Federal Judge Dismisses xAI Trade Secrets Lawsuit Against OpenAI

A federal judge has dismissed xAI’s trade secrets lawsuit against OpenAI, ruling that the Elon Musk–founded startup failed to present sufficient facts directly linking OpenAI to any alleged misconduct. However, the court granted xAI permission to amend its complaint and refile.

Rita F. Lin, a U.S. District Judge, concluded that the allegations primarily focused on the actions of former xAI employees rather than specific wrongdoing by OpenAI itself, which is the sole defendant in the case. The judge emphasized that to proceed beyond the initial pleading stage, a plaintiff must present factual claims that, if proven true, demonstrate that the defendant committed the alleged unlawful act.

xAI originally filed the lawsuit in September, accusing OpenAI of orchestrating what it described as a coordinated and unlawful campaign to steal proprietary technology by aggressively recruiting its engineers. The complaint claimed that OpenAI induced eight former xAI employees to misappropriate sensitive materials, including source code, training methodologies, and data center deployment strategies. According to the filing, lucrative multi-million-dollar compensation packages were offered to engineers who allegedly accessed internal files shortly after communicating with an OpenAI recruiter.

Judge Lin ruled that xAI did not sufficiently allege that OpenAI directed, knew of, or used any misappropriated trade secrets. The order noted that even if individual misconduct occurred, mere possession of trade secrets is not enough to establish corporate liability. The court also dismissed related state-level unfair competition claims, finding them preempted under trade secret law.

The judge set a March 17 deadline for xAI to submit a revised complaint and barred the company from adding new claims or defendants without court approval. Meanwhile, a separate case against former xAI engineer Xuechen Li remains active, with his response deadline extended to March 6 as both sides review disputed materials under a preliminary injunction issued in January.

Legal Experts Say High Bar Applies to Trade Secret Claims

Legal analysts say the ruling reinforces the difficulty of holding companies liable for trade secret violations tied to employee movement. Ishita Sharma, managing partner at Fathom Legal, told Decrypt that courts require concrete factual links between an employer and the alleged misuse of proprietary information. She noted that simply hiring employees from a competitor does not, on its own, constitute unlawful conduct without evidence of inducement or actual use of confidential materials.

Sharma added that if xAI chooses to amend its complaint, it will likely need to narrow its claims and provide detailed allegations specifically describing OpenAI’s direct involvement rather than relying on broad assertions about employee behavior.

Latest Chapter in Musk’s Legal Disputes With OpenAI

The ruling marks another development in the increasingly contentious relationship between Elon Musk and Sam Altman. Musk, a co-founder of OpenAI, has been engaged in multiple legal disputes with his former venture as competition intensifies in the artificial intelligence sector.

In addition to the trade secrets case, Musk’s AI company and X Corp. previously filed an antitrust lawsuit alleging that an exclusive agreement between Apple and OpenAI made ChatGPT the default AI assistant on iPhones, disadvantaging competitors such as Grok. More recently, Musk reportedly sought up to $134 billion from OpenAI and Microsoft, claiming entitlement to gains derived from his early contributions.

With the trade secrets claim dismissed but amendable, the next move now rests with xAI. Whether the company can present more detailed factual allegations may determine if the case proceeds to discovery or ends at the pleading stage.