AI Washing: Legal Risks and Enforcement Trends for Companies and Attorneys

As AI becomes a powerful buzzword in marketing, regulators are cracking down on companies exaggerating or faking their use of artificial intelligence. This deceptive trend—known as “AI washing”—poses serious legal risks for both defendants and plaintiffs navigating these claims in court.

AI Washing Defined

AI washing is defined as a deceptive marketing practice where companies exaggerate or fabricate the use of artificial intelligence (AI) in their products or services. It is obvious why this type of fraud would be more prevalent in the past 24 months especially since the widespread knowledge about and use of tools like ChatGPT.

The tactic aims to leverage the growing interest in AI, particularly generative AI, to enhance an organizations market perception and attract investment or even customers. The term draws parallels with greenwashing, where environmental claims are misleading, highlighting a pattern of corporate misrepresentation in emerging technologies Techtarget. For instance, a company might label a product as "AI-powered" when it relies on simpler algorithms, misleading consumers and investors about its technological sophistication.

The practice is facilitated by AI's broad and sometimes nebulous definition, encompassing technologies from machine learning to natural language processing and now AI use in audio, image and video generations. This somewhat amorphous use of the term AI allows firms to stretch its meaning for marketing purposes. This Forbes article outlines strategies to spot AI Washing. This can lead to overstatements, such as claiming "intelligent" features without actual learning capabilities, as noted in recent analyses BBC.

Who Engages in AI Washing

Research suggests that a wide range of companies, particularly those in technology, finance, and AI development, are prone to AI washing. Tech startups often engage in this practice to secure funding, leveraging AI buzzwords to differentiate themselves in competitive markets. See Deeper Insights.

Financial institutions, such as investment advisors, may overstate AI use to attract clients, especially given the sector's reliance on perceived innovation for investor trust. See Ncontracts. Even established AI firms might exaggerate capabilities driven by incentives to maintain market leadership, gain relevant tax credits and/or research grants. See Evolution AI.

Companies might also advertise AI features before implementation, intending to develop them later, as a strategy to buy time and keep investor funds coming Techtarget. This behavior is particularly prevalent in industries like document processing, where AI claims are often hard to verify. See Evolution AI. Legal AI, ironically, is likely to be rife with this kind of conduct. The reality is that most lawyers focus on their business, practicing law, and understandably do not dig deeply into such AI claims in tools intended to help them in their practice.

Other Fraudulent Conduct Analogous To AI Washing

• Greenwashing: Overstating environmental benefits, such as claiming products are eco-friendly without substantiation or when they are known to not be eco-friendly. This is designed to attract environmentally conscious consumers and investors . Techtarget has a nice discussion of this.

• Pinkwashing: Organizations claiming support for breast cancer awareness, such as through product sales, to boost sales, often without significant contributions to the cause. This mirrors AI washing by using a popular cause (AI innovation) to enhance brand image. Forbes discusses an analysis of corporate marketing tactics like this.

• Health Washing: Products marketed as healthier than they are, such as labeling foods as "low-fat" without evidence or otherwise deceiving consumers about health benefits. This is analogous to AI washing, where companies overstate AI capabilities to deceive about technological advancement, as discussed in this BBC article.

Cases at State and Federal Levels

At the federal level, regulatory actions have been significant. The SEC has taken a lead role, settling with Delphia (USA) Inc. and Global Predictions Inc. in March 2024 for making false AI-related claims, fining them a total of $400,000. See SEC Press Release. These cases involved violations of the Investment Advisers Act, highlighting the SEC's focus on AI washing as a form of securities fraud. Additionally, in June 2024, the SEC charged Ilit Raz with securities fraud for misrepresenting an AI venture's capabilities, marking an expansion to private market participants. See Orrick.

The FTC has also acted launching "Operation AI Comply" in September 2024 resulting in settlements with five companies for deceptive AI claims. See FTC Press Release. These federal actions underscore a growing regulatory scrutiny, with SEC Chair Gary Gensler recently comparing AI washing to greenwashing, signaling a crackdown on misleading disclosures Bloomberg Law.

At the state level, my research indicates no reported regulatory enforcement action or settlements.

Tips No Matter Which Side You Are On

Defense Side Tips:

• Ensure clients can substantiate AI claims with technical documentation, such as code repositories or development logs, to demonstrate actual implementation. Review all public statements, social media posts, internal company messaging, emails, etc., including marketing materials and investor presentations, for accuracy as to AI related claims. Consider a good faith argument especially if the company was in the process of integrating AI, as seen in cases like Delphia Debevoise Data Blog. Potential gaps in the plaintiff/prosecution’s case include the lack of a standardized AI definition, making it hard to prove what constitutes "true" AI use, and challenges in proving intent to deceive.

Plaintiff/Prosecution Side Tips:

• Focus on proving that the company made false or misleading statements, using internal emails, website marketing, advertising, social media posts, product development records, or customer complaints to show discrepancies between claims and reality. Demonstrate materiality by showing how these claims influenced investor decisions or consumer trust, as seen in FTC's Operation AI Comply cases FTC Press Release. Potential gaps in the defense could include difficulty in proving the company was unaware of the falsehood, especially if internal records show knowledge of limited AI use while marketing expands the claims of AI use beyond what was internally acknowledged.

Key Citations

• AI washing explained: Everything you need to know Techtarget

• What Is AI Washing? Built In

• SEC Targets "AI Washing" With Two New Settled Cases SEC Press Release

• FTC Announces Crackdown on Deceptive AI Claims and Schemes FTC Press Release

• Federal ‘AI washing’ enforcement likely to continue Legal Dive

• AI Enforcement Starts with Washing: The SEC Charges its First AI Fraud Cases Debevoise Data Blog

• Spotting AI Washing: How Companies Overhype Artificial Intelligence Forbes

• What is 'AI washing' and why is it a problem? BBC

• AI or Just Hype? The Growing Problem of AI Washing Deeper Insights

• What is AI Washing and What are the Risks? Ncontracts

• AI Washing: What is it, and Why is it a Misuse of AI? Evolution AI

• AI Washing Enforcement Continues, Highlighting Risks to Companies and Investors Orrick

• AI Washing Erodes Consumer and Investor Trust, Raises Legal Risk, Bloomberg Law

• Decoding the SEC’s First “AI-Washing” Enforcement Actions Harvard Law School Forum

• Is It Really AI? Emerging Enforcement Against AI Washing Lexology

• AI washing meets marketing rule, as SEC fines two advisers for their AI claims Thomson Reuters