July 30, 2026  ·  Complaint filed June 30, 2026  ·  United States District Court for the Western District of Washington at Seattle, No. 2:26-cv-02281

Newman News, By David Brunk

Read the complaint

Anderson v. Nadella Alleges Microsoft Board Hid AI Copyright Risks and Copilot Failures

Proxy Statements Claimed AI Training Complied With Copyright Laws While Litigation Mounted

A Microsoft shareholder filed a derivative complaint on June 30, 2026, alleging that the company’s directors and officers—including CEO Satya Nadella and CFO Amy Hood—breached their fiduciary duties by concealing material risks tied to Microsoft’s AI strategy, including copyright infringement and the underperformance of its Copilot products. The complaint, brought by shareholder Eric Anderson, targets 16 current and former directors and officers, accusing them of making materially false and misleading statements in SEC filings and proxy statements. The complaint asserts multiple causes of action, including Breach of Fiduciary Duty (state law; all Individual Defendants against Microsoft) and Violation of Section 14(a) of the Securities Exchange Act of 1934 (15 U.S.C. § 78n(a)) and Rule 14a-9 (17 C.F.R. § 240.14a-9; all Director Defendants against Microsoft) (Compl. ¶¶1, 2). The complaint also includes a Shareholder Derivative Claim for materially false and misleading statements and omissions regarding Microsoft’s AI business, operations, and financial condition, violating SEC regulations under Item 303 and Item 105 of Regulation S-K (Compl. ¶4).

The complaint alleges that Microsoft’s AI training practices violated copyright laws, citing multiple lawsuits filed against the company, including one accusing Microsoft of training its AI models on nearly 200,000 pirated books, and another alleging that Microsoft systematically scraped paywalled news content without permission. The complaint states that Microsoft’s 2024 and 2025 Proxy Statements represented that the company’s AI training complied with global copyright laws and used data accessed through negotiated arrangements with publishers and copyright owners (Compl. ¶2, ¶75). The complaint quotes the 2025 Proxy Statement as stating, "Generative AI Models — Microsoft uses a variety of data sources, including publicly available information, in a manner consistent with global copyright laws" and "We train on data that we gain access to... through negotiated arrangements with publishers and copyright owners" (Compl. ¶2). The complaint further alleges that Microsoft’s role in the alleged copyright violations included the use of the Books3 dataset, which contained nearly 200,000 pirated books, as referenced in a June 2025 lawsuit (Compl. ¶45). The complaint also notes that Microsoft’s capital expenditures in fiscal year 2025 totaled $88 billion, reflecting the company’s aggressive investment in AI infrastructure and partnerships (Compl. ¶78).

Following a June 2025 ruling in Bartz v. Anthropic, where the court held that training AI models on pirated books constituted copyright infringement, the complaint alleges that the board continued to approve proxy statements claiming compliance with copyright laws. The 2025 Proxy Statement asserted that Microsoft "does not train on data from the USTR Notorious Markets list" (Compl. ¶75). The complaint further alleges that Microsoft’s role in the alleged copyright violations extended to its partnership with OpenAI, which included a $13 billion investment since 2019 and the provision of Azure infrastructure for training AI models (Compl. ¶40). Additionally, the complaint notes that Microsoft invested $5 billion in Anthropic, which committed to purchasing $30 billion in Azure compute capacity and 1 gigawatt of additional capacity from Microsoft (Compl. ¶56). The complaint also alleges that OpenAI agreed to purchase $250 billion in incremental Azure services as part of their partnership (Compl. ¶55). Microsoft’s valuation of its 27% stake in OpenAI was reported as $135 billion (Compl. ¶55).

