Stability AI has launched a vigorous defense against claims of "seller's remorse" brought by artificial intelligence expert Cyrus Hodes in a California federal court. Hodes alleged that he played a pivotal role in developing the technology behind Stability AI but was deceived into selling his minority stake in the company. Stability AI and its CEO, Mohammad Emad Mostaque, have countered that Hodes' allegations are an attempt to undo a legitimate business transaction.

Hodes had asserted that he and Mostaque collaborated on creating Stability AI, responsible for the innovative Stable Doodle tool, using generative AI to aid governments in responding to the COVID-19 pandemic. Hodes claimed to have been instrumental in securing funding and marketing for the startup.

However, when Hodes discovered alleged embezzlement by Mostaque and his history of misleading investors, he decided to sell his 15% minority stake for $100 in May 2022, believing it to be of little value. He now alleges that the stake, which Mostaque was secretly developing into a text-to-image generator, is worth $500 million.

Stability AI and Mostaque have emphasized that Hodes willingly sought to sell his shares and had personal motivations for doing so. They contend that Hodes' regret, in hindsight, is not actionable.

Furthermore, Stability AI and Mostaque argue that the court should not entertain Hodes' claims as he has failed to establish personal jurisdiction over the defendants. Mostaque, a U.K. resident and citizen, made the alleged misrepresentations from the U.K. in connection with stock purchase agreements for shares of a Delaware corporation. The transactions took place in Florida, where Hodes resides, indicating no connection to California.

Even if personal jurisdiction were established, the defendants maintain that Hodes' claims lack merit. They highlight that Hodes waived his right to receive company information during the initial stock purchase, and Delaware law, which governs his claims, does not impose a fiduciary duty to disclose in a private stock sale between a director and a minority shareholder.

Hodes filed the lawsuit in July, citing a delayed and largely unsuccessful COVID-19 project due to Mostaque's alleged misconduct and lack of transparency. Stability AI attained "unicorn status" following the unveiling of its text-to-image generator shortly after Hodes sold his shares in August 2022.

Hodes has requested the court to void or rescind the share purchase agreements, award damages, and require Stability AI and Mostaque to disgorge benefits from their alleged wrongdoing.

Responses from Stability AI and Hodes' counsel were not immediately available.

The case is Cyrus Hodes v. Mohammad Amad Mostaque et al., case number 4:23-cv-03481, in the U.S. District Court for the Northern District of California.