required for a contract and breach of contract, the plaintiff can still recover money in the case if there was a promise that they reasonably relied on that the other party didn’t follow through on, and it would be unjust not to enforce that promise.
Breach of Fiduciary Duty: A Question of Trust
Breach of fiduciary duty is quite simply this: It is when one party has a relationship to care for another and they don’t follow through with those obligations. So duty could be like responsibility or obligation, and breach just means you didn’t do it. You violated them. You breached them. I will give you an example. If a client hires a lawyer to work for them and the lawyer doesn’t act in the client’s best interest, let’s say the lawyer finds out about an opportunity while doing the work and takes advantage of that opportunity or the lawyer isn’t honest with the client about what is happening. These are breaches of fiduciary duty. The simple idea is that the lawyer has a fiduciary duty to work on behalf of the client. And so the client in this case might be called the principal, and the lawyer might be called the agent, and the agent works for the principal. And if you are an agent of somebody, you need to work on their behalf. You need to be honest with them. You can’t take advantage of your benefit when you are working for the benefit of the principal.
Unfair Competition and Legal Recourse
Unfair competition is a broad umbrella of claims. There is common law unfair competition, which means you can’t do stuff that cases have held is illegal to do within a commercial marketplace. And then you have statutory unfair competition. That is the one that is brought here. Saying, “Hey, look, under California statute, you can’t do certain things that are considered unfair.” What is an example? Dishonesty in the marketplace or tortiously interfering with other relationships. We will get into what specific unfair competition Elon Musk is claiming here shortly.
Then, finally, the fifth claim in this lawsuit is for accounting. That is simply saying, “Hey, look, we want OpenAI to account for all of the money and transactions so we can figure out exactly what is owed here. And accounting just means, “Hey, go have an accountant, do some work, run the financial numbers, do an accounting, and figure out where we stand from a financial basis?” That is what accounting is. If a court orders an accounting, that means typically, CPAs will get involved and they will do an audit or some sort of less formal process to figure out what is happening with all the financials.
The Foundational Agreement and Its Breach
Now let’s dive into the significant part of this lawsuit. It looks like it is the parties here. We already kind of talked about those. Each of the parties is listed. Moving on to jurisdiction and venue, sometimes this is included, sometimes not. Jurisdiction and venue is often a section in a complaint that isn’t required, but usually, it mentions a few things. First, does the court have jurisdiction over the parties? That is called personal jurisdiction. Normally, you want to state in a lawsuit that the court has jurisdiction over the parties, and you might even provide a legal basis for that, like a statute.
The second part of jurisdiction is subject-matter jurisdiction. That is where the court has the authority to hear the subjects that are being brought into the court. For example, under federal trademark law, only federal courts have subject-matter jurisdiction over trademark infringement. You are not permitted to bring trademark infringement lawsuits in state court. They need to be brought to federal court. Likewise, under federal copyright law, you need to bring copyright infringement cases in federal court. State courts don’t have subject-matter jurisdiction. So usually in this little section here, there is a statement about the legal basis for subject-matter jurisdiction.
Third, there is usually a statement about the venue. Venue is just the most appropriate court for this to be brought. Usually, that is based on where the parties are located, and where the wrongful actions occurred. But I will tell you a little trick. Often, attorneys base it on which court is going to rule most favorably to them because, often, there is an argument that multiple venues would be proper. Maybe it is the venue of the plaintiff. Maybe it is the venue of the defendant. Maybe it is a venue that is more favorable where they can argue certain actions occurred. So often, you see fights over venue because if a California court is hearing the case, that court may be more inclined to rule based on precedent in a certain way that advantages one party over another.
General Allegations and Overview of the Case
We now turn to the general allegations. This is an overview of the case. As it says right here in the complaint, usually, the general allegations start with a bit of a narrative. Keep in mind, this is a story. It doesn’t say once upon a time, but let’s see how Elon Musk jumps into this. “Over the 20th century, the United States gradually shifted from a primarily human labor-based economy to a primarily human knowledge-based economy, with economic value increasingly created primarily by human intelligence. As the century progressed, another paradigm shift was already underway, value creation through artificial intelligence, AI. Early AI programs were capable of outperforming humans in certain discreet tasks. Almost immediately after the invention of the programmable computer, AI could show superhuman performance on a highly formalized problem, like finding the fastest path through a network of roads. It took longer for AI to reach superiority for problems requiring more creativity.