The complaint highlights Microsoft’s financial commitments to its AI partnerships, including allegations in copyright complaints that Microsoft’s investment in OpenAI exceeded $10 billion (Compl. ¶8). The complaint also alleges that Microsoft’s cloud infrastructure was central to these partnerships, with the company designing and operating the Azure supercomputing infrastructure used to train OpenAI’s models. The complaint quotes internal descriptions of the infrastructure as being "specifically designed to use 'essentially the whole internet'" (Compl. ¶127). The Environmental, Social, and Public Policy Committee, chaired by Penny Pritzker and including other directors, allegedly oversaw Microsoft’s AI strategy but failed to address the copyright violations, despite the committee’s stated responsibility for "responsible AI policies" (Compl. ¶140). The complaint alleges that the committee ignored red flags, including the Bartz v. Anthropic ruling, which distinguished between lawful and unlawful training data, stating, "Training on lawfully acquired books was 'exceedingly transformative' and could constitute fair use under 17 U.S.C. § 107" (Compl. ¶124).

SEC Filings Omitted Copilot’s Low Adoption, Operational Challenges, and Capital Expenditure Risks, Plaintiff Alleges

The complaint alleges that Microsoft’s directors and officers misrepresented the financial health and competitive position of its AI products, particularly Copilot, while omitting material adverse trends from SEC filings. Microsoft’s Q3 2025 Form 10-Q reported a 33% increase in Azure and other cloud services revenue, with 16 points of growth attributed to AI services (Compl. ¶64). The complaint notes that Azure revenues reached $75 billion in fiscal year 2025, representing a 34% increase, and that the Intelligent Cloud segment’s gross margin increased by 14% during the same period (Compl. ¶38). Microsoft’s Intelligent Cloud revenue for Q3 2025 was $26.8 billion, reflecting a 21% increase, while Q4 2025 revenue reached $29.9 billion, a 26% increase (Compl. ¶63, ¶29). However, the complaint alleges that these filings failed to disclose operational challenges, including low adoption rates, user dissatisfaction with Copilot, and the diversion of computing capacity from Azure to AI research and development. The complaint further notes that Microsoft’s paid M365 Commercial seats grew to 430 million in Q3 2025, representing a 7% year-over-year increase, but this growth was not reflective of Copilot’s actual utilization (Compl. ¶64).

The complaint further alleges that Microsoft misrepresented Copilot’s adoption and market position. The 2025 Proxy Statement highlighted that Copilot apps had surpassed 100 million monthly active users and that 230,000 organizations were using Copilot Studio (Compl. ¶76–77). The complaint alleges that these statements omitted critical weaknesses, including internal data showing that some companies used only 10% of their paid Copilot subscription seats and that Copilot’s market share declined from 14.3% in June 2025 to 8.7% in June 2026 (Compl. ¶106). The complaint also alleges that Microsoft failed to disclose organizational challenges and user confusion, which hampered adoption, including "disorganized data silos" and complaints about forced adoption (Compl. ¶97–98). As Citi Research analysts noted, "Disorganized data silos have been an issue for Copilot" (Compl. ¶97).

On January 28, 2026, Microsoft announced its Q2 2026 results, revealing a slowdown in Azure growth and low Copilot adoption, with only 15 million paid seats. The complaint states that Microsoft’s share price declined sharply following the announcement, dropping from $481.63 to $433.50 on January 29, 2026, representing a $48 per share decline and 129 million shares traded (Compl. ¶99). By February 5, 2026, the stock had fallen below $393 per share, and by March 20, 2026, it had dropped to $380 per share, representing a 30% decline from its relevant period high (Compl. ¶100, ¶103). Despite these trends, the complaint alleges that Microsoft’s SEC filings failed to disclose known adverse trends, including Copilot’s underperformance and the diversion of computing capacity from Azure to AI initiatives. Melius Research LLC published a note on February 11, 2026, linking Copilot’s woes to Azure capacity diversion, stating, "Copilot Woes and Azure are Linked" and "the better the AI assistants get from competitors, the more Microsoft will seem behind in Copilot" (Compl. ¶101).

