As AI becomes an ever-more present component of many companies’ strategies and operations, one concern is the extent to which this technological shift could affect companies’ litigation risk exposures. One risk companies may face is that in seeking to promote their adoption of AI strategies, companies may be susceptible to allegations that they overstated their AI capabilities or the extent to which the strategies will actually improve results.
In that vein, a securities lawsuit filed last week against the robotic process automation company UiPath alleges that the company’s announced turnaround strategy, in which the company, among other things, rebranded itself as an AI-powered Business Automation Platform, misrepresented the strategy’s likely prospects and success. This lawsuit is the latest example of cases in which companies adopting AI strategies face securities litigation over their AI-related representations. A copy of the June 20, 2024, complaint in the UiPath lawsuit can be found here.
Background
UiPath provides robotic process automation (RPA) tools to automate repetitive business tasks typically performed by humans. In recent years, UiPath has sought to enhance its business automation offerings with AI-powered products that work in conjunction with its RPA tools.
On September 27, 2022, at a time of declining demand for the company’s RPA products, the company announced a turnaround strategy. Among other things, the strategy included rebranding itself as an AI-powered Business Automation Platform. The company also overhauled its sales strategy, focusing on selling a platform of products, rather than single product offerings, and also focusing on the company’s largest customers. The company claimed at the time and in subsequent statements that its turnaround strategy enabled the company to close larger deals and that its AI-powered products “set us apart from the competition.”
Initially the company announced increased sales that the company attributed to the execution of its turnaround strategy. Its share price increased as a result. However, on May 29, 2024, the company announced the departure of its CEO and appointment of a new CEO, while at the same time announcing disappointing 1Q25 results and cutting its FY 2025 revenue guidance.
The company attributed its poor results to “contract execution challenges on large deals” and an inadequate “execution strategy to scale” the Company’s AI-powered products “to reach their full potential. The company’s new CEO said, among other things, that “AI is creating a bit of confusion with other customers” and that rather than closing deals, the customers are continuing to “evaluate what kind of tasks are better suitable to automate the AI.” The subsequently filed securities lawsuit alleges that the company’s share price fell more than 34% on this news.
The Complaint
On June 20, 2024, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against the company and certain of its officers. The complaint purports to be filed on behalf of a class of investors that purchased the company’s securities between December 1, 2023, and May 29, 2024.
The complaint alleges that, contrary to the defendants’ representations, the company’s turnaround strategy “had failed.” Far from a competitive strength, “UiPath’s AI-powered Business Automation Platform caused ‘confusion’ among customers and was not able to be adequately scaled.” As a result, “UiPath experienced significant difficulties closing and/or expanding large multiyear deals.”
The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the class.
Discussion
As I noted on this site, SEC Chair Gary Gensler has warned about the possibility of companies misleading investors by their statements about the companies’ AI capabilities. Gensler’s concern is that companies would exaggerate or overstate their AI capabilities in order to try to capitalize on the current market enthusiasm for AI-related strategies, a phenomenon Gensler referred to as “AI-washing.” There have in fact already been AI-washing related SEC enforcement actions (most recently here), and indeed there have previously been AI-washing related securities lawsuits filed as well, as noted below.
This case appears to be yet another example of a securities class action lawsuit based on “AI-washing” related allegations. The plaintiff in this case alleges that the company overstated its AI capabilities, such that rather than representing a competitive strength, as the company contended, its AI-based strategy created confusion among its customers, in part because its AI-based tools could not be adequately scaled.
By my count, this lawsuit represents the third AI-related securities class action lawsuit to be filed this year, along with the lawsuits previously filed against Innodata and Evolv (as discussed here and here, respectively). In thinking about AI-related allegations as a securities litigation risk, the concerns involve not only the type of AI-washing related allegations this case presents, but also allegations that the defendant company insufficiently disclosed the risks associated with its AI-based strategy.
Many companies are under pressure from investors and from the marketplace to launch AI-related strategies, at a time when the technology itself is still developing and rapidly changing. As this case shows, many companies are struggling to determine how best to adopt AI to their existing products and services and how to make the technology support their operations and improve their results. This combination of circ*mstances gives rise to the risk that companies might not accurately state their AI-capabilities or not accurately state the actual promise of AI to improve the companies’ operating performance and financial results.
The net result is that it seems likely that there will be further AI-related lawsuits filed in the weeks and months ahead, and companies struggle to adopt AI-based strategies. I suspect that by year end we will see that AI-related securities class action lawsuits will represent a significant portion of the overall number of securities lawsuits filed during the year.
One final note. While I detailed above the AI-related securities lawsuits that have been filed this year, there have in fact been AI-related securities suits filed in prior years, as well. For example, in May 2022, plaintiff shareholders brought asecurities class action lawsuitagainst Upstart, which claimed to be a cloud-based artificial intelligence lending platform. Among other things, the plaintiffs alleged that the defendants misrepresented the extent of its AI platform’s ability to adequately account for interest rates and other macroeconomic factors.
In addition, in November 2021, a plaintiff shareholder launched asecurities class action lawsuitagainst the online real estate firm Zillow, in which the plaintiff alleged, among other things, that the company misrepresented the capabilities of its Zillow Offers tool. The company allegedly claimed that it used the tool to allow consumers to buy or sell houses quickly. Zillow allegedly said that its tool’s neural networks used artificial intelligence capabilities to map millions of data points, providing predictive power. However, the plaintiffs allege, the tool was unable to accurately predict home prices, and eventually the company had to shut it down. The Zillow case is currently set for trial in June 2025.
