On September 25, 2024, the Federal Trade Commission (FTC) announced the launch of “Operation AI Comply,” an initiative created to tackle unfair and deceptive business practices involving the use of artificial intelligence (AI), particularly false or exaggerated claims about an AI product’s offerings. As part of the initiative’s debut, the FTC announced its crackdown on five companies, accusing them of using AI “to supercharge deceptive or unfair conduct that harms consumers.”
While this specific initiative may be relatively new, the FTC’s focus on AI issues is not. The agency has been quite active over the past few years in identifying what it believes to be appropriate standards for AI companies, through both its guidance and its enforcement actions. It has leveraged this authority particularly in matters where companies use AI tools in a potentially discriminatory manner. These cases provide insight into how the FTC is approaching AI-related enforcement and some of the key issues that the agency is grappling with as it reviews how companies develop and deploy AI tools.
In the rest of this post, we have summarized each of the actions identified by the FTC in its recent announcement.
Summary of Recent FTC AI Cases
- DoNotPay: DoNotPay is an online subscription service for individuals seeking assistance with commercial and legal issues involving American civil law. The FTC took action filing an administrative complaint against the company for allegedly making false claims about rendering an AI service that was “the world’s first robot lawyer” and an “AI lawyer” capable of replacing human lawyers. Through a chatbot, subscribers submit prompts or queries to an AI “robot lawyer” that the company represented operated like a human lawyer, drafting legal documents and rendering legal advice.
According to the complaint, among other things, DoNotPay promised that its service would allow consumers to “sue for assault without a lawyer” and “generate perfectly valid legal documents in no time,” and that the company would “replace the [$200 billion] legal industry with artificial intelligence.” The FTC alleged that DoNotPay, however, could not deliver on these promises, highlighting that the company did not conduct testing to determine whether its AI chatbot’s output was equal to the level of a human lawyer, and that the company itself did not hire or retain any attorneys to test the quality and accuracy of the service’s law-related features.
DoNotPay agreed to a settlement, including a $193,000 payment and notifying consumers about the service’s limitations. The FTC’s proposed order prohibits the company from making unsubstantiated claims about its AI’s capabilities.
- Ascend Ecom: Ascend Ecom (Ascend) is a company that offers logistics, wholesale distribution and e-commerce investment management services. The FTC filed a lawsuit in the US District Court for the Central District of California against the company with allegations that the company falsely claims its AI-powered tools help consumers quickly earn thousands of dollars a month in passive income by opening online storefronts. According to the FTC’s complaint, Ascend charges consumers tens of thousands of dollars to start online stores on e-commerce platforms such as Amazon, Walmart, Etsy and TikTok, while also requiring them to spend tens of thousands more on inventory. According to the complaint, Ascend advertises online that consumers can make five figures or more per month in passive income by investing in Ascend’s e-commerce business opportunity and that consumers’ profit margins can be up to 40% or sometimes even 50%. The complaint highlights that Ascend claimed to use proprietary software and AI to maximize clients’ business success. However, according to the complaint, none of Ascend’s clients earn the advertised income. The FTC’s complaint includes nine counts against Ascend for violations of the FTC Act, the Business Opportunity Rule and the Consumer Review Fairness Act (CRFA). The counts are for (i) false or unsubstantiated earnings claims; (ii) deceptive claims of a “risk free” offer with buyback guarantee; (iii) unfairness; (iv) misrepresentations regarding income or profits; (v) disclosure document violations; (vi) earnings claims to prospective buyers violations; (vii) industry financial, earnings or performance information violations; (viii) general media earnings claims violations; and (ix) CRFA violations. The case is ongoing, and the court has issued a temporary restraining order on the defendants, temporarily halting the alleged scheme and putting the business under the control of a receiver.
- Ecommerce Empire Builders: Ecommerce Empire Builders offers services and programs to help individuals and businesses build, launch and scale their e-commerce ventures. The FTC filed a lawsuit against the company in the US District Court for the Eastern District of Pennsylvania alleging that the company markets and sells 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” and the company’s “proven” strategies. The complaint says that the company falsely promised that customers would quickly earn $10,000 per month—and could even make millions of dollars. However, according to the complaint, the promised profits never materialize. The case is ongoing, and the court has issued a temporary restraining order on the defendants, temporarily halting the alleged scheme and putting the business under the control of a receiver.
- Rytr: Rytr is a company that offers an “AI-powered” writing assistant designed to help users create high-quality content quickly and efficiently; one such offering is “Testimonial & Review” generation—through which paid subscribers could generate an unlimited number of detailed consumer reviews based on very limited and generic input. The FTC filed an administrative complaint against the company alleging that Rytr’s service generated detailed reviews that contained specific, often material details that had no relation to the user’s input, and these reviews almost certainly would be false for the users who copied them and published them online. The complaint charges Rytr with violating the FTC Act by providing subscribers with the means to generate false and deceptive written content for consumer reviews. The complaint also alleges that Rytr