And then we jump into 1996. I am not going to read through all this, but as you can see, the complaint starts with a bit of a background narrative before we jump into the specific details at issue here. If you want to read the complaint, I will have a link to it below. But for purposes of this video, let’s stay focused on the highlights.
Elon Musk’s Concerns and the Founding of OpenAI
Let’s take a look at Section 18 because this is where it starts getting good. Mr. Musk has long recognized that AGI, which stands for artificial general intelligence—I am just going to call it AI for the future—poses a grave threat to humanity, perhaps the greatest existential threat we face today. His concerns mirrored those raised before him by luminaries like Stephen Hawking and Sun Microsystems founder, Bill Joy. Our entire economy is based on the fact that humans work together to come up with the best solution to a hard task. If a machine can solve nearly any task better than we can, that machine becomes more economically useful than we are. As Mr. Joy warned with a strong AGI quote, “The future doesn’t need us.” In his complaint, Elon Musk then says that other companies like Google started to advance AI, and Elon Musk got very concerned.
Now Elon Musk talks about OpenAI. Mr. Altman purported to share Mr. Musk’s concern over the threat posed by AI. In 2015, Mr. Altman wrote the quote, “Development of superhuman machine intelligence is probably the greatest threat to the continued existence of humanity. There are other threats that I think are more certain to happen but are unlikely to destroy every human in the universe in the way that AI could.” So, Elon Musk and Sam Altman, according to the complaint, shared the same idea, at least at that time. At least that is how Elon Musk recognized Sam Altman’s concern about the threats of AI.
Now, here is the key point. This is where we look to determine what was Elon Musk’s donor intent when donating to a nonprofit. We also look to what are the reasonable expectations of the founders when creating an enterprise together.
On page six of the complaint, it says, “Mr. Altman approached Mr. Musk with a proposal that they join forces to form a nonprofit AI lab that would try to catch up with Google in the race for AI, but it would be the opposite of Google. Together with Mr. Brockman, the three agreed that this new lab, one, would be a nonprofit developing AI for the benefit of humanity, not a for-profit company seeking to maximize shareholder profits, and two, would be open source. Balancing would only countervailing safety considerations and would not keep its technology closed and secret for proprietary commercial reasons.”
This is what they are calling the founding agreement. And so from this moment on, whenever there is a reference to the agreement that was breached, the founding agreement, it is a reference to these two basic principles that ElonMusk says, “Hey, this is what I agreed to. This is what Sam Altman and OpenAI promised to do. We had a funding agreement. Two major points. It won’t be for profit. It will be nonprofit, and it won’t be confidential trade secrets. It will be open source for the benefit of humanity.”
Imagine if you gave millions of dollars with that understanding, and then later, those two basic things were taken away from you. All of a sudden it became for-profit, and you are not one of the owners, and it became a trade secret. And so it is not being shared for the benefit of humanity. If you donated to a nonprofit with that cause in mind and your money was then used for the exact opposite purpose, would you be frustrated? Well, if you say yes, now you know how Elon Musk feels. That is what is happening here. And that is where he is saying, “Hey, look, these guys made promises that they violated. That is why I am suing for promissory estoppel. I think it was more than a promise. It was a contract. It was an agreement where we all contributed something. Everybody had an exchange happening here. We all put something in. We all had a shared benefit we agreed on. We agreed on what it would look like.” That constitutes an agreement. Why? Because you have an offer, “Hey, let’s do this.” You have the parties agree, “Yeah, that is a good idea. I will accept that.”
The parties all gave up something. You have an exchange of consideration. That is giving up something, and it was agreed. It wasn’t just oral. It was in writing, not a written document that everybody signed on the bottom, but emails that went back and forth and other documents that were exchanged. So that is why I believe Elon Musk has a very good claim for breach of contract.
