U.S. court rejects Elon Musk’s OpenAI “for-profit” prevention lawsuit

A motion by X owner, Elon Musk, which could have prevented OpenAI from being a for-profit company, has been rejected by a federal judge in Northern California. 

According to a report cited by Bloomberg, U.S. District Court Judge Yvonne Gonzalez Rogers ruled Tuesday that the X owner and co-founder of OpenAI failed to provide enough evidence that warrants an injunction. 

For what will be Musk’s consolation, the judge added that the court is ready to hold a trial on the claim that OpenAI’s transition plan to a for-profit enterprise is not legal. Rogers cited that “irreparable harm is incurred when the public’s money is used to fund a non-profit’s conversion into a for-profit.”

The ruling is the latest twist in Elon Musk’s move on OpenAI and against its CEO Sam Altman. The X owner accused the ChatGPT maker of abandoning its original nonprofit mission to make the fruits of AI research available to all.

The scenario ran back to when Elon Musk and other investors in his circle submitted a $97.6 billion bid to purchase OpenAI. The bid came amidst a series of fallouts between Musk and Open AI’s Sam Altman, with whom he co-founded the company with numerous other individuals in 2015.

The bid was an attempt from Musk to prevent the startup from becoming a for-profit firm. His lawyer Marc Toberoff, while supporting Musk’s position, said that OpenAI is putting control of the for-profit enterprise up for sale, and said the move will “enrich its certain board members rather than the charity.”

But OpenAI rejected the $97.4 billion bid with claims that the company is not for sale and future bids would be disrespectful to its stance. Altman authored a sarcastic X post stating: “No thank you but we will buy Twitter for $9.74 billion if you want,” and told news website Axios that the startup was not for sale. In his response, Musk retorted: “swindler.” 

In late December, OpenAI made plans to restructure its model which will see the company create a public benefit corporation to make it easier to raise more capital and remove the nonprofit restrictions imposed on the startup. 

The company argues that the move is significant to secure additional funds and compete in the AI race.

Also Read: OpenAI launches Chat GPT-4.5, a latest model that understands human intentions.

OpenAI’s “for-profit” battle

The lawsuit drives back to the ill-fated relationship between Musk and Altman. This saw Musk try to block the startup he co-founded and later left from becoming a for-profit firm.

After Musk’s departure in 2019, OpenAI created a for-profit arm that has drawn billions of dollars in funding, sparking allegations from Musk that the startup breached its original mission by putting profit ahead of the larger public good.

The company was founded as a nonprofit before transitioning to a “capped-profit” structure in 2019. This structure is the sole controlling shareholder of the capped-profit OpenAI corporation that retains formal ownership responsibility to the nonprofit’s charter. 

Musk sued Altman, OpenAI, and its biggest backer, Microsoft in August last year for alleged breach of contract. However, his lawyers said the investors would withdraw their bid for OpenAI if it dropped plans to become a for-profit entity.

The startup is now in the process of restructuring to a traditional for-profit company, specifically a public benefit corporation in a bid to raise much more capital which Musk has stood against with the bid and lawsuit. 

Though Musk’s for-profit prevention lawsuit has been rejected, a future case on the illegality of the startup’s transition is expected. There, the board would have to demonstrate that it’s not underselling the company’s nonprofit by handing the nonprofit’s assets, including IP from OpenAI’s proprietary research to an insider (e.g. Sam Altman) for a steep discount.

“Musk is throwing a spanner into the works. He’s exploiting the fiduciary obligation of the nonprofit board to not undersell the asset. [Musk’s bid] is something OpenAI has to pay attention to,” said Stephen Diamond, a lawyer who represented Musk’s opponents in corporate governance battles at Tesla. 

As per reports, the company is gearing up for a funding round that would value its for-profit arm at $260 billion. In that, its nonprofit is slated to get a 25 per cent stake in OpenAI’s for-profit.

Musk-led investors’ bid throws another twist to the board. Musk has signalled there’s at least one group of investors willing to pay a sizable premium for OpenAI’s nonprofit wing which puts the board of directors in a tight spot. 

In addition, experts claimed that the bid might raise the potential market value of the OpenAI nonprofit’s assets which could force OpenAI to raise more capital than it originally anticipated and complicate talks with the startup’s existing backers. 

It could also taint the value of stakes held by the investors in the for-profit arm, including major partners such as Microsoft. If this materializes, Altman would be in a difficult situation on the bank of his effort with investors in determining how to fairly compensate the nonprofit.