The promise of artificial intelligence is speed and efficiency. Still, relying on it for critical business decisions without human oversight can lead to substantial, often unforeseen, legal risks.
The regulatory landscape is changing fast, and currently, algorithms do not have the same legal protections as human judgment. The first step to being ready for potential lawsuits is understanding where your company is exposed.
Liability for discriminatory outcomes
AI systems learn from historical data, which often has biases built in. Without a person checking the work, these biases can lead to discriminatory business decisions in hiring, loan approvals, pricing and customer service, to name a few. Federal laws, such as Title VII of the Civil Rights Act, still prohibit discrimination, regardless of the technology your company is using.
Courts usually reject defenses that try to blame the algorithm. This means your company may be held fully responsible for any automated discriminatory decisions.
Regulatory non-compliance risks
Many industries operate under rules that require (either clearly or indirectly) human judgment. If systems make decisions completely on their own, you could face serious compliance problems, including:
- SEC violations from algorithmic trading without proper supervision
- HIPAA breaches if your AI makes autonomous healthcare decisions
- Fair lending violations from automated credit decisions
- FTC Act infractions when using algorithms for consumer targeting
- GDPR and CCPA violations due to autonomous data processing
It is important to know that federal agencies are increasing their scrutiny of AI systems across all industries.
Breach of fiduciary duty exposure
Corporate officers have fiduciary duties, responsibilities that an AI simply cannot fulfill on its own.
Typically, the business judgment rule protects decision-makers. However, that protection can significantly weaken when your company delegates critical decisions entirely to algorithms.
If you have complete automation with no human review, the company might face significant exposure to shareholder lawsuits. These lawsuits could claim that your leadership has effectively abandoned its responsibilities.
Contract formation and enforcement issues
U.S. contract law requires both a “meeting of the minds” and proper authority. These concepts become tricky when your algorithms start operating independently.
If a court decides that the AI exceeded its authority or did not include essential human judgment, you might encounter contract invalidation or an unfavorable legal interpretation for your company.
Intellectual property infringement liability
Generative AI creates content based on its training data, which sometimes includes copyrighted material. If your unsupervised AI generates an image or text that infringes on someone else’s copyright or trademark, your company, not the AI vendor, will likely have to address the resulting lawsuit.
Similarly, if an AI-powered chatbot makes a defamatory public statement about a competitor or person, the business could be liable for that false communication.
The imperative for legal counsel
As the AI world keeps changing, you need experienced legal guidance. This help is necessary to set up clear AI use policies, perform bias audits on your data and draft contracts that protect your business from vendor liability.
Do not risk your company’s future by letting an algorithm operate without a human “co-pilot.” Investing in the right governance structures pays off by reducing the risk of lawsuits and ensuring regulatory compliance.