Now there are some arguments against it. One interesting argument for a breach of contract claim would be, does it need to be in writing under the statute of frauds? Was it reasonably specific enough, or was it too general? If the parties agree to just loose generalities, that often won’t be enforceable.
For example, if I say, “Hey, you should paint my house.” And you say, “Yeah, I will paint your house.” Is that a contract? Well, some terms are usually part of a contract of that type that are missing. For example, the price? How much is the payment going to be? Another example is the time, the details about how many coats, what kind of paints can be used, what kind of colors will be used, and when will this be performed. So, a contract has to be specific enough to be performed for it to be a contract, but it doesn’t always have to be every term. Often, a court will imply reasonable terms.
There are several cases where a court has said, “Even though the parties didn’t discuss a price, the court will insert a reasonable price.” Especially this is the case when a price could generally be assumed from the circumstances. For example, if the parties had prior dealings that had a price, a formula that generally was set, or maybe there is some sort of industry-wide fair market value, for example, if it is a commodity that is regularly traded, you can just look up in the newspaper to see what was the price on that particular day. Those are easy cases, but there are even cases where the court said, “You know what? Everything else was specified. The parties hadn’t figured out the price. The court will insert what the court believes is a reasonable price.”
So did it have to be extremely specific? Not extremely specific, but enough to be performed. And so that will probably be an argument that is brought in this case.
Section 25 of the complaint says, “The founding agreement was also memorialized.” What does that mean? It usually means it was in writing. It is not just an oral agreement that we are arguing was discussed between the parties. It was memorialized in writing. Where? The complaint says, “Among other places, it was memorialized in the certificate of incorporation for OpenAI, which affirmed that its resulting technology will benefit the public and the corporation will seek to open-source technology for the public benefit when applicable. The corporation is not organized for the private gain of any person.”
Let’s talk about that. The fact that it is not organized for the private gain of any person is fairly typical language in a nonprofit organization’s articles of incorporation. So that is not unusual. What is unusual and customized for this case is the fact that it says the corporation will seek to open-source technology for the public benefit when applicable. That is custom-written just for this document.
There are all sorts of other examples, I assume, emails that talk about all of these things. Let’s move forward in the complaint to other important language.
Elon Musk then goes on to write in Section 26: “Mr. Musk was a moving force behind the creation of OpenAI, contributing a majority of its funding in its first several years, advising on research directions, and most importantly, recruiting some of the world’s leading scientists and engineers to work at the nonprofit venture.”
The lawsuit goes on to explain how the nonprofit OpenAI proceeded with that nonprofit vision for a while, but then it changed.
Section 29 of Elon Musk’s complaint says, “In 2023, defendants Altman, Brockman, and OpenAI set the founding agreement aflame.” You might ask, “Why is a word like aflame used in here?” It is because, for two reasons, I believe. First, judges are humans too. Legal documents can get way too boring if you don’t at least introduce some narrative, some intrigue, and some non-legal, and non-boring language. They were able to just use one word, aflame, to at least have the judge and the judge’s clerks go, “Ah, it is about to get good. Let’s see what we have going on here.” That is one reason. The second reason, I think, is probably publicity. In a case of this size, this type of complaint was probably run through a public relations department to review to see if there are any concerns from a PR standpoint. And although the complaint must follow all the requirements of the lawyers in the court system, there is probably at least a consideration of how will the public view this and how will the media view it. So with that opening introduction about setting the founding agreement aflame, we get into the specifics. In March 2023, OpenAI released its most powerful language model yet, GPT-4. The paragraph goes on to say how powerful GPT-4 is.
The complaint then says, “Instead of this being released to the public, it has primarily been released to Microsoft, a competitor of Elon Musk.” That doesn’t feel fair if you were promised that this would be open source for the general public.
And now we have a very interesting statement by the CEO of Microsoft. Section 32 says, “That Microsoft CEO boasted that it would not matter if OpenAI disappeared tomorrow.” And he explained why, “We have all the IP rights and all the capability. We have the people. We have the computer. We have the data. We have everything.” Well, if a strategic partner of OpenAI, who is a competitor of Musk, is saying they have everything but it is not available to the public as Musk was originally promised and was part of the founding agreement, there is certainly an argument here that this is a breach of the funding agreement and a violation or breach of the promises that were made to Musk when Musk donated to help start OpenAI.
