FTC Targets Unfair or Deceptive AI Practices With Five New Enforcement Actions

The FTC recently announced five enforcement actions against companies that use or sell artificial intelligence (AI) tools that could deceive or harm consumers. With these actions, the FTC announced a new law enforcement sweep aimed at cracking down on AI-infused frauds: “Operation AI Comply[.]”

These actions and the accompanying FTC consumer alert regarding Operation AI Comply underscore that the FTC will aggressively pursue people and companies that make false or unsubstantiated claims about an AI product, its capabilities, or its efficacy. Since early 2023, the FTC has been outspoken about the dangers of AI marketing hype. The agency has been scrutinizing businesses that use AI, or the promise of AI, to lure consumers into spurious schemes. In addition, the SEC and DOJ also have recently targeted companies for alleged false representations about their use of AI to induce others to invest. It is clear that federal law enforcement agencies are prioritizing combatting false claims about AI.

FTC Chair Lina Khan reinforced this point when announcing the sweep on September 25: “The FTC’s enforcement actions make clear that there is no AI exemption from the laws on the books. By cracking down on unfair or deceptive practices in these markets, FTC is ensuring that honest businesses and innovators can get a fair shot and consumers are being protected.”

Key Areas of FTC Enforcement Activity in Operation AI Comply

Targeting Broad Claims About an ‘AI Lawyer’

The FTC brought a complaint and proposed consent order against DoNotPay, a UK-based company, for allegedly advertising a “robot lawyer” or “AI lawyer” chatbot that purported to give legal advice and draft legal documents. The company claimed this service was “ironclad” and would “replace the $200-billion-dollar legal industry with artificial intelligence.” The FTC alleged these and other claims about the “AI lawyer” product and its capabilities were false or misleading. The proposed settlement includes a fine of $193,000 and would require DoNotPay to notify its customers about the limitations of its services.

Generating Fake Customer Reviews

The FTC filed a separate complaint against Rytr, a company that advertised an AI-enabled “writing assistant” that included a specific functionality designed to generate fake online customer reviews. In many cases, the FTC alleged, the AI-generated reviews contained details that would deceive potential consumers deciding to purchase the product or service described. Rytr agreed to a proposed order to resolve the allegations.

Notably, the FTC Commissioners voted 3–2 along party lines to authorize the complaint. It accused the start-up of “violating the FTC Act by providing subscribers with the means to generate false and deceptive written content for consumer reviews.” The dissenting commissioners argued the action was misguided and would undermine innovation because there was no evidence of actual harm to consumers.

False Claims About AI-Driven e-Commerce Entities

The FTC also targeted companies that used AI in marketing to make what the FTC says are false claims about earnings and services “powered by” AI to entice customers and people to invest in business opportunities.

In a civil case filed in California, the FTC alleged a group of individuals and companies “promoting themselves as e-commerce experts” falsely marketed a business model as “powered by AI” to entice consumers to invest in online stores. In fact, according to the FTC’s complaint, the claims about the business were deliberately overstated. Most of the online stores that had been created were suspended by major e-commerce sites and most clients earned little income and lost all their investment.

In another case, filed by the FTC in Pennsylvania, the FTC alleged that the defendants sold “e-commerce business opportunities and self-study programs by falsely claiming that consumers will generate substantial income from online stores that are ‘powered by artificial intelligence.’” Again, the FTC alleges that these claims were false or unsubstantiated, citing reports from “numerous” clients of the defendants who have “not generated sales close to what Defendants claimed,” and have lost money due to the cost of maintaining e-commerce sites. The FTC also alleges that, when clients seek refunds after the returns they were promised do not materialize, the defendants “challenge them, … often do not refund consumers, or only refund them partially.”

What Companies Should Consider Doing

Companies should pay particular attention to certain practices that appear to be areas of focus for the FTC. This includes:

• Using AI-powered chatbots that can generate misleading or made-up answers.
  • The FTC warns consumers to verify any “answers you get from a chatbot by searching online or checking with a reputable source. And don’t rely solely on a chatbot for medical, legal or financial advice.”
• Tools that allow users to generate fake online reviews via AI software.
  • The FTC also is warning consumers against relying solely on online reviews.
• For customer-facing interactions and applications, disclose when customers are interacting with AI.
• Like the SEC, the FTC is focused on companies that make exaggerated claims about their AI technology or refer to the prospect of huge earnings from AI-powered business opportunities.

Companies also should consider:

• Disclosures, advertisements or other public statements regarding their use of AI. Companies should be careful with any such representations and may need to use the same level of care as when disclosing other material risks. This should include:
  • Ensuring consistency across all communications.
  • Making disclosures about AI specific to the risks a company faces, including operational, legal and competitive risks. These should not be boilerplate or uniform.
  • Being able to back up claims with supporting material.

If you have any questions, reach out to our authors (Bradley Marcus, David Rhinesmith and Jackson Hagen) or another member of the Orrick team.