As AI becomes more prevalent in our lives, it’s important to stay educated on how our legal system is addressing novel topics related to its increasing use. Many of the issues discussed in this article are not even on the radars of business owners – but they should be.
One of the more interesting recent cases addressed a company’s use of AI in researching and planning the defense to a potential claim. The business extensively used an AI platform to pose questions using facts and assumptions related to formulating a defense – all before retaining counsel. Of course, the information included various embarrassing facts and assumptions. The matter ultimately blossomed into litigation, and, during discovery, the plaintiff requested all information from that AI platform related to the claim. Although the company objected, claiming it was privileged, the court found otherwise. It reasoned that the business was not receiving advice from an attorney as AI is not an attorney.
What does this mean for a business owner? Well, first, expect litigants to start asking for all AI queries related to the case. Second, although no court has yet ruled on this issue, logic dictates that the court may have ruled differently had the AI research been done at the request of the company’s lawyer. This is because that may have cloaked the information with the work product privilege, which is an exception to disclosure. Yet another reason to consult your friendly neighborhood attorney.
Another issue relates to shadow AI, which is AI use by employees without oversight or approval. Shadow AI can expose a business to significant risk if confidential information, trade secrets, customer data or proprietary strategies are uploaded to unsecured platforms. With most AI systems, submitted data enters the public realm. Sensitive company information generally should not be entered into an open AI system because it then loses its confidential nature. Moreover, use of client information within an AI platform may result in a breach of confidentiality obligations between you and your clients.
Business owners should consider implementing a policy to govern employee use of AI. It should address what information may be entered into AI platforms, what approval processes are required, what systems are authorized for use and what human review procedures must occur before AI-generated content is relied upon or distributed.
Another developing area of concern involves the use of AI in employment decisions. Some businesses have started using AI tools to screen resumes, evaluate applicants, monitor productivity and even assist in making hiring or termination decisions. While these systems can create efficiencies, they also create legal risks.
First, at least one court has ruled that such use of AI can result in a violation of consumer protection statutes like the Fair Credit Reporting Act, which contains a broad definition of consumer reports and stringent requirements on disclosures. Along the same lines, inputting personal data in an employer’s possession might violate any number of state or federal privacy laws.
Second, if the use of AI disproportionately screens out candidates belonging to a protected class, an employer may still face liability under existing discrimination laws even if the discrimination was unintended. In other words, employers generally cannot avoid responsibility by blaming the algorithm. Courts and regulatory bodies are increasingly taking the position that businesses remain accountable for decisions made with the assistance of AI systems. Simply put – there’s no excuse for abandoning human oversight.
AI also presents substantial concerns involving intellectual property rights. Businesses frequently use AI to generate marketing materials, written content, software code, logos, photographs and other creative works. However, ownership rights involving AI-generated content remain unsettled in many respects.
For instance, under current guidance from the U.S. Copyright Office, purely AI-generated works may not qualify for copyright protection because copyright law traditionally requires human authorship. This means that a business could spend significant time and resources developing AI-generated content only to discover it lacks enforceable intellectual property rights to the finished product.
There’s also the risk that AI-generated material may unintentionally infringe upon the intellectual property rights of others. Many AI systems are trained on enormous amounts of pre-existing data, including copyrighted materials found online. As a result, businesses using AI-generated content should not assume AI-created work is free from infringement concerns. Several currently pending high-profile lawsuits are testing these exact issues.
Defamation presents another emerging concern. AI systems occasionally generate inaccurate or entirely fabricated information, commonly known as hallucinations. While these errors are sometimes harmless, they can become problematic when false statements are made about individuals or businesses.
Imagine you ask an employee to use AI to quickly prepare a report about a competitor, vendor or former employee. If the AI system fabricates criminal conduct, regulatory violations or unethical behavior and the information is then circulated, the company could potentially face defamation-related claims. Meaningful human review of AI-generated content should be required before it’s distributed externally.
Finally, contractual issues involving AI are becoming more significant. Many businesses now rely upon third-party AI vendors for software, automation, customer service and data analysis. Before implementing such systems, owners should review vendor agreements to determine who owns the data being entered into the platform, how that data may be used, what security obligations exist and what liability limitations are in the agreement. Many businesses are surprised to discover standard vendor contracts heavily favor the AI provider and may provide limited protection in the event of a data breach, system failure or inaccurate output.
Ultimately, businesses should resist the temptation to treat AI as merely another software tool. AI systems can influence employment decisions, generate public-facing statements, process confidential information and shape important business strategies. As a result, decisions involving AI should receive the same oversight and risk analysis that businesses would apply to any other significant operational or legal issue. Or, said another way, don’t abandon common sense.
This article appears in July SBJ 2026.