Musk goes on to make that exact point. This case is filed to compel OpenAI to adhere to the founding agreement and return to its mission to develop AI for the benefit of humanity, not to personally benefit the individual defendants and the largest technology company in the world, Microsoft.
The next section of the complaint goes into more detailed allegations. In other words, we have an opening narrative, and now we get into what the lawyers need to establish to prevail in their case. Often, a complaint is looked at as a checklist, and the complaint needs to have every allegation that’s required to fulfill the elements of a claim. I will explain. If you have a claim for breach of contract, you have to show that there was a contract. That is the first element. That there was a breach of the contract. That is the second element. The third element is that there was causation that the breach caused some sort of harm. And then the fourth element is there has to be harm. In other words, if there is a breach of contract but there is no damage to somebody, they generally can’t sue. So you are going to see a complaint typically include those elements in proving breach of contract. Probably not yet. This is still in the narrative portion of the story, but we will see that coming up in the very next section where each claim is specifically spelled out.
Jumping now to page 17 of the complaint, Section 70, we get into a whole new section, that is talking about the transition in the corporate structure. Think about it. If you are a founder, wouldn’t it be great if you could just start your business as a nonprofit? Enjoy all the tax benefits that a nonprofit has, and then once the business is profitable and has some great assets and IP, move that over into a for-profit company, a corporation, or an LLC, and then you get all the money because the problem with a nonprofit usually is that you can’t profit from it. A nonprofit gets all these tax benefits because a nonprofit is to benefit the public. That is the only reason it gets tax benefits. So if it is going to have shareholders where shareholders are profiting, it can’t be a nonprofit. It has to be a for-profit company like a traditional corporation or LLC.
So here is what Elon Musk says in Section 70, “In the years following the announcement of OpenAI, the corporate structure became increasingly complex. A limited partnership was formed. An LLC was formed. The sole member of an LLC was another LLC. Another LLC was formed in Delaware. The sole member was a different LLC.” Yeah, this is getting complex. I assume there were good reasons for this. I don’t think it is just to allow a business to benefit from an asset in the nonprofit, but we will get to that.
In Section 77 of the complaint, Elon Musk gives a little bit of history on what OpenAI was doing to build AI. For example, it had it play a video game. And try to learn how to play that and how to beat it.
Now we are at 2023 in this story. Having reached the threshold of artificial general intelligence, which means GPT-4 is pretty smart in a lot of categories. For example, taking the LSAT exam, etc. Having reached that threshold, which under the founding agreement, they were to develop for the benefit of humanity rather than any for-profit company or personal profit. OpenAI and Sam Altman instead radically departed from their mission in breach of the founding agreement. GPT-4 is entirely a closed model. In other words, it is a secret. That code has not been released. Musk is like, “Come on. I gave all this money and effort to build this nonprofit for a very particular purpose. And as a donor, my intent should be honored.” Also, because there was a founding agreement, the terms of that agreement should be followed, and to not do so is a breach of the founding agreement.
And here is a powerful statement in Section 113 of Elon Musk’s complaint. He says, “It is important to reflect on what has transpired here. A nonprofit startup has collected tens of millions of dollars in contributions for the express purpose of developing AGI technology for public benefit. Shortly before achieving the very milestone that the company was created to achieve, the company became a closed for-profit partner of the world’s largest corporation, Microsoft, thereby personally enriching the defendants.
Elon then goes on to make an analogy. “If this business model were valid, it would radically redefine how venture capitalism is practiced in California and beyond.” So, in other words, let’s face it. If this is allowed, why wouldn’t every entrepreneur start with a nonprofit? He says, “Rather than start as a for-profit entity from the outset, smart investors would establish nonprofits, use pre-tax donations to fund research and development, and then, once their technology had been developed and proven, would slide the resulting intellectual property assets into a new for-profit venture to enrich themselves and their profit-maximizing corporate partner. That is not supposed to be how the law works in California or anywhere else in this country. And this should not be the first court to hold otherwise.”