The complaint also highlights specific statements made by Microsoft executives that allegedly misled investors. For example, Rajesh Jha, then Executive Vice President of Experiences and Devices, claimed in a public statement that Copilot’s features enabled it to understand work context, stating, "The first thing is what we call Work IQ, which is understanding your work context" and "Connector is trying to drink through a very thin straw and understand your work context" (Compl. ¶90). Jha further asserted that Copilot outperformed competitors like Google’s Gemini in side-by-side analyses, stating, "We are not beholden to a model, we are beholden to the best outcome" (Compl. ¶90). Callie August, another Microsoft executive, stated, "Copilot doesn’t just access your work data, it actually understands it" (Compl. ¶92). The complaint alleges that these statements were materially false and misleading, given Copilot’s operational failures, including an incident where an enterprise Copilot failed to assist on a public webpage, prompting a frustrated email from Nadella to Jha (Compl. ¶99).

The complaint further alleges that Microsoft’s capital expenditures ballooned during the relevant period, with the company spending $88 billion in fiscal year 2025 and $72.4 billion in the first six months of fiscal 2026 alone (Compl. ¶78, ¶104). In Q2 2026, Microsoft’s capital expenditures reached $37.5 billion, exceeding analyst expectations by $37 billion (Compl. ¶104). On April 29, 2026, Microsoft announced plans to spend $190 billion on capital expenditures for calendar year 2026, a figure the complaint alleges was not adequately disclosed in prior SEC filings (Compl. ¶104). The complaint asserts that these expenditures were driven in part by the diversion of computing capacity to AI initiatives, which contributed to the slowdown in Azure growth. Microsoft’s commercial bookings in Q4 fiscal year 2025 reached $100 billion, reflecting the company’s aggressive investment in AI infrastructure (Compl. ¶78). The complaint also notes that Microsoft’s Intelligent Cloud revenue for Q1 fiscal year 2026 was $30.9 billion, representing a 28% increase, with Azure and other cloud services revenue growing by 40% (Compl. ¶84).

Nadella and Hood Received Substantial Compensation While AI Strategy Faced Challenges, Complaint Alleges

The complaint alleges that Microsoft’s directors and officers unjustly enriched themselves by approving excessive compensation while breaching their fiduciary duties, asserting a Third Cause of Action for Unjust Enrichment against Executive Officer Defendants Nadella, Hood, Spataro, and Jha (Compl. ¶3). According to the complaint, Satya Nadella received a total of $224,115,510 in compensation between 2023 and 2025, including $96,496,790 in 2025 alone (Compl. ¶136, ¶163). The complaint states that Nadella’s 2025 compensation was 480 times greater than the median Microsoft employee’s annual total compensation of $200,972 (Compl. ¶136). Nadella’s compensation breakdown for 2025 included a $2,500,000 annual salary, $25,037,360 in stock awards, $3,421,000 in non-equity incentive compensation, and $23,191 in other compensation, totaling $29,481,551 (Compl. ¶163). In 2024, Nadella’s total compensation was $79,106,183, comprising a $2,500,000 salary, $21,094,956 in stock awards, $3,642,750 in non-equity incentive compensation, and $61,500 in other compensation (Compl. ¶163). In 2023, Nadella’s total compensation was $48,512,537, including a $2,500,000 salary, $16,450,701 in stock awards, $2,295,250 in non-equity incentive compensation, and $156,946 in other compensation (Compl. ¶163). The complaint alleges that this compensation was unjust, given Nadella’s alleged knowledge of Copilot’s operational issues, including internal communications expressing frustration about the product’s performance. For example, the complaint cites an email from Nadella to Jha regarding Copilot’s failure on a public webpage (Compl. ¶99).

The complaint also alleges that Nadella sold $75 million worth of Microsoft shares during the relevant period at a price of $500 per share, further benefiting from the alleged misrepresentations (Compl. ¶114). The complaint asserts that these sales occurred while the company’s stock price was artificially inflated due to the undisclosed risks associated with Microsoft’s AI strategy. The complaint further notes that the aggregate unjust compensation awarded to Satya Nadella between 2023 and 2025 totaled $224,115,510 (Compl. ¶163).

