Good morning. In today's newsletter, we dive into the big legal questions raised by Elon Musk's new lawsuit against OpenAI; explore the perils of handling confidential information in a home office; and tell the story of one trader's education in inequality. (Was this newsletter forwarded to you? Sign up here.)
Musk v. AltmanFrom Silicon Valley to Wall Street to Washington, the blockbuster case that Elon Musk filed against OpenAI and its C.E.O., Sam Altman, has become Topic A. It is the business world's hottest soap opera. But among lawyers, the case has become something of a fascination for a different reason: It poses a series of unique and unusual legal questions without clear precedent. And it remains unclear what would constitute "winning" in a case like this, given that it appears to have been brought out of Musk's own personal frustration and philosophical differences with Open A.I, a company he helped found and then left. The lawsuit — which pits one of the wealthiest men in the world against the most advanced A.I. company in the world, backed by Microsoft, one the world's most valuable companies — argues that OpenAI, a nonprofit organization that created a for-profit subsidiary in 2019, breached a contract to operate in the public interest and violated its duties by diverting from its founding purpose of benefiting humanity. Musk's lawyers — led by Morgan Chu, a partner at Irell & Manella who is known as the "$5 billion man" for his win record — want the court to force OpenAI to open its technology to others and to stop licensing it to Microsoft, which has invested billions in its partnership with the start-up.
Among the questions that lawyers and scholars are asking after poring through Musk's 35-page complaint: Does Musk even have standing to sue? "One of the differences with nonprofits compared to other companies is that, generally, no one other than the state attorney general has standing to sue for the kind of stuff that he's complaining about, like not following your mission," Peter Molk, a professor of law at the University of Florida, said of Musk's lawsuit. That's most likely why Musk's lawyers are presenting the case as a breach of contract instead of attacking the company's nonprofit status. Musk also alleges that OpenAI has breached its fiduciary duty, but that charge has its own challenges, lawyers said, given that such claims are traditionally handled in Delaware, not California, where the lawsuit was filed. (Musk, of course, has an infamously rocky relationship with the state of Delaware.) Was there actually a contract to breach? The lawsuit puts forth a sprawling agreement that is made up of conversations and documents, and that makes it harder to show whether there was a binding contract — and what it might have involved.
What was required of OpenAI? Noah Feldman, a professor at Harvard Law School who advised the A.I. company Anthropic on its corporate governance structure, said the contract Musk claims OpenAI and Altman breached contains "a hole you can drive a truck through." OpenAI's certificate of incorporation, which Musk's lawyers claim is part of the deal, says the A.I. maker will seek to open its work to the public for its benefit "when applicable" — and OpenAI can easily argue that it is adhering to this term, which is vague. Can a jury determine what constitutes "artificial general intelligence?" The suit asks the court to determine that OpenAI's latest artificial intelligence model constitutes A.G.I., or a machine that can match what the human brain can do, which would put it outside the scope of OpenAI's licensing agreement with Microsoft. There is no legal criteria for defining an A.G.I. Will this case help catch the attention of the California attorney general? OpenAI's new board was appointed after the previous board briefly removed Altman as the company's chief executive. The short-lived mutiny raised questions over whether the company's corporate structure allowed OpenAI's for-profit arm to creep away from the parent company's nonprofit obligation to focus on civic duties over shareholders. The progressive consumer rights advocacy group Public Citizen has already petitioned California's attorney general, seeking OpenAI's dissolution for failing to "carry out its nonprofit purposes." "That petition and Musk's lawsuit have a more than trivial overlap," said Joseph Grundfest, a corporate governance expert at Stanford Law School and a former S.E.C. commissioner.