This is a huge issue. Can you move assets out of a nonprofit into a for-profit company? There are ways to do it. But it has to be done very carefully. And here is the general idea. The nonprofit can sell its assets to a for-profit company at fair market value. Not a sweetheart deal. Not a discount. Fair market value. How do you figure out fair market value? One way is a public auction where other competitors have a right to bid to buy the intellectual property.
So I will give you an example. Let’s say a nonprofit starts a website, and that website is designed to help people. But over time, the nonprofit realizes this is profitable. And the founders say, “You know what? Wouldn’t it be great with what we have built here if we could start making money for ourselves? We would love to move the website into our own LLC. We will set up Google ads on it or something else and start making a lot of money off it.” Can that be done? Well, you can’t just give it to the LLC, but again, the nonprofit could sell it at fair market value. Fair market value might be considered or determined by an appraisal. An appraiser might value the asset. In this case, a website, that is being sold to the LLC, but it has to be fair market value. And let’s face it. If the buyer has a connection with the seller, that is not considered an arms-length transaction. That is considered an inside transaction, and inside transactions are scrutinized by courts after the fact. If it were an arm’s-length transaction, like the nonprofit sold to some unrelated LLC, a court would likely assume it is an arm’s-length transaction.
They got the best they could from it. But if the buyer is a sibling of the seller, or if the buyer is the spouse of the seller, or if the buyer is an LLC owned by the seller, that is an insider deal. That is not an arms-length transaction. That is what is called a transaction to an interested party. They have an interest in this on both sides of it.
So in those sorts of transactions, courts are required to scrutinize. Was the value fair? In other words, was it a fair market value? Was it fair based on market performance at the time as though it were auctioned off after being advertised to the public competently?
So competitors had an opportunity to bid on this. Why does all this matter? If the nonprofit OpenAI developed this AI technology and then either gave it to a for-profit company or used it to help a for-profit company such as Microsoft or another, they did that in some sort of sweetheart deal. It wasn’t fair market value. We have a problem. What is the problem? Well, first, we have a violation of nonprofit laws. Probably the IRS tax code. Probably state statutes relating to nonprofit charitable organizations. Who can bring those claims? Well, that is a little tricky. IRS could bring them. The attorney general in the state where the nonprofit is incorporated could bring them. And then there is sometimes a statute called private attorney general statute. That is a statute that says, “Hey, look, if the state’s attorney general doesn’t bring a claim, a private party who is harmed by it may be able to bring a claim for the benefit of the public funded by that private party, not funded by tax dollars.”
So each state has its law as it relates to a private attorney general statute. And that is something you have to look up in a particular state. I imagine some states don’t even have that option. But the question then is, can Elon Musk sue for that? He certainly can bring it to light. He might even get a ruling from a judge on those issues, but typically that is a violation of state law, hurting the public.
And so, I think what Elon Musk is trying to do here is raise that issue and tangentially get that issue decided as part of his promissory estoppel and breach of contract claims. Knowing that if a court rules against OpenAI on that issue, we very likely would see an attorney general say, “You know what? I will bring that claim. Let’s get some money for the public good here. Let’s have OpenAI send money to our state coffers.” So, if I were OpenAI’s attorneys, I would be very, very concerned about the fact that this high-profile case is now potentially getting the attention of the IRS and Attorney General’s offices.
There is plenty more to the story. You can read the complaint using the link in the description below. But let’s now take a look at Elon Musk’s claims against OpenAI, Sam Altman, and the other defendants. Claim number one. Breach of contract. Elon Musk is saying, “Hey, we had an agreement. Based on that agreement, I invested. I put a lot of effort into this, and you have now done something different.” One of the basic reasons or two of the basic reasons I proceeded, Elon Musk would say, are first, this was supposed to be for the benefit of humanity as a nonprofit. And second, it was supposed to be open-source public information to benefit all.
