Engineer Xuechen Li, one of the first twenty employees at Musk's AI company xAI, uploaded xAI's entire source codebase to a personal cloud account in July last year. At the same time, he was messaging an OpenAI recruiter named Tifa Chen on Signal. A virtual meeting took place literally minutes after the files were uploaded. By August 1, he had a multimillion-dollar offer in hand and accepted it.
It sounds like textbook industrial espionage, doesn't it? But federal judge Rita F. Lin thinks otherwise, at least when it comes to OpenAI's own liability.
Details of the lawsuit
xAI filed the lawsuit in September 2025. It alleged that OpenAI conducted a "coordinated, unfair, and unlawful campaign" aimed at poaching employees who took sensitive information about the Grok chatbot, source code, training methods, and data center deployment strategies with them. According to the lawsuit, OpenAI used "any means necessary" to induce at least eight former xAI engineers to steal company data before leaving.
Two of them allegedly even admitted to the theft. The case of Xuchen Li was the most specific of all. Nevertheless, Judge Lin dismissed the lawsuit on Tuesday, February 24, 2026.
Why did the court say no?
In her ruling, Judge Lin wrote a sentence that says it all: "Conspicuously absent are any allegations concerning OpenAI's own conduct."
In other words, while xAI described what its former employees did, it failed to prove that OpenAI was behind the conduct of those involved, knew about it, or ever used the stolen data. Simply hiring employees from a competitor is not enough. The judge emphasized that "mere possession of trade secrets is not enough" to hold a company legally liable.
Legal expert Ishita Sharma of Fathom Legal summed it up by saying that courts in the rapidly evolving world of AI want highly specific, factually supported allegations. Poaching employees does not in itself violate the law.
The judge gave xAI another chance. It may file an amended complaint with more specific evidence by March 17, 2026. However, it may not add new parties or new claims without the court's permission.
OpenAI celebrates while Musk remains silent
OpenAI welcomed the decision with open arms. On X, the company wrote that the lawsuit was "baseless from the start and just another part of Musk's ongoing campaign of harassment." xAI's lawyers did not respond to a request for comment.
OpenAI's victory feels somewhat like a win on points rather than a knockout. The case is not over. A parallel lawsuit directly against engineer Xuchen Li is still ongoing, and his deadline to respond was extended to March 6.
The dismissed lawsuit is just one piece of a much larger legal conflict between Musk and Altman. Musk is also suing OpenAI over its transition to a for-profit structure, seeking up to $134.5 billion in damages from OpenAI and Microsoft for "wrongful gains" stemming from his early contributions. Jury selection in that case is scheduled for April 27.
Meanwhile, xAI and X Corp. have filed a federal antitrust lawsuit against Apple and OpenAI because ChatGPT became the default AI assistant on iPhones while Grok was left out.
Musk has until March 17 to show whether he has stronger cards up his sleeve. If xAI files an amended complaint, it will have to be much more specific: direct evidence that OpenAI knowingly instructed employees to steal, or that it actually used the stolen data. That is a very high bar.
For now, it appears that Sam Altman has the upper hand in this round. But in a battle with Elon Musk, it never pays to celebrate too soon.
Sources: finance.yahoo.com and theinformation.com
