Labor & Employment Law Daily Wrap Up, TORT CLAIMS—N.D. Cal.: Misappropriation claims by Musk’s xAI against rival OpenAI dismissed with prejudice, (Jun 17, 2026)

By Thomas Long, J.D.

XAI failed to plead facts showing a connection between former employees’ alleged disclosure of Grok secrets and any misconduct by OpenAI.

X.AI Corp. has failed in its second attempt to link its former employees’ alleged trade secrets misappropriation to competitor OpenAI, Inc., the federal district court in San Francisco has decided. The court dismissed the lawsuit with prejudice. The former employees included engineers who were accused of revealing confidential information about the “Grok” artificial intelligence model. At most, OpenAI was accused of passively receiving the information, which is not enough to constitute misappropriation of trade secrets in violation of the Defend Trade Secrets Act. Nor were there sufficient facts to support an inference that OpenAI induced the former employees to reveal confidential information. Although separate lawsuits against two former engineers remain pending, the court refused to allow X.AI Corp. to file a third amended complaint against OpenAI, concluding that doing so would be futile (X.AI Corp. v. OpenAI, Inc., No. 3:25-cv-08133-RFL (N.D. Cal. Jun. 15, 2026)).

Elon Musk’s X.AI Corp (“xAI”) and OpenAI are well-known competitors in the field of generative artificial intelligence. In the summer of 2025, eight xAI employees left to pursue opportunities with OpenAI. According to xAI, the former employees—including engineers Xuechen Li and Jimmy Fraiture—took proprietary source code and other confidential information with them. xAI filed suit against OpenAI, alleging violations of the Defend Trade Secrets Act (DTSA). xAI separately sued London-based Fraiture in the United Kingdom and filed a complaint against Li in the Northern District of California. The court granted xAI’s motion for a temporary restraining order against Li on September 2, 2025. xAI also filed a miscellaneous action in November 2025 seeking an application for discovery under 28 U.S.C. § 1782 to support the U.K. action against Fraiture. The court denied the application, finding that that the discovery requests were premature, overly broad, and essentially a “fishing expedition” aimed at gaining an unfair advantage in both the U.K. action and the N.D. Cal. lawsuit against OpenAI.

First amended complaint. The court dismissed the first amended complaint without prejudice after determining that xAI failed to plead that OpenAI acquired, used, disclosed, or induced the misappropriation of xAI’s trade secrets. In the court’s view, xAI did not point to a connection between the former employees’ alleged misconduct and any misconduct by OpenAI and therefore did not plausibly allege misappropriation under the DTSA.

Second amended complaint. xAI filed a second amended complaint, and OpenAI again moved to dismiss. xAI contended that it plausibly pleaded two theories of misappropriation: (1) OpenAI induced Li to misappropriate xAI’s trade secrets; and (2) Li disclosed xAI’s trade secrets to OpenAI in a presentation that he delivered during the recruitment process. The court rejected both theories.

Inducement. In its second amended complaint, xAI attempted to overcome the deficiencies in the previous pleading by alleging that (1) OpenAI specifically targeted Li for recruitment because of his knowledge of features of Grok; (2) OpenAI typically asked engineers being considered for employment to give presentations about a prior project, which necessarily reveals technical details of that project; (3) OpenAI knew or should have known that asking Li to present on his prior work was tantamount to asking Li to disclose the confidential technical information about the Grok features; (4) during a meeting between LI and OpenAI’s head of research, Li described his work on Grok; and (5) as part of the recruiting process, OpenAI scheduled Li to meet with key leaders of its teams working on similar features for OpenAI’s products.

The court deemed these allegations insufficient. “In essence, xAI equates asking a candidate about their prior work experience with encouraging the candidate to divulge trade secrets obtained during that prior work experience,” the court explained. “Without more, however, merely asking Li to discuss his previous work—a routine part of the hiring process—does not allow a plausible inference that OpenAI induced Li to reveal anything confidential or secret about that work.” Nothing in the allegations supported an inference that Li’s presentation would necessarily reveal trade secrets, and xAI’s assertion that OpenAI asked Li to present on “proprietary methods” was speculative.

OpenAI’s continued interest in Li as a candidate would not constitute inducement unless “OpenAI knew or should have known that Li had disclosed xAI’s trade secrets in his presentation,” the court said. However, xAI’s newly pleaded allegations did not support an inference that OpenAI had this knowledge. “It is not clear at what level of detail Li discussed xAI’s reinforcement learning techniques,” the court noted. Although an xAI engineer “confirmed” that Li’s slide deck disclosed trade secrets, that was not enough to show that OpenAI’s engineers would understand that. In the court’s view, the second amended complaint requires inferences to be made without accounting for “obvious alternative explanation[s] at each inferential step.”

Disclosure by Li. Allegations of Li’s disclosure of trade secrets to OpenAI would not, if proven true, establish misappropriation by OpenAI because there was no indication of anything other than “passive receipt” of the information by OpenAI. “Under the DTSA, misappropriation includes acquisition, disclosure, or use,” the court said. “At most, disclosure by Li could constitute only acquisition by OpenAI and not disclosure or use.” Acquisition under the DTSA requires active conduct, the court explained, because mere possession of trade secrets does not rise to the level of misappropriation.

Leave to amend denied. The court declined to permit xAI to further amend its pleadings because, in its view, doing so would be futile. “xAI has already been provided multiple opportunities to state a valid claim,” said the court. “Accordingly, dismissal is without leave to amend.”

The Case is No. 3:25-cv-08133-RFL.

Judge: Lin, R.

Attorneys: LeElle Bruerea Slifer (King & Spalding) for X.AI Corp. Carolyn Hoecker Luedtke (Munger, Tolles Olson) for OpenAI, Inc.

Companies: X.AI Corp.; OpenAI, Inc.

Cases: TortClaims AINews Procedure CaliforniaNews