In a few short days, jury selection will begin in the long-awaited Musk v. Altman case. At the end of that process, an Oakland federal court will task nine regular people with deciding if OpenAI defrauded Elon Musk when it announced, and recently completed, its reorganization to become a more traditional for-profit business. More than just being the venue where two billionaires will air their grievances against one another in public, the trial has the potential to reshape the AI industry.
How did we get here?
Musk first sued OpenAI in 2024, but the seed of the dispute was planted when Sam Altman emailed the billionaire on the evening of May 25, 2015. “Been thinking a lot about whether it’s possible to stop humanity from developing AI. I think the answer is most definitely not,” Altman wrote at the time. “If it’s going to happen anyway, it seems like it would be good for someone other than Google to do it first. Any thoughts on whether it would be good for [Y Combinator] to start a Manhattan Project for AI?”
“Probably worth a conversation,” Musk responded a couple of hours later. That same year, OpenAI announced itself to the world, with Altman and Musk as co-chairs of the new joint venture. “OpenAI is a nonprofit artificial intelligence research company. Our goal is to advance digital intelligence in the way that is mostly likely to benefit humanity as a whole, unconstrained by a need to generate financial return. Since our research is free from financial obligations, we can better focus on a positive human impact.”
If we’re to believe OpenAI’s telling of the events that followed, by 2017, almost everyone at the company, including Musk, agreed that a for-profit entity “had to be part of the next phase for OpenAI,” due to the enormous amount of investment needed to pursue its original mission. At some point before Musk left OpenAI’s board of directors in February 2018, OpenAI claims he demanded full control of the company, with the intent to eventually merge it with Tesla.
Following Musk’s departure, OpenAI created its for-profit arm in 2019, which at the time was organized under a “capped-profit” structure designed to limit investor returns to 100x, with any excess windfalls flowing to the company’s nonprofit. The idea being that if OpenAI achieved artificial general intelligence, its nonprofit would be the greatest beneficiary. However, after the success of ChatGPT in 2022, that structure became problematic for OpenAI as the company sought to raise ever more capital, and as part of its $6.6 billion funding round in October 2024, it reportedly agreed to a less-than-two-year deadline to free its for-profit from control of the nonprofit.
“At the heart of this trial is that OpenAI began as a non-profit organization, and then decided that it needed to be a for-profit organization in order to raise the enormous sums of money it needed to develop the technology it wanted to create,” explains Professor Michael Dorff, executive director of the Lowell Milken Institute for Business Law and Policy at UCLA. “That is a very troublesome transition under the law.”
Earlier this year, following protracted negotiations with Microsoft (the for-profit’s largest investor) and the state attorneys general of California and Delaware, OpenAI announced the successful reorganization of its corporate structure. As things stand, the for-profit is now a public benefit corporation, making it more appealing to investors looking for an uncomplicated return structure. Meanwhile, the nonprofit — now known as the OpenAI Foundation — holds equity in the for-profit arm, a stake valued at $130 billion at the time the agreement was announced.
At the end of last year, Musk filed an injunction to prevent the reorganization from going through but failed. As an early donor to OpenAI, Musk will not see a single cent of money come his way when the company holds an initial public offering, on account of the fact donations are made with no expectation of any return. Musk has therefore argued OpenAI’s founding group, including CEO Sam Altman and President Greg Brockman, defrauded him as a donor.
Determining the exact amount Musk contributed to OpenAI was an early question during pre-trial discovery. You see, Musk has greatly exaggerated his monetary contributions. As recently as March 2023, the billionaire regularly claimed he had donated about $100 million to OpenAI. He later cut that estimate by half, telling CNBC in May 2023: “I’m not sure the exact number but it’s some number on the order of $50 million.” In recent court filings, that number was again revisited to $38 million, and it’s the number that currently stands.
What’s at stake for OpenAI?
In his original complaint, Musk’s legal team tried to “throw the kitchen sink” at OpenAI, says Professor Dorff. In subsequent filings, Musk’s lawyers narrowed down their client’s desired set of outcomes to a handful of remedies. Should the jury rule in his favor, Musk has requested the court force Altman and Brockman to step down, and for OpenAI to restructure as “a bona fide public charity that operates as the nonprofit it was intended to be, consistent with its founding charter and mission.” He's also made the highly unusual request that any monetary damages which would be awarded to him in the verdict be redirected to OpenAI's own nonprofit arm.
According to Professor Dorff, it’s highly unlikely Musk will be able to undo OpenAI’s reorganization. For one, District Judge Yvonne Gonzalez Rogers has already signaled her reluctance to do just that — and it’s her, not the jury, who will get to decide if that’s an appropriate remedy. Effectively, Musk is asking the judge to “unscramble the eggs” of a complicated corporate restructuring.
“There was a moment where that might have been possible, when the attorneys general of Delaware and California intervened and came to the current compromise,” explains Dorff. “Whether you agree or disagree with what the AGs decided to do, I think it's unlikely the court will feel it's appropriate to undo that compromise because of all the high government officials involved who, in theory, had all of the right incentives.” When Musk filed his request for a preliminary injunction to stop OpenAI’s conversion to a for-profit company, the judge said the request was “extraordinary and rarely granted.” The fact Musk is deeply involved with OpenAI's competitor xAI “may also weigh heavily on the judge's mind,” Droff adds.
Far more uncertain is how Musk’s other demands could play out, since the jury will decide if OpenAI is guilty of defrauding him. According to Dorff, most high-stakes business cases end with the two sides settling because of the risk of involving a jury in the outcome. “I just don’t see that happening here given the tenor of the dispute,” he says. “It seems unlikely either side will settle.”
If the case does end in a jury decision, it will then be up to those nine people, with guidance from the judge, to decide on monetary damages. “That will be very difficult to figure out because there is a maximalist version of this, and a minimalist version of this. They’re very different numbers and the result could be anywhere in between two,” says Dorff. Musk’s legal team is seeking a disgorgement of between $65.5 billion and $109.43 billion from OpenAI (and between $13.3 billion and $25.06 billion from Microsoft, which is a co-defendant in the case). In a worse case scenario, Professor Dorff suggests Altman might lose the confidence of OpenAI’s board, costing him his position as CEO. He might even be forced to write some checks to settle the disgorgements.
Dorff suspects OpenAI “would love” the minimalist version where Musk is rewarded his $38 million donation back (and it ends up with the company’s non-profit). Should some other disgruntled donors emerge to sue OpenAI for fraud, the Musk v. Altman case would make it easier to litigate those cases, given “the map has been drawn as to which legal claims are likely to succeed,” says Dorff. However, those would amount to “traffic tickets” for OpenAI.
Whatever happens next, it should be an eventful trial. With public testimonies from Microsoft CEO Satya Nadella, former OpenAI board member and Musk confidant Shivon Zilis and even Altman himself a likelihood, we'll at the very least be treated to a wealth of formerly private communications — and some new piece of vocabulary — between some of the richest people in the tech space.
This article originally appeared on Engadget at https://www.engadget.com/ai/what-you-need-to-know-as-elon-musks-lawsuit-against-sam-altman-begins-191500726.html?src=rss
