The high-profile litigation between xAI and OpenAI continues to escalate, with new filings that lay bare the deepening legal and reputational battle between Elon Musk's AI startup and the industry leader he helped found.
In early October, OpenAI filed both a motion to dismiss xAI's complaint and an answer and affirmative defenses. Together, the filings portray xAI's trade secret suit as a vindictive effort to generate bad publicity, rather than to vindicate any legitimate intellectual property rights.
OpenAI's Motion to Dismiss
OpenAI's motion to dismiss, filed October 2, 2025, argues that xAI's trade secret claims fail as a matter of law because xAI does not plausibly allege that OpenAI ever acquired, used, or even knew about xAI's alleged trade secrets.
The motion methodically walks through xAI's allegations about its former engineers, Xuechen Li and Jimmy Fraiture, but argues that the complaint "stops short of claiming that OpenAI sought xAI trade secrets through them, that they ever transferred trade secrets to OpenAI, or that they used those secrets at OpenAI." The filing stresses that Li allegedly uploaded xAI code to a personal cloud account, not to any OpenAI system, and that Fraiture deleted any downloaded materials before joining OpenAI.
OpenAI also urges the court to strike portions of the complaint that name other former xAI employees who later joined OpenAI but are not alleged to have misappropriated anything. It argues those allegations are "immaterial" and "scandalous" under Rule 12(f), intended only to publicly smear current OpenAI employees.
The filing closes with a request for full dismissal of the complaint, or, in the alternative, an order striking paragraphs 114–115 of xAI's pleading. The hearing is scheduled before Judge Rita Lin on November 18, 2025.
The Answer and Affirmative Defenses
OpenAI filed its answer and affirmative defenses on the same day, offering a direct and sharply worded response to Musk's accusations. The document opens with a statement that "xAI has filed this groundless trade secret lawsuit" and personally accuses Elon Musk of using litigation "to distract from the failures of his own competitive AI effort."
Among its key factual rebuttals, OpenAI emphasizes that:
- Li never joined OpenAI. OpenAI admits it extended Li an offer on July 28, 2025, which he accepted by August 1, but confirms that it revoked the offer shortly thereafter. The revocation, though not explained in detail, appears consistent with OpenAI's claim that it "had no role in Li's alleged actions" and did not want any involvement once the allegations against him surfaced.
- Recruiting communications were routine. OpenAI includes screenshots of its recruiter's emails and a DocSend link to a benefits packet to refute xAI's claim that a "cloud storage link" was used to solicit stolen code.
- Fraiture's conduct predated his employment. OpenAI notes that Fraiture allegedly downloaded code while still at xAI and deleted it before joining OpenAI.
The answer also sets out fourteen affirmative defenses, ranging from failure to state a claim, waiver, and estoppel, to a notable fourteenth defense: that xAI's claims are "frivolous, unreasonable, and brought in bad faith." OpenAI specifically invokes 18 U.S.C. § 1836(b)(3)(D), which allows defendants in DTSA cases to recover attorneys' fees where a trade secret claim is brought in bad faith.
Bad Faith Under the DTSA
One of the most strategically significant aspects of OpenAI's filing is its reliance on the DTSA's bad faith fee-shifting provision, § 1836(b)(3)(D), which authorizes courts to award reasonable attorneys' fees to the prevailing party when a misappropriation claim is made "in bad faith," when an injunction is sought or opposed in bad faith, or when misappropriation is willful and malicious.
What Does "Bad Faith" Mean Under the DTSA?
The definition of "bad faith" under the DTSA is unsettled, and different circuits apply slightly different standards. In the Southern District of New York, Judge Liman's recent opinion in Recoop LLC v. Outliers Inc., No. 22-cv-4535, 2025 WL 1725024 (S.D.N.Y. June 20, 2025), provides a very comprehensive overview. There, the court reviewed competing formulations across jurisdictions:
- The Second Circuit has not adopted a uniform rule but generally follows the two-part meritlessness and improper purpose test, tracking the common law fee-shifting standard. See Insurent Agency Corp. v. Hanover Ins. Co., 2020 WL 86813 (S.D.N.Y. Jan. 9, 2020).
- The Third Circuit requires proof that the plaintiff completely lacked evidence and knew, or was reckless in not knowing, that its claims lacked merit. See Elmagin Cap., LLC v. Chen, No. 22-2739, 2024 WL 2845535, at *5 n. 14 (3d Cir. Mar. 21, 2024).
- The Seventh Circuit takes a broader approach, finding bad faith where claims are frivolous or maintained for improper purposes such as harassment or delay, or needless increase in the cost of litigation. See LQD Bus. Fin., LLC v. AKF, Inc., 2025 WL 830444, at *4 (7th Cir. Mar. 17, 2025).
- The Sixth Circuit demands evidence that "that a party's claim was meritless, that the party knew at a certain point that it was meritless and nonetheless maintained it, and that the party brought or maintained the claim for some improper purpose." Shepard & Assocs., Inc. v. Lokring Tech., LLC, 2025 WL 1420931, at *4 (6th Cir. May 16, 2025).
- The Fourth Circuit, by contrast, holds that a DTSA claim is not made in bad faith if it had "at least some chance of success," and that a finding of bad faith "requires, at a minimum, that the plaintiff's 'claim had no chance of success under existing law.' " Akira Techs., Inc. v. Conceptant, Inc., 773 F. App'x 122, 125 (4th Cir. 2019) (quoting Tullidge v. Bd. of Supervisors of Augusta Cty., 391 S.E.2d 288, 290 (Va. 1990)).
In Recoop, Judge Liman concluded that most courts require both (1) objective speciousness (the absence of a reasonable factual or legal basis) and (2) subjective bad faith (an improper motive). Applying that framework, the court denied the defendant's motion for fees, finding that the plaintiff's weak but colorable claims did not satisfy that dual showing ("a failure of proof does not alone establish that the claim was brought in bad faith.").
Illustrative DTSA Cases
The cases below further illustrate how courts apply (and often reject) bad faith fee requests:
- TransPerfect Global, Inc. v. Lionbridge Technologies, Inc., No. 19-cv-3283 (DLC), 2022 WL 2119344 (S.D.N.Y. May 31, 2022): After granting summary judgment for defendants, the court denied fees, holding that although TransPerfect's claims lacked evidentiary support, defendants failed to show the "high degree of bad faith" required under the DTSA.
- Design Gaps, Inc. v. Hall, No. 3:23-cv-186-MOC, 2024 WL 203244 (W.D.N.C. Jan. 18, 2024): The court dismissed the DTSA claim for failure to identify any cognizable trade secret but declined to award fees, emphasizing that "transparently flawed" pleadings alone do not prove dishonest intent.
- RJB Wholesale, Inc. v. Castleberry, 788 F. App'x 565 (9th Cir. 2019): The Ninth Circuit reversed a fee award, holding that even meritless trade secret claims do not justify fee shifting without evidence of improper motive or intentional abuse of process.
OpenAI's Litigation Strategy
Bad faith fee awards under the DTSA remain rare and demand a high evidentiary showing. But OpenAI's invocation of this defense is telling. It signals that OpenAI is preparing not only to defend the lawsuit but also to argue that xAI filed it to inflict reputational harm and deter employee movement. If successful, OpenAI could recover attorneys' fees and set an influential precedent discouraging companies from using trade secret litigation as a competitive weapon in Silicon Valley's AI arms race.
Why It Matters
If OpenAI succeeds in persuading the court that xAI's claims were brought in bad faith, it could do more than win the lawsuit against it. A favorable ruling under the DTSA's bad faith provision would help define how courts interpret and apply the DTSA's fee-shifting provision and, in doing so, bolster the strategy for defendants to go on offense in trade secret litigation. Rather than simply defending against misappropriation allegations, OpenAI is using the DTSA to challenge the motives and methods behind the claim.
All eyes will now turn to the November 18 hearing before Judge Rita Lin, and we will keep this page updated accordingly.
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