Unsealed OpenAI and Microsoft Statements Threaten NYT Fair-Use Defense as Options Activity Heats Up

The fair-use defense rests on showing that the accused product is neither a substitute for nor a direct competitor to the source work. According to the Wall Street Journal, an OpenAI executive allegedly acknowledged that the company's chatbots were exactly that: an 'existential threat' to journalism, delivering information directly and sparing the reader the click-through. OpenAI allegedly copied millions of copyrighted articles for training, possibly exploiting hacks to retrieve them. Microsoft's own director of applied science, Brent Hecht, reportedly described the training as 'the largest theft of labor in human history,' according to the Washington Post, while the companies' own data showed the Times' click-through rates dropping precipitously.

OpenAI co-founder Greg Brockman reportedly wrote in 2017 that he was 'deeply motivated by the gazillions' he hoped to earn commercializing the technology, according to the Financial Times. He allegedly replied 'ah nice' when told an employee had found a hack around the Times' paywall.

The findings meaningfully raise the odds of either a massive settlement and licensing deal or, failing that, a Times victory at trial. A trial loss would be catastrophic for the defendants and enormously remunerative for the plaintiff, the Times.

The one wrinkle for the Times was the September 1 statement of interest from the Department of Justice asking the court to hold that training AI models on copyrighted work is fair use, citing national security. The argument is that if foreign adversaries will train on anything they can access by any means, restricting U.S. systems risks ceding an insurmountable lead.

Given the enormity of what is at stake, the market reaction has been muted. New York Times shares have been flat year-to-date and barely moved on Friday. But options activity has heated up.

The meat of the flow was a purchase of roughly 4,400 October 72.5/77.5 call spreads for a $0.925 debit, risking just 1.3% of Friday's close to win at least 4.6% by October expiration, and potentially 10% or more on a move to the $77.73 average analyst target. Concurrent volume in the October 62.5 and 65 puts suggests the trader may have trimmed the outlay further by selling downside puts, just below the August lows.

The October expiration implies an expectation that a summary judgment ruling, or a settlement, could potentially land within weeks, a likelihood the unsealed emails just increased. If the risk is a negative surprise driving new lows, and the near-term target coincides with analyst consensus, the trade can be structured as a stock substitute with defined risk and reward and lower capital use. A 65/77.5 call spread offers more than $7 of upside against just over $5 of downside, with a de minimis outlay of extrinsic premium.