California AG Is Investigating OpenAI (c)(3), but Taking no Official Role In Musk Litigation. Hearing Next Month

California Attorney General Rob Bonta

Delaware, California, and the United States all have legal interests in OpenAI (c)(3)’s transformation to a public benefit corporation and in Elon Musk’s suit claiming antitrust, nonprofit corporate governance, and tax exemption violations.  Earlier this year, OpenAI confirmed that it intends to transfer its technology transfer side to a public benefit corporation.  It will retain its research side and hold an equity stake in the public benefit corporation.  Though Delaware and the United States have already gone on record expressing there interest in the case, California has hardly uttered a public word, despite being urged to do so.  Delaware didn’t say a preliminary injunction is unnecessary, but that is what they meant. DOJ and FTC filed a joint Statement of Interest last week.  The two agencies relate their understanding of antitrust and unfair competition laws:

The Antitrust Division of the U.S. Department of Justice and the FTC (collectively, the “Agencies”) enforce the federal antitrust laws, including the prohibition against interlocking directorates in Section 8 of the Clayton Act, 15 U.S.C. § 19,1 and the prohibition against contracts, combinations, and conspiracies in restraint of trade in Section 1 of the Sherman Act, 15 U.S.C. § 1. The Agencies therefore have a strong interest in their correct application. The FTC is further charged by Congress with preventing unfair methods of competition under Section 5 of the FTC Act, 15 U.S.C § 45. Such unfair methods include “incipient violations of [the Clayton Act], and conduct which, although not a violation of the letter of the antitrust laws, is close to a violation or is contrary to their spirit.” E.I. du Pont de Nemours & Co. v. FTC (Ethyl), 729 F.2d 128, 136–37 (2d Cir. 1984). California similarly prohibits unfair competition, Cal. Bus. & Prof. Code § 17200, and federal and state courts look to Section 5 of the FTC Act to interpret that statute’s meaning. See Cel-Tech Commc’ns, Inc. v. Los Angeles Cellular Tel. Co., 20 Cal. 4th 163, 185–86 (1999) (“As the issue before us in this case arises out of a claim of unfair competition . . . the relevant jurisprudence would be that arising under section 5’s prohibition against ‘unfair methods of competition.’”). The FTC therefore has an interest in the correct interpretation of California’s Unfair Competition Law (“UCL”), Cal. Bus. & Prof. Code § 17200.

The Agencies file this Statement of Interest in response to Plaintiffs’ Motion for a Preliminary Injunction, ECF No. 46, to address the proper standards for analyzing whether (1) a  claim under Section 8 is moot and (2) a company violates Section 8 by appointing a natural person to serve on the board of a competing company. This statement also explains how interlocking board member arrangements can undermine fair competition and therefore violate the FTC Act and, by extension, California’s UCL. Finally, this statement discusses the legal standard for when group boycotts can run afoul of Section 1. The Agencies take no position on any other issue in this case, including the facts alleged by Plaintiffs.

California is the only other directly involved government that has not yet indicated its interest in the case, at least not officially to the Court.  But last week, Cal Matters published a letter the California AG sent to OpenAI(c)(3).  The letter confirms what most people already know – that California has begun its own scrutiny of the pending transformation. Here is an exerpt:

In furtherance of the Attorney General’s responsibility to protect assets held in charitable trust, and in light of OpenAI, Inc’s Amended and Restated Certificate of Incorporation irrevocably dedicating its assets for charitable purposes, the Attorney General seeks the following information:

1. Information on OpenAI’s restructuring plans;

2. Value of OpenAI’s assets;

3. Value of OpenAI’s charitable assets held by its subsidiaries; and

4. Plans for the transfer and/or disposition of OpenAI, Inc.’s charitable assets with the restructuring plans.

I wonder why California has not made it known to the Court that it is monitoring the transaction, as did Delaware a month or so ago.  The defendants should include the fact of California’s interest if California does not do so itself.  By the way, the hearing on Elon’s motion for preliminary injunction takes place on February 4, 2025 at 9:00 am, Pacific.  The public can watch and listen via zoom here.

darryll k. jones