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Elon Musk’s Lawsuit Could Cost OpenAI More Than $1 Billion

When OpenAI announced that it had completed its corporate restructuring last month, it became less likely that Elon Musk’s federal lawsuit against the company would foil OpenAI’s plans. Musk hasn’t given up, but even if he wins the case, he is unlikely to inflict any meaningful damage on OpenAI.

There’s a decent chance that the case will go to trial in March. If Musk wins some of his claims, a victory could cost OpenAI more than $1 billion, according to an analysis by three law professors of the remedies he is seeking. That’s a drop in the bucket for OpenAI, which plans to spend $40 billion on computing next year alone and was recently valued at $500 billion. And it’s small change for Musk, whose stake in Tesla alone is worth $300 billion.

And that’s the most money OpenAI could pay. If the court decides in Musk’s favor but thinks compensating him for his losses is sufficient, the damages could amount to as little as a repayment for the $38 million he initially donated to OpenAI.

Musk last year sued OpenAI and some of its founders, claiming that they engaged in fraud and breach of contract when they started a for-profit unit of OpenAI, which began as a nonprofit research lab.

The Tesla CEO had donated $38 million to the nonprofit, along with four Teslas. He has argued that OpenAI violated its original agreement with him by raising tens of billions of dollars from Microsoft and other investors and pursuing profits instead of its charitable mission. OpenAI, which expects to generate $13 billion in revenue this year, is losing money. But it’s projected to generate $38 billion in cash in 2030.

For the case to go to trial, Musk’s claims must survive OpenAI’s latest legal challenge, which asks for an early ruling against him. OpenAI has argued that Musk does not have standing for some claims because he donated through donor-advised funds, or a type of charitable vehicle operated by an investment firm, which “severed Musk’s legal interest in the funds.” Musk counters that he still has the right to sue because the intermediaries acted on his behalf.

In each of the four claims that could go to trial, Musk asks for a payout that goes beyond what he initially donated to OpenAI. The court could decide OpenAI needs to pay Musk much more than his original donation if it agrees that OpenAI should give up assets “traceable” back to Musk’s donations, meaning what a $38 million investment in OpenAI would be worth today. That could cost OpenAI over $1 billion, according to Anupam Chander, who teaches AI regulation as a law professor at Georgetown University.

However, that would be an aggressive remedy for the court to award, said Ira Steinberg, a partner at Los Angeles–based law firm Greenberg Glusker who specializes in companies’ disputes over technology. That kind of remedy is typically for instances when regular damages, in this case compensating Musk for his losses, would be inadequate, he said. It’s more likely the court would require OpenAI to return the amount Musk donated, he said.

The court could additionally award Musk punitive damages to punish OpenAI for bad behavior, but they would not exceed nine times the other damages, and a multiple that high would be unlikely, said Steinberg.

Nettlesome to OpenAI, lawyers for either side could introduce depositions made by Altman, President Greg Brockman and other senior executives at a potential trial. These could expose details about private negotiations, as the recently made public deposition of co-founder Ilya Sutskever did.

If OpenAI does have to pay up, it would probably opt for cash rather than equity. Courts typically prefer defendants to pay damages with money, and Musk did not ask for equity in his complaint, noted Charlie Bullock, a senior research fellow at the Institute for Law and AI, a legal think tank.

That should come as a relief to the investors that have sunk more than $60 billion into the company and risk dilution—a drop in the value of their investment—if it issues more shares.

A spokesperson for OpenAI said in a statement “that Mr. Musk is even continuing with this baseless and time-wasting lawsuit only goes to show it was always just part of his ongoing pattern of harassment.”

Of course, even the biggest cash payout pales beside the real risk that OpenAI had faced from the Musk suit: that it could have derailed the restructuring. This process, which OpenAI completed late last month, allowed it to finalize a $41 billion fundraising led by SoftBank and will eventually make it possible to hold a public offering.

Such a risk is now much less likely after the California and Delaware attorneys general said they wouldn’t block the restructuring. At a hearing in February, the judge overseeing the Musk lawsuit said that the attorneys general represent the public, so their investigations could be sufficient to determine whether the restructuring should be allowed to proceed.

Even Musk’s own attorney, Marc Toberoff, argued at the same hearing that reversing the lawsuit could be tough, saying that if the restructuring proceeds, “it will be impossible to unwind these transactions.”

A different lawyer for Musk also argued more recently that “the closing of this latest transaction has no impact on Plaintiffs’ monetary claims and does not preclude the Court from awarding appropriate injunctive relief.”

Still, now that the restructuring has occurred, it would be tricky to unwind in practice. For one thing, the judge overseeing the case could defer to the attorneys general for California and Delaware.

For another, reversing the restructuring would be very disruptive to OpenAI. “It would be very surprising to me if a court decided to step in and take one of the largest companies in the world and do that kind of screwing with it,” especially based on a handshake deal between Musk and Altman, Bullock said.