The use of artificial intelligence (“AI”) has exploded in popularity and impacted nearly every sector of the economy. The transformative nature of AI has prompted many public companies to try and capitalize on the vast capabilities associated with AI tools and applications. It is becoming increasingly common for companies, during investor conference calls, to proclaim their use of AI. Such declarations have resulted in sharp stock price increases driven by the promise of rapid growth.
However, these declarations of AI adoption come with legal risk. For example, some public companies have been accused of “AI Washing” which is a term used to describe a company thar overstates or embellishes their use of AI.
SEC Emphasizing Enforcement of AI Washington Claims
The Securities and Exchange Commission (SEC) appears particularly interested in establishing guidelines and rules regarding the road around AI claims made by public companies. For instance, the SEC published a series of “comment letters” emphasizing that AI-related claims made by companies in public filings must be “accurate, complete, and compliant with securities laws,” according to Reuters.com. The SEC has also publicly stated that companies must evaluate, among other things, the impact of AI on their financial performance and growth and the relevance of AI to the company’s business.
The SEC recently reaffirmed that AI Washington was an “examination priority” for fiscal year 2025. An SEC attorney recently remarked that the Commission is focused on “rooting out” the misuse of AI by brokerage firms and publicly traded companies. The SEC attorney also expressed an interest in learning more about how public companies and startups discuss their use of AI technology with customers and investors.
Companies Need to Be Cognizant of Potential Investor Lawsuits
If your company is planning to launch, or recently launched, an AI-related product or service, you also need to be cognizant of securities laws that enable investors to file lawsuits for alleged misleading statements. For context, investors are afforded a private right of action under the Securities Act and Exchange Act. Such legal actions can be pursued for alleged false and misleading public statements made by public companies. Many investors have already exercised their legal rights in this area. For example, securities class action filings associated with alleged AI-misstatements doubled in 2024 compared to 2023. Based on the current number of filings, 2025 is set to be a record-setting year for such lawsuits.
How Los Angeles Companies Can Protect Themselves
To help mitigate the risk of AI Washing lawsuit, or SEC enforcement action, businesses in Los Angeles should consider taking the following steps:
- Develop a robust compliance plan. Invest the time and resources to develop internal processes and protocols for regularly reviewing AI usage and marketing language for accuracy and regulatory alignment.
- Promote cross-departmental collaboration. Your technology team and legal team should be working in tandem to assess the actual role and performance of AI within the company’s offerings.
- Emphasize transparency. Make sure to clearly label AI products and applications. Also, ensure you understand the AI product’s capabilities so you can avoid making a misstatement or overstatement about the product’s capabilities.
- Review insurance coverage. Take steps to ensure your company’s D&O or Employment Practices Liability policies provide sufficient protection for AI-related risks.
Have Questions? Contact an Experienced Business Attorney in Los Angeles
If you have questions or concerns around AI Washing claims, then now is the time to contact the Hakim Law Group. We are a corporate law firm in Los Angeles geared toward helping business owners tackle complex legal and regulatory matters, including issues associated with AI products and applications. Our business law firm was founded on the premise that experience matters. We are laser focused on providing the highest levels of representation in addressing the legal and business challenges facing our clients today, tomorrow, and in the future.
Our team of skilled and highly reputable Los Angeles business attorneys have worked at top-tier international law firms and served as general counsel to major companies. This high level of diverse legal and business experience is paramount to our boutique approach.
For additional information or to schedule an appointment, please contact the attorneys from Hakim Law Group at (310) 993-2203 or visit www.HakimLawGroup.com to learn more.