The complaint further alleges that Amy Hood, Microsoft’s CFO, received substantial compensation, including nearly $30 million in 2025, comprising a $1,000,000 salary, $25,037,360 in stock awards, $3,421,000 in non-equity incentive compensation, and $23,191 in other compensation (Compl. ¶163). In 2024, Hood’s total compensation was $25,799,206, including a $1,000,000 salary, $21,094,956 in stock awards, $3,642,750 in non-equity incentive compensation, and $61,500 in other compensation. In 2023, her total compensation was $19,902,897, comprising a $1,000,000 salary, $16,450,701 in stock awards, $2,295,250 in non-equity incentive compensation, and $156,946 in other compensation (Compl. ¶163). The complaint alleges that Hood was directly involved in disseminating statements about Microsoft’s AI strategy and financial performance. For example, the complaint alleges that Hood and Nadella highlighted "major advances in AI innovation" and "best in class AI capabilities" at the 2025 Shareholders Meeting (Compl. ¶91). The complaint also notes that Microsoft’s Intelligent Cloud revenue reached $30.9 billion in Q1 fiscal year 2026, representing a 28% increase, and $29.9 billion in Q4 2025, representing a 26% increase (Compl. ¶84, ¶29). However, the complaint alleges that these figures were misleading due to the undisclosed diversion of computing capacity from Azure to AI initiatives.

The complaint alleges that the board’s compensation committee failed to exercise proper oversight, approving compensation packages while ignoring red flags related to Microsoft’s AI strategy. The complaint states that the board met frequently with management to discuss AI strategy, investments, and risks, but failed to act on these discussions. For example, the 2025 Proxy Statement noted that "For major initiatives, such as our approach to AI, the Board engages with management on strategic vision, investments, partnerships, capital requirements, and risks" (Compl. ¶140). Despite this stated oversight, the complaint alleges that the board approved compensation packages that rewarded executives for AI-related performance while failing to disclose the material risks and challenges associated with the strategy. The complaint further alleges that the board’s failure to disclose these risks violated its fiduciary duties and exposed the company to significant financial harm, including the sharp decline in Microsoft’s stock price from its intraday all-time high of $551.05 per share on July 31, 2025 (Compl. ¶57). The complaint also notes that Microsoft’s capital expenditures in fiscal year 2025 totaled $88 billion, reflecting the company’s aggressive investment in AI infrastructure (Compl. ¶78).

Board Oversight Committees Allegedly Ignored Copyright and AI Risks

The complaint alleges that Microsoft’s board committees, including the Audit Committee and the Environmental, Social, and Public Policy Committee, failed to exercise proper oversight over the company’s AI strategy and copyright compliance. The complaint asserts a Shareholder Derivative Claim for materially false and misleading statements and omissions regarding Microsoft’s AI business, operations, and financial condition, violating SEC regulations under Item 303 and Item 105 of Regulation S-K (Compl. ¶4). The complaint alleges that the Audit Committee, which included directors Charles Scharf, Teri List, and John Stanton, failed to address the ongoing litigation and relevant court rulings (Compl. ¶138). The complaint alleges that the committee ignored red flags, including multiple lawsuits, such as Authors Guild v. OpenAI & Microsoft Corp., Basbanes v. Microsoft Corp. & OpenAI, and Richner Communications, Inc. v. Microsoft Corp., as well as the Bartz v. Anthropic ruling, and approved proxy statements that claimed compliance with copyright laws. The complaint further alleges that the Audit Committee failed to ensure compliance with copyright laws, despite the committee’s oversight responsibilities. The complaint notes that Microsoft’s capital expenditures in fiscal year 2025 totaled $88 billion, a figure that underscores the scale of the company’s AI investments and the potential financial exposure from litigation (Compl. ¶78).

The Environmental, Social, and Public Policy Committee, chaired by Penny Pritzker and including directors Reid Hoffman, John Stanton, Emma Walmsley, and Catherine MacGregor, allegedly oversaw Microsoft’s AI governance but failed to address the copyright violations and operational risks. The complaint alleges that the committee was responsible for "responsible AI policies" but ignored the mounting litigation and relevant court rulings (Compl. ¶140). The complaint quotes the 2025 Proxy Statement as stating that the board engages with management on strategic vision and risks for major initiatives like AI. Despite this stated oversight, the complaint alleges that the committee failed to act on the known risks, including the Bartz v. Anthropic ruling, which clarified the legal boundaries of AI training data (Compl. ¶124). The complaint also alleges that the committee ignored shareholder proposals expressing concerns about generative AI risks, including data sourcing accountability and copyright infringement, recommending that shareholders vote against these proposals (Compl. ¶61, ¶82).