Now it is being operated for the benefit of a for-profit company, Microsoft, perhaps others, and OpenAI is closed and not presenting its trade secrets to the general public so humanity can benefit from it. That is essentially a breach of contract, and Elon Musk is arguing, “Hey, I put a lot into this. We will have to figure out what I am owed.” You might say, “Well, what is he owed?” Is he owed his donated money back? That might be one resolution. It might also be compensation for what he contributed. It might also be his share of the profits if a court wanted to go the route of saying, “Hey, I am going to treat Elon Musk as a shareholder.” I think it is unlikely. Most likely the court is going to impose nonprofit charitable organization law and restrict the profits and benefits that can go to others.
One thing that is a little interesting here is Microsoft is not listed as a defendant in this case. I would tend to think that there was significant deliberation on the part of Elon Musk’s attorneys about whether to include Microsoft in this case. There are probably a lot of pros and cons. The benefit would be the disgorgement of financial benefits from Microsoft. So, what is a disgorgement? And that means taking it back. So if Microsoft were a party to the case, the court could order Microsoft to return money to the nonprofit here for the furtherance of the nonprofit mission. But if you have Microsoft listed as a defendant, now you have one more party to be fighting with. You have all the financial resources
of that party thrown at this. Every time you have a court hearing, the judges know, you are outnumbered because, let’s face it, Elon Musk will have an attorney. OpenAI will have at least one attorney, and then there are a bunch of other entities and individuals. My guess is there are going to be a whole handful of attorneys, and so every time, the judge hears from Elon Musk’s attorney, the judge will hear from all these other attorneys. Do you want one more party? Microsoft is in the courtroom arguing against Elon Musk. It starts to feel like you are outnumbered. And so these are all factors that are considered when a party decides who should we name as defendants in this case.
There is one more interesting part about the breach of contract claim, and it is on page 29 of the complaint. It is near the very end. It says, “As a direct and proximate result of defendant’s breaches.” Let’s talk about those because those are legal words that a lot of people don’t understand. The direct result means, “But for this breach, the plaintiff wouldn’t have been harmed.”
So it shows there is a direct causal connection there. The proximate result means the defendant should have known that this damage would happen. Proximate generally means it was foreseeable or could have reasonably been foreseeable. In other words, the defendants knew that their actions would cause harm to Elon Musk, or they should have reasonably foreseen that their actions would cause harm and that their breach of contract would injure Elon Musk. That is what direct and proximate result means.
But then we look at the end here. It says for $35,000. Why such a small amount? Shouldn’t it be millions or billions? Well, certain courts limit the amount that you can put in a lawsuit because they got so tired of parties putting large amounts in there just for public relations purposes. For example, if you said in the lawsuit, “I am suing for 10 billion dollars.” Of course, that would be the headline in the newspaper, 10 billion dollar lawsuit against blank. Courts said, “You know, we don’t want to deal with that. The purpose of these legal documents is not public relations. If it is more than a certain amount, just put in the limit, the jurisdictional limit here.” And so that is what we have. Saying, “Look, the amount is more than $35,000 that the rules say.” So we’ll figure out what it is later in the filings.
And then this final line, Elon Musk also seeks and is entitled to specific performance. You usually get either damages from a breach of contract or specific performance. Specific performance is when a party has to comply with the contract. You have to perform specifically as the contract said. So you can’t have both, usually. You can either have damages because they didn’t perform as they were supposed to, or you can require them to perform as they are supposed to. And so basically they are saying, “Hey, look. We are entitled to either of those. We are going to ask the court for both of those.” Usually what happens is the plaintiff, Elon Musk, in this case, will ask the court for one relief, like damages or specific performance. And if they don’t get it, they will say, “In the alternative, we asked for the other relief.” That is what that means when you see this at the end here.
The second cause of action is promissory estoppel. This is a weird legal term. So let’s just take a look at it quick. It is pretty short. This first line, by the way, is just saying, “Hey, we incorporate everything that has been said so far. So keep all that other stuff in mind.”
