Over the past several years, artificial intelligence has become an increasingly integral part of everyday life and business. In 2024, roughly 78% of organizations globally reported using AI, and in the United States, private AI investments grew to $109.1 billion.
However, as AI usage in businesses continues to grow and companies feel the pressure to keep up with industry changes, the practice of “AI washing” has become more prominent. In turn, federal agencies have taken an interest in protecting consumers and investors, leading to potential liability for individuals and companies involved in the practice.
What Is AI Washing?
AI washing refers to the practice, typically within companies, of falsely claiming to use AI to enhance services or exaggerating AI capabilities. While it is typically an intentional practice relying on the general public’s lack of understanding of AI, there is the possibility that individuals inadvertently engage in AI washing due to a lack of understanding of their AI products’ and services’ capabilities.
AI Washing Liability
While AI washing may seem harmless, federal regulators are cracking down on the practice. This creates liability not only for the businesses utilizing AI, but for the owners of those businesses who also engage in AI washing.
Federal Regulation Compliance Liability
In 2021, the Securities and Exchange Commission began examining companies’ claims of their AI practices to “root[] out” AI misuse by regulated companies. There have been several complaints and actions brought by federal agencies, including the SEC and the Federal Trade Commission.
The FTC is tasked with enforcing the FTC Act, which prohibits deceptive and unfair competition. Across these cases, companies and individuals alike are finding themselves liable for falsely representing their products’ or services’ AI capabilities and the returns that consumers will receive from using those AI tools.
For example, in 2024, the SEC accused two investment firms, Delphia (USA) Inc. and Global Predictions Inc., of making false and misleading statements in SEC filings, press releases, and social media posts regarding the use of AI to predict market growth for the purposes of making investments. Delphia (USA) Inc. had to pay a civil penalty of $225,000.00 and Global Predictions Inc. had to pay a civil penalty of $175,000.00 for the violations.
Similarly, the FTC filed a complaint against the company DoNotPay, Inc., an online legal service company, for claiming to provide an AI program that would serve as a substitute for a human lawyer by creating documents and checking businesses compliance with state and federal law. DoNotPay, Inc. had to pay $193,000.00 in refunds to consumers who used its products.
William Basta and Kenneth Leung, who operated a suite of businesses (collectively “Ascend”), were accused by the FTC of defrauding consumers of more than $25 million for falsely claiming its AI tools could help consumers earn passive income from online storefronts. A proposed settlement order entered in June 2025 would require Ascend to turn over assets and cease improper business actions. The order also contains a partially suspended $25 million monetary judgment.
Most recently, in August 2025, the FTC filed a complaint against Air AI and its owners, who allegedly advertised a conversational AI tool to replace customer service-related employees and earn users increased profits. The product was advertised as increasing profits for businesses who use it, but the estimated losses for businesses and entrepreneurs using these products is up to $250,000.00.
Private Liability
In addition to federal compliance issues, some companies are beginning to face private lawsuits from investors who may feel the financial impacts of AI washing. Innodata, Inc., a data engineering firm, is facing a federal securities class action brought on behalf of its shareholders. Wolfpack Research, a financial research firm, published a reporting unmasking “smoke and mirrors” AI and marketing claims. Allegedly, as a result of that report, Innodata, Inc.’s stock price dropped over 30%.
Upstart Holdings, Inc., a lending platform that alleges to use AI to partner consumers with banks and credit unions, is also being sued by shareholders. It is alleged investors were misled as to the advantages and capabilities of Upstart Holdings, Inc.’s AI capabilities.
The online real estate listing platform Zillow Group Inc. is facing similar claims. Zillow Group Inc.’s shareholders allege that the AI tools Zillow used did not perform as claimed, resulting in financial losses to the company and forcing the business to wind down.
In addition to securities lawsuits by shareholders, there may be future potential for consumers to bring claims against companies and individuals engaging in AI washing. Many state statutes provide private rights of action for deceptive or unfair business practices and common law presents avenues for litigation on claims of negligent misrepresentation or fraudulent misrepresentation. These laws open the door for consumers who have been impacted by AI washing to bring individual claims on their own behalf and on behalf of impacted businesses.
What It Means for Your Business
While the rapidly evolving and growing scheme of AI and the corporate competitiveness that comes along with it may seem like a motivator to implement AI technology in your business, it is important to have a true understanding of your business’s AI capabilities and services. Businesses should avoid overstating those capabilities to their clients, investors, customers, and consumers. Businesses should also verify the truthfulness of any statements being made by the company itself or its employees regarding AI usage and what may reasonably be expected from AI programs. Understanding AI capabilities can help prevent intentional and inadvertent AI washing that may create liability for your business.