The complaint also alleges that the board’s failure to address these risks exposed Microsoft to significant legal and financial liability. The complaint states that limitations in Microsoft’s directors and officers insurance policy may leave the company vulnerable to damages from ongoing litigation, which threatens its recurring revenues and market position. Specifically, the complaint notes that Microsoft’s D&O insurance policy includes an "insured versus insured exclusion," which eliminates coverage for claims brought by Microsoft against its directors and officers (Compl. ¶145). The complaint alleges that this exclusion could leave Microsoft without recourse for the alleged breaches of fiduciary duty and violations of federal securities laws. The complaint quotes the policy exclusion as stating, "The 'insured versus insured exclusion' eliminates coverage for any action brought by Microsoft against the Individual Defendants" (Compl. ¶145).

The complaint further alleges that Microsoft’s market capitalization, which reached $1 trillion during the relevant period, was artificially inflated due to the undisclosed risks associated with its AI strategy (Compl. ¶37). The complaint asserts that the board’s failure to disclose these risks violated its fiduciary duties and exposed the company to significant financial harm. For example, the complaint alleges that Microsoft’s capital expenditures, which totaled $88 billion in fiscal year 2025 and $72.4 billion in the first six months of fiscal 2026, were driven in part by the diversion of resources to AI initiatives, which contributed to the slowdown in Azure growth (Compl. ¶78, ¶104). The complaint alleges that these expenditures were not adequately disclosed in Microsoft’s SEC filings, further misleading investors about the company’s financial condition. The complaint also highlights that Microsoft’s Intelligent Cloud revenue for Q3 2025 was $26.8 billion, reflecting a 21% increase, and that the company’s commercial bookings in Q4 fiscal year 2025 reached $100 billion (Compl. ¶63, ¶78).

The complaint alleges that the board’s oversight failures extended to its handling of Microsoft’s AI partnerships, including its $13 billion investment in OpenAI and $5 billion investment in Anthropic. The complaint states that Microsoft’s cloud infrastructure was specifically designed to support these partnerships, with Anthropic committing to purchasing $30 billion in Azure compute capacity and 1 gigawatt of additional capacity (Compl. ¶56). The complaint further alleges that Microsoft’s valuation of its 27% stake in OpenAI was $135 billion, reflecting the significant financial commitments tied to these partnerships (Compl. ¶55). Despite these investments, the complaint alleges that the board failed to disclose the material risks associated with the partnerships, including the potential for copyright infringement litigation and the diversion of computing capacity from Azure to AI initiatives. The complaint also notes that Microsoft’s paid M365 Commercial seats reached 430 million in Q3 2025, representing a 7% year-over-year growth, but this figure did not reflect the actual utilization of Copilot seats (Compl. ¶64).

The complaint also highlights the board’s alleged failure to address operational challenges within Microsoft’s AI teams. The complaint alleges that there was a lack of cohesive experience across Copilot products, with organizational silos between consumer and enterprise teams hampering a unified vision (Compl. ¶99). The complaint further alleges that there was a shortage of computing capacity, which was rationed to ensure availability for OpenAI and Azure customers, further exacerbating the challenges faced by Copilot (Compl. ¶99). The complaint alleges that these operational challenges were not disclosed in Microsoft’s SEC filings, despite the board’s stated oversight of AI strategy and risks. The complaint also notes that Microsoft’s capital expenditures in fiscal year 2025 totaled $88 billion, a figure that underscores the scale of the company’s AI investments and the potential financial exposure from litigation and operational challenges (Compl. ¶78).

The allegations described here are taken from the filing and remain unproven; no responsive pleading is reflected in the source document.

David Brunk is a civil litigation attorney. He can be reached at david@newmanbrunk.com.