What would damages look like? "The usual remedy for breach of contract — if you can quantify it — is money damages," said Eric Talley, a professor of corporate governance at Columbia University. In this case, he believes the damages are easily quantifiable: the $44 million that Musk put into the company. Legal experts said the court could issue an injunction, ordering Microsoft and OpenAI to change the nature of the relationship, but it would be unlikely. "That just sets up a multiyear babysitting relationship," Talley said. What would happen if the case goes to trial? OpenAI, which did not respond to a request for comment, is likely to move to have this case dismissed. If Musk's lawyers, who declined to comment, succeed in bringing the case to trial, the discovery process could leave some of OpenAI's internal workings exposed to wider scrutiny — though its most closely held secrets would probably be deemed privileged or kept under seal. Whatever happens, the case shines a spotlight on a wider fight over the future of artificial intelligence — a split over the responsibilities companies that develop these powerful tools should have. — Ephrat Livni and Lauren Hirsch
Apple ended its attempt to build an electric vehicle. The iPhone maker gave up trying to build a self-driving car after spending billions of dollars over the course of about a decade. The company used the project to innovate and build other products and services, from Apple Maps to CarPlay. Bitcoin is back. The cryptocurrency closed in on a record high this week, surging in value since the S.E.C. approved a spot E.T.F. while also warning that it was an extremely volatile asset. Bitcoin topped $60,000 for the first time in three years, edging nearer to a record of $68,788.73 that it reached in November 2021. The F.T.C. sued to block the biggest supermarket merger in U.S. history. The regulator moved to block Kroger's $25 billion bid for Albertsons, warning that the deal would raise prices and damage union workers' bargaining power. Insider trading from homeThe husband of a former BP merger and acquisitions manager who pleaded guilty this month to eavesdropping on her phone calls and then using what he had learned to illegally earn $1.76 million isn't alone in exploiting remote work to obtain confidential information. There's also the chief compliance officer (yes, the chief compliance officer!) who is accused of trading on information he stole from his girlfriend's laptop. (He pleaded guilty under a cooperation agreement with the Justice Department.) Or the husband who, while his wife took work calls on the way to a family vacation, overheard that her company would miss earnings expectations and was shortly later accused of insider trading. (He agreed to pay the S.E.C. more than $300,000 to settle the charges, without admitting or denying the allegations.) It's not a new problem, but the post-Covid era of remote work has made it more prevalent. And companies aren't prepared. "Many employers have pretty rigorous data protections in place," said Laura Sack, a partner at Davis Wright Tremaine. "Less attention is being paid to less sophisticated ways of breaching confidentiality, like having a conversation that's overheard." Treating family as an exception to confidentiality is a common but risky approach. "Do I think that happens every day? Yes," said Robert Hinckley Jr., a shareholder in the Denver office of Buchalter. "As an attorney, do you do that? No." Sack cites a hypothetical worst-case scenario: You share confidential information with your spouse, and then when you break up, that person tries to use it against you. Ellenor Stone, a partner at Morris Manning & Martin, says she sometimes tells her clients about the former head of a prep school who was awarded an $80,000 discrimination settlement — which the school later refused to pay, citing a confidentiality agreement, after his daughter posted about it on Facebook. Can confidential conversations even happen in the work-from-home era? Stone, who often works on sensitive personnel issues, says that if she knows someone else can overhear her, even at home, she will message the person she is talking with and create code words for the conversation — for example, "When I say Bob, I mean Brian, and when I talk about back surgery, I'm talking about Brian's heart condition." Sack said that during the pandemic, her husband had referred to her parked car as a "mobile office" because it was often the only place she could guarantee she wouldn't be within earshot of anyone else. Employees can be fired for failing to safeguard sensitive information — even if they didn't mean to share it, says Sack. They could also potentially face civil lawsuits. She said companies should do more to explain these risks to employees. Hinckley pointed to another type of employer effort: "Frankly, having folks come back to work and be in the office is an effective way to avoid that situation," he said. On our radar: A trader's education in income inequalityWhen Gary Stevenson first walked onto Citigroup's London trading floor in March 2007, he hardly fit the mold of a traditional big-bank trader: an intern clad in an ill-fitting suit, with little knowledge of financial jargon like "C.D.S." Over the course of "The Trading Game: A Confession," a recounting of his seven years at Citi that comes out on Tuesday, Stevenson describes his education in the markets, learning from a crew of misfits who wouldn't have been out of place in "Liar's Poker." At this point, "The Trading Game" resembles that classic memoir, as Stevenson is introduced to a world of impenetrable terminology and unrelenting greed. He captures the feel of a heyday for trading, when market middlemen plied traders with boozy dinners in exchange for business and obnoxious chest-beating was common. But as Stevenson gets wealthier, the book steers closer in tone to another Michael Lewis book, "The Big Short." The author and his team first profit by betting against the global economy in the buildup to the 2008 financial crisis. Stevenson then becomes one of Citi's top traders by betting against an economic recovery, believing (correctly) that central banks would keep interest rates down to prop things up. As Stevenson is racking up millions, he describes his growing awareness of how he is profiting from a system that lets one-percenters like him get richer at others' expense. "The Trading Game" ends with Stevenson's efforts to get out of Citi amid a mental breakdown. But he has since redoubled his focus on inequality, earning a master's in economics and studying works by progressive academics like Thomas Piketty, calling for a wealth tax and criticizing government policies on his YouTube channel. We hope you've enjoyed this newsletter, which is made possible through subscriber support. Subscribe to The New York Times. Thanks for reading! We'll see you Monday. We'd like your feedback. Please email thoughts and suggestions to dealbook@nytimes.com.
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Saturday, March 2, 2024
DealBook: Musk v. Altman
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