Section 129: To induce Elon Musk to make millions of dollars in contributions to OpenAI over the years and to induce Elon Musk to provide substantial time and other resources to get OpenAI off the ground, the defendants repeatedly promised Elon Musk that OpenAI would be a nonprofit developing artificial intelligence for the benefit of humanity, not for Microsoft or any other for-profit company seeking to maximize shareholder benefits, and OpenAI would be open-source balancing only countervailing safety considerations and would not keep its technology and secret for proprietary commercial reasons.
The defendants knew Elon Musk would rely on their promises. Elon Musk did rely on those promises, and that was reasonable. This is what he is alleging, and this is all standard language. They are fulfilling all the requirements of promissory estoppel here.
Elon Musk reasonably relied on defendants’ false promises to Musk’s detriment, ultimately providing tens of millions of dollars to OpenAI. As well as his time and other resources only to have OpenAI abandon its irrevocable nonprofit mission, stop providing basic information to the public, and instead exclusively dedicate and license its AI algorithms to Microsoft, the largest for-profit company in the world, precisely the opposite of the promises defendants made to Elon Musk.
. Injustice can only be avoided through the enforcement of these promises. If specific performance under breach of contract is not awarded, then at a minimum, defendants should make restitution in an amount equal to Elon Musk’s contributions that have been misappropriated by the amount that the intended third-party beneficiaries of the founding agreement have been damaged.
So, what Elon Musk is saying is that, if they said they would do something, they should do it. And if they won’t, at a minimum, Elon Musk should get his money back and compensation for his other non-monetary investments in the effort. Promissory estoppel is a backup for a breach of contract claim. It is quite common to have a complaint like this, and it is no surprise that we see it here.
Breach of Fiduciary Duty and Legal Responsibilities
The third claim in the case is a breach of fiduciary duty. So under California law, Elon writes, “The defendants owe fiduciary duties, including a duty to use Elon’s contributions for the purpose they were made. Defendants have repeatedly breached their fiduciary duty.” And then it goes on to repeat exactly how that was done. I think that this is a very effective argument. This probably pulls in other important legal doctrines, like the doctrine of donor intent, meaning when a donor donates to a nonprofit, the nonprofit is required to use the money for the purposes it was understood to be given.
So if a nonprofit, for example, says, “Hey, we have a women’s shelter. We are raising money for that.” And let’s say $100,000 in donations goes to this nonprofit for a women’s shelter. And then the nonprofit says, “You know what? We are not going to do women’s shelters anymore. We are going to focus on alcohol treatment. It is another good cause. It is also a nonprofit cause. We are going to shift that over.” That is not permitted. It is not permitted under the doctrine of donor intent, which overlaps with the charitable trust doctrine. The idea is if donors give money for a particular purpose, a charitable trust is around that, and the recipients of that money need to use that money for the purpose it was given. You can’t just go use it for another purpose.
So, that probably all gets incorporated here under fiduciary duties because I don’t see it called out separately. If I were bringing this case, I would probably at least reference those doctrines so that I am bringing the court’s attention to those issues. Let’s just see if donor intent appears here. No, it doesn’t. And let’s just see if charitable trust appears here. No, it doesn’t. So if I were writing this, I probably would have incorporated at least those terms, maybe not as a separate claim but at least reference them, so that OpenAI can’t argue later that the complaint failed to allege a violation of donor intent doctrine and charitable trust doctrine. Now, I think even if OpenAI does allege that there are sufficient facts here to support those doctrines, but I think I would have liked to see those claims called out specifically.
Unfair Competition and Accountability
Claim number four is pretty straightforward and pretty short. It is a similar allegation to the prior ones, but this time it is referencing a California statute regarding unfair competition. The fourth claim is for unfair business practices, and under California statute, parties cannot solicit donations under pretenses. You can’t use deception to raise funds. And so this is just another way of pulling in a body of law that says, “You can’t falsely, dishonestly, and deceptively raise funds.” So whether OpenAI changed its mind later and decided to use Elon’s funds for a different purpose, or they intentionally deceived Elon Musk. The argument is from Elon. It doesn’t matter. The funds were dedicated to a particular purpose, and they are not being used for that purpose.
