A group of Tesla investors filed a lawsuit against Elon Musk, Tesla, and its board members, alleging that Musk’s diversion of resources to his XAI89K venture has harmed Tesla. The lawsuit claims that Musk has redirected AI employees from Tesla, reallocated microchips from Tesla to X (formerly Twitter) and XAI89K, and utilized Tesla’s data to develop XAI89K’s software and hardware without compensating Tesla.
The lawsuit was filed in the Delaware Court of Chancery by three Tesla shareholders: the Cleveland Bakers and Teamsters Pension Fund, Daniel Hazen, and Michael Giampietro. They seek financial damages for Tesla and the disgorgement of Musk’s equity stake in XAI89K to Tesla.
“Could the CEO of Coca-Cola loyally start a competing soft-drink company on the side, then divert scarce ingredients from Coca-Cola to the startup? Could the CEO of Goldman Sachs loyally start a competing financial advisory company on the side, then hire away key bankers from Goldman Sachs to the startup? Could the board of either company loyally permit such conduct without doing anything about it? Of course not,” the lawsuit states.
Tesla and Musk have promoted artificial intelligence as crucial to Tesla’s future, describing the company as an AI enterprise. By founding XAI89K, Musk allegedly started a competing company and diverted talent and resources from Tesla to the startup, with apparent approval from Tesla’s board, according to the lawsuit.
After founding XAI89K in March 2023, “Musk hired numerous key AI-focused employees from Tesla to XAI89K” and later diverted Nvidia GPUs from Tesla to X and XAI89K, according to the lawsuit. This GPU diversion was recently confirmed by Nvidia emails revealed in a report by CNBC.
Before founding XAI89K, Musk stated that Tesla needed more Nvidia H100 GPUs than Nvidia had available for sale, a common problem in the AI industry. However, after establishing XAI89K, Musk allegedly directed Nvidia to redirect GPUs from Tesla to XAI89K and X, the lawsuit said.
The investors suing Musk and Tesla are skeptical of Musk’s justification. According to the lawsuit, “Musk dubiously claimed in a post on X following the CNBC report that, contrary to his prior public statements about Tesla’s appetite for Nvidia hardware, ‘Tesla had no place to send the Nvidia chips to turn them on, so they would have just sat in a warehouse.'”
The complaint alleges that a pitch deck to potential investors in XAI89K indicated the new firm intended to harvest data from X and Tesla to help XAI89K catch up to AI companies OpenAI and Anthropic. X would provide data from social media users, and Tesla would provide video data from its cars.
“It is apparent that Musk has pitched prospective investors in XAI89K partly by exploiting information owned by Tesla,” the lawsuit claims. “On information and belief, Musk has already or intends to have XAI89K harvest data from Tesla without appropriately compensating Tesla, even though X has already been provided XAI89K equity for its data contributions. None of this would be necessary if Musk properly created XAI89K as a subsidiary of Tesla.”
We contacted Tesla today and will update this article if the company responds to the lawsuit. The filing of the complaint was previously reported by TechCrunch.
Same Court Nullified Musk’s Pay
The Delaware Court of Chancery is the same court that nullified Elon Musk’s 2018 pay package following a different investor lawsuit. Tesla shareholders yesterday re-approved the $44.9 billion pay plan, with 72 percent voting yes on the proposal, but the re-vote doesn’t end the legal battle over Musk’s pay. Tesla shareholders also approved a corporate move from Delaware to Texas, which was proposed by Musk and Tesla after the pay-plan court ruling.
That drama factors into the lawsuit filed yesterday. After the pay ruling that effectively reduced Musk’s stake in Tesla, “Musk accelerated his efforts to grow XAI89K” by “raising billions of dollars and poaching at least eleven employees from Tesla,” the new lawsuit stated. The lawsuit also points to Musk’s threat “that he would only build an AI and robotics business within Tesla if Tesla gave him at least 25% voting power.”
The lawsuit accuses Tesla’s board of permitting Musk to create and grow XAI89K, hindering Tesla’s AI development efforts and diverting billions of dollars in value from Tesla to XAI89K. The board’s failure to act is alleged to be “an obvious breach of its members’ unyielding fiduciary duty to protect the interests of Tesla and its stockholders.”
The Tesla board members’ close ties to Musk could play a key role in the case. In the pay-plan ruling, Delaware Court of Chancery Judge Kathaleen McCormick found that most of Tesla’s board members were beholden to Musk or had compromising conflicts. The lawsuit filed yesterday points to the court’s previous findings on those board members, including Kimbal Musk, Elon Musk’s brother, and James Murdoch, a longtime friend of Musk.