Securities Regulation Daily Wrap Up, AI NEWS—W.D. Wash.: Complaint alleges Microsoft D&Os misled about AI strategy, copyright violations, (Sep 9, 2026)
Law Firms Mentioned:Herman Jones LLP
Organizations Mentioned:Microsoft | Microsoft Corporation
By Anne Sherry, J.D.
Copyright violations placed the company at risk of litigation, the action alleges.
A new complaint alleges that Microsoft’s officers and directors made false and misleading statements about the company’s artificial intelligence strategy and concealed issues with its Copilot products, including that Copilot trained on copyrighted works (Gray v. Nadella, No. 26-cv-03215 (W.D. Wash. filed Sept. 8, 2026)).
The complaint was filed as a shareholder derivative action on behalf of nominal defendant Microsoft.
Background. According to the plaintiff, Microsoft has invested billions of dollars in large language models and the companies that develop them, including over $13 billion in OpenAI. Microsoft based its Copilot products on OpenAI’s ChatGPT.
In September 2023, a group of fiction writers filed a copyright class action against OpenAI; the complaint was amended to add Microsoft as a defendant. Similar actions followed regarding nonfiction works in each of 2024, 2025, and 2026. Each of the complaints alleges that Microsoft actively participated in intellectual property theft and copyright violation.
From the scale of the lawsuits, the defendants were on notice of alleged, pervasive IP violations, the derivative action alleges. The defendants also ignored numerous red flags, such as a 2025 case distinguishing between training AI systems on legally acquired works (which could qualify for fair use) and training on pirated works (which would not be protected fair use).
Rather than scale back, Microsoft charged ahead in its collaboration with OpenAI, developing cloud infrastructure specifically designed to use “essentially, the whole internet” to train the large language models. The complaint alleges that the director defendants thus knew or recklessly disregarded that pirated copyrighted material was being used in this training.
Because the defendants touted AI-related successes while downplaying concerns, Microsoft’s stock price reached an intraday all-time high of $551.05 per share on July 31, 2025, the complaint alleges.
Misleading statements. According to the plaintiff, the officer and director defendants caused Microsoft to make materially false and misleading statements about AI strategy and risk.
Microsoft touted the success of Copilot while concealing the copyright violations and its partnerships with AI companies. The company also concealed major issues with Copilot’s brand positioning, user experience, usage, data siloing, computational capacity, organization, and interoperability. Finally, Microsoft concealed that its proprietary AI model was lagging behind those of its competitors.
The complaint also alleges that Microsoft violated Items 303 and 105 of Regulation S-K by failing to disclose these facts as known trends or uncertainties and as risk factors, respectively.
Truth emerges. A series of disclosures put the lie to the above statements, according to the plaintiff. Microsoft revealed that growth of its cloud computing platform, Azure, had slowed because the company diverted computing power to AI development. For similar reasons, capital expenditures in the first half of fiscal 2026 reached nearly the amount incurred in the entire previous fiscal year. And Microsoft disclosed for the first time that it was failing to convert commercial users into paid Copilot users.
In February 2026, the Wall Street Journal published an article reporting that Copilot faced such severe issues that Microsoft had lost market share to competitors. Further analyst and news reports filled in the picture, and Microsoft’s stock price dropped 30 percent from its high.
Claims. The complaint brings a claim for breach of fiduciary against all defendants. It also brings claims against the director defendants for violating Exchange Act Section 14(a) and against the officer defendants for unjust enrichment in the form of hundreds of millions in bonuses, options, and other performance-based compensation.
The case is No. 26-cv-03215.
Attorneys: Gregory F. Wesner (Herman Jones LLP) for Katelyn Gray.
Companies: Microsoft Corporation
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