The Demand for an Accounting
The fifth and final cause of action in this case or claim is for accounting. Elon is saying, “Hey, look, I want to know what has happened with all this money. What money went where, and all that will be relevant to determine what the damages are.” You are not going to get an accounting in a case ordered by a judge unless the judge has determined you are owed some money. You don’t get an accounting unless you are owed money. Now we have yet to have a response from OpenAI.
OpenAI’s response is going to include, I expect, substantive and procedural defenses. Substantive says, “We didn’t say this, we didn’t promise that, we didn’t have a contract.” Procedural defenses are things like the statute of limitations has already run, or the other side did something bad as well, or it has been too long and the evidence is gone for this, or whatever other arguments they can put together here.
Usually, there is not a whole lot of attention to the response from the defendants on the part of the court at the time when it is filed. The response from the defendants is called the answer, and it includes both denials, saying, “Hey, we didn’t say that. We didn’t do that.” Affirmative defenses, are certain things you have to argue and put in your answer if you are going to bring them up ever in the case, so you will have certain affirmative defenses listed there, and then you might even have counterclaims. Claims against Elon Musk for doing something wrong. Often, defendants want to find something that they can argue the other side did, just so it is not a one-sided lawsuit. They want to try to level the playing field a little bit. So it will be interesting to see if OpenAI can identify some argument that Elon Musk did something wrong, even if it is a stretch, just so that it is not a one-sided lawsuit against the defendants. And if the defendants can find a counterclaim against Elon Musk, then Musk will need to respond with what is called a reply. That is the third essential document filed in a complaint.
Finally, then, we have the prayer for relief. This is nearly the end of the complaint, and it is just a list of everything that Elon Musk is asking for. We have already talked about that, so I won’t read through that here. And the final part is there is a demand for a jury trial. So what do we have here? We have Elon Musk asking to have all of these issues aired in a public court before a jury in California, likely in San Francisco. One of the tech centers of the world. I don’t think OpenAI wants to have all of its information aired in a public court there. Elon Musk is going to spend some money on this case. But I think OpenAI has a lot more at risk because, not only are they going to spend a lot of money, second, I think they could lose. Third, the process of discovery, where the parties exchange information, may result in a significant amount of information being revealed to Musk, who is a competitor, and potentially to the public.
All of that serves Musk’s goals. So in a way, it is no surprise that Elon Musk brought this lawsuit, and it wouldn’t surprise me if he spends tens of millions of dollars litigating this and doesn’t want it to settle because all of this, at least so far, is good PR for him.
But what happens next? Let’s see how OpenAI responds. We haven’t had that response yet, both legally, nor have we seen it from a public relations perspective. So I don’t have any ties to anybody in this case. I don’t have any confidential information. All I have is this complaint, but I wanted to do this video because I think the commentators I have seen so far have completely gotten it wrong.
I believe Elon Musk has a very strong case, and this is going to be a massive settlement, either financially or with some sort of agreement that OpenAI release all of this information to the public, as Elon Musk is asking for.
If you have questions about this, feel free to add them in the comments section below. I am happy to do other videos on this topic because these are such important issues for CEOs who want to avoid mistakes in breach of contract mistakes as it relates to public relations mistakes when putting out a press release or interviewing with a reporter.
This case brings together all sorts of mistakes in a massive lawsuit. If founders and CEOs want to avoid similar lawsuits, once they are successful, they will learn from what is happening here and avoid unintentional contracts, unintentional promissory estoppel, and this whole commingling of nonprofit assets with for-profit companies. These are very serious issues that will likely result in millions, if not tens of millions of dollars, in legal fees for OpenAI as this case plays out in the coming months.
I am Aaron Hall. I am an attorney for business owners. I have no involvement in this case. I use this channel to help educate you on issues so you can avoid trouble for yourself. Before you rely on any of this, though, I encourage you to consult with your attorney. Just use this as public education. Don’t rely on it in your circumstances. If you are interested in finding out about other mistakes made by business owners and how you can avoid them, go to AaronHall.com/free. That is where you can find a quick spot to sign up and get free videos and other resources that I make available to CEOs and business owners who want to avoid legal problems and trouble in their companies.
