Microsoft Faces Shareholder Suit Over Handling of AI

A Microsoft shareholder filed a class action lawsuit against the company last Friday. In it, the plaintiff alleges that Microsoft misled investors by overstating the financial viability of Copilot, while failing to disclose material risks. A recent memo in The D&O Diary summarizes the allegations set forth in the complaint:

“The complaint alleges that during the class period the defendants failed to disclose:

(a) that Microsoft’s Copilot family of products had experienced significant brand positioning, user experience, usage, data siloing, computational capacity, organizational, and interoperability problems;

(b) that Microsoft’s flagship proprietary AI model ranked well below competitors on a number of benchmark tests;

(c) that Microsoft needed to increase by billions of dollars its capital expenditures and divert GPU and CPU capacity away from fulfilling demand for its profitable Azure services in order to improve the competitive positioning of its critical Copilot family of products and increase its AI-related R&D; and

(d) that, as a result of (a)-(c) above, Microsoft had failed to convert a significant percentage of its commercial Microsoft 365 users to paid Copilot subscriptions and the Company’s Copilot offerings has lost market share to rival product, a trend that was increasing.”

The plaintiffs are seeking damages for alleged violations of Sections 10(b) and 20(a) 0of the Securities Exchange Act of 1934. The suit argues that Microsoft diverted resources into developing and scaling Copilot. It is alleged that the opportunity cost of that diversion led to declines in more profitable divisions of the company. The memo notes that securities litigation involving AI is on the rise, and the Microsoft case marks another important entry in a growing body of cases.