A second lawsuit filed by an artificial intelligence company alleging a former employee stole trade secrets has been filed in California, just days after Elon Musk’s xAI alleged it had recently experienced corporate espionage.
In this case, Scale AI, a leading AI data-labeling firm, sued competitor Mercor Inc. in federal court Wednesday, accusing the startup and a former employee of misappropriating trade secrets to win new business.
Scale is valued at approximately $29 billion following a massive $15 billion Meta investment.
The allegations
The lawsuit, filed in the U.S. District Court for the Northern District of California, targets Eugene Ling, Scale’s former head of engagement management, and his new employer, Mercor.
The case is Scale AI Inc. v. Mercor.io Corporation, 25-cv-07402.
In its court filing, Scale alleges Ling downloaded over 100 confidential documents, including proprietary customer strategy materials and product information, to a personal Google Drive while still employed at the company and after meeting with Mercor’s CEO.
According to the complaint, Ling then contacted one of Scale’s top clients, referred to as “Customer A,” on behalf of Mercor while still at Scale, even arranging calls to pitch Mercor’s services. The lawsuit claims this effort was an attempt to steal business worth “millions of dollars.”
Attempts to reach Ling’s attorney were unsuccessful. But on his social media, Ling posted that he “never used” any of the Scale files and is “still waiting for guidance on how to resolve this.”
“I just wanted to say that there truly was no nefarious intent here,” he wrote. “I’m really sorry to my new team at Mercor for having to deal with this.”
Mercor’s response
Mercor co-founder Surya Midha denied any misuse of Scale’s intellectual property, stating that while several former Scale employees have joined Mercor, the two firms operate under “intentionally different” strategies. He added that Mercor is investigating the matter and had offered to have Ling delete any documents in his possession.
“While Mercor has hired many people who departed Scale, we have no interest in any of Scale’s trade secrets and in fact are intentionally running our business in a different way,” Midha said in a statement.
“Eugene informed us that he had old documents in a personal Google Drive, which we have never accessed and are now investigating,” it reads. “We reached out to Scale six days ago offering to have Eugene destroy the files or reach a different resolution, and we are now awaiting their response.”
Scale, in turn, argues that ordering Ling to destroy the files would eliminate crucial evidence. The company is seeking damages, legal fees, an injunction barring Mercor from using the stolen material, and the return of all misappropriated documents.
Scale’s legal move is another speed bump for a turbulent period for the company, which has recently experienced Meta’s massive investment, the hiring of Scale’s CEO Alexandr Wang by Meta, and a 14% workforce reduction.
Cutthroat competition comes to the courts
The case is a glimpse into the fiercely competitive nature of the AI sector, where intellectual property—particularly data strategy and customer relationships—is the key to market dominance. The situation mirrors another recent trade secret lawsuit, when Elon Musk’s xAI sued a former engineer for allegedly stealing confidential information on his way to a rival.
In that case, Musk’s company is alleging Zhihao “Zack” Li stole confidential files tied to the development of Grok, the company’s chatbot, before departing for rival OpenAI.
The complaint, filed in California state court, accuses Li, who joined xAI last year as an engineer, of copying proprietary materials in July 2025 shortly after agreeing to take a job at OpenAI. Court filings say Li also sold $7 million worth of vested xAI stock ahead of his departure.
According to the lawsuit, Li admitted during an internal meeting on Aug. 14 that he had taken sensitive documents, though xAI alleges he attempted to “cover his tracks” by deleting files. Forensic checks later uncovered additional materials still stored on his devices, the company alleges.
Musk’s startup argues that the stolen information could allow OpenAI to enhance ChatGPT with what it describes as xAI’s “more innovative AI and imaginative features.”
That case is xAI Corp v. Xuechen Li, U.S. District Court, Northern District of California, No. 3:25-cv-07292-RFL
What are the broader implications?
For investors and the AI industry in general, the lawsuit highlights two key risks.
Firstly, the theft of highly complex and coveted intellectual property, or even the appearance of it, can rapidly alter competitive positioning in a market where trust and proprietary data are currency. Secondly, it signals that AI startups may increasingly turn to legal avenues to enforce boundaries and protect their turf.
As AI becomes a part of so much of the technology we see and use all the time, the companies that make it are going to become even more fiercely protective of their products and brands. The value of proprietary data and client relationships makes legal protection, and the precedents set through lawsuits like this, the next frontier for companies looking to safeguard their tools and reputations.
“Scale has become the industry leader on the strength of our ideas, innovation, and execution,” Joe Osborne, a spokesperson for Scale, said in a statement. “We won’t allow anyone to take unlawful shortcuts at the expense of our business.”
