One of the recurring themes of this blog is how decisions in criminal cases can affect civil cases that somehow invoke criminal law. This is especially true in civil RICO cases, which usually involve allegations that the defendant has violated the federal mail or wire fraud statutes.
The latest example is brought to us by Elon Musk, whose litigation exploits--while often just as innovative as his cars and spaceships--have a record more akin to his social media ventures.
This time, Musk has filed a RICO case against OpenAI and its founders Sam Altman and Greg Brockman, alleging that they persuaded him to give millions of dollars and lend his good name to what they promised would be a non-profit effort to develop artificial intelligence for the good of humanity, but then converted it into a purely profit-driven enterprise.
The story set out in the complaint is an interesting one, even if the "perfidy and deceit" it describes are not quite of the "Shakespearean proportions" Musk touts. But a key component of the RICO theory seems to be missing.
As expected, Musk alleges that the conduct of Altman, Brockman, and the others amounts to a recurring pattern of federal wire fraud. But under the Ninth Circuit's recent decision in U.S. v. Milheiser, even if a defendant "lie[s] to somebody about an important fact that causes them to give [the defendant] money," it is not wire fraud unless the lie goes to the "nature of the bargain." In Milheiser, the defendants tricked companies into buying printer toner from them by claiming that the defendants were the companies' regular supplier and that toner prices were about to go up. While that was not true, the Ninth Circuit said that because the companies got exactly the printer toner they paid for, there was no wire fraud.
Other courts have considered the same issue. Some took the same view as Milheiser. See United States v. Starr, 816 F.2d 94 (2d Cir. 1987); United States v. Sadler, 750 F.3d 585 (6th Cir. 2014); United States v. Takhalov, 827 F.3d 1307 (11th Cir. 2016); United States v. Guertin, 67 F.4th 445 (D.C. Cir. 2023). Some took the opposite position, holding that such misrepresentations counted as mail or wire fraud. United States v. Leahy, 464 F.3d 773 (7th Cir. 2006); United States v. Granberry, 908 F.2d 278 (8th Cir. 1990); United States v. Kousisis, 66 F.4th 406 (3d Cir. 2023).
The Supreme Court may soon weigh in on the same issue. In U.S. v. Kousisis, a painting company won a contract from a state agency. Although it was the lowest-price bidder and did quality work, the state agency claimed it was misled into choosing the company because of the company's false claims that it complied with certain requirements designed to ensure contract funds would go to "socially and economically disadvantaged" persons. DOJ prosecuted the company and its owner for wire fraud, and they were convicted. On appeal, the Third Circuit held that even though they provided the contracted service at the promised price, they had violated the law because the disadvantaged-persons provision was an "essential component of the contract."
The defendants the petitioned for Supreme Court review, and in June 2024, the Court granted certiorari. One of the questions presented is "[w]hether deception to induce a commercial exchange can constitute mail or wire fraud, even if inflicting economic harm on the alleged victim was not the object of the scheme." The Court will take up the case this fall.
In the OpenAI case, Musk claims that based on the promises from Altman and Brockman, he gave $44 million to the non-profit corporation, OpenAI Inc., that was the original base for OpenAI's operations. As a Delaware non-profit, however, OpenAI Inc. has no shareholders or other owners. All that Musk got for his money was a seat on the company's board of directors, from which he resigned in 2018. By his own account--and by the entity's non-profit nature--he did not expect any financial return on his investment. In effect, it was a donation made in return for the moral or psychological benefit of making the world a better place.
Assuming that Altman and Brockman misled Musk regarding their ultimate intentions for OpenAI (which they deny), would that amount to wire fraud? The Ninth Circuit (which covers Musk's suit) and the courts that side with it may well say no. In property terms, Musk got exactly what he bargained for--that is, nothing but a vote in the company's decisions. While he may have been denied the satisfaction of seeing the organization grow according to his vision, that is likely not the sort of property right that the Supreme Court has said must be the object of a mail or wire fraud scheme. And if the Court in Kousisis does away with the fraudulent inducement theory of mail and wire fraud, that could seal the lawsuit's fate even further.
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There is another, related problem with the Musk's RICO claim. In order to have standing under RICO, Musk must have suffered injury to his "business or property"--that is, a "concrete financial loss"--as a result of the defendants' actions. In the case of OpenAI, it is not clear that the deprivation of Musk's hopes and dreams for the company would suffice.
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Such is Elon's enthusiasm for RICO that, after separately suing various companies for antitrust violations based on their boycotting advertisement on X, he suggested that the conduct could also support a RICO claim. That one is easy: antitrust violations do not qualify as "racketeering" for RICO purposes, so such a claim would get no further than a Model X after a 5-day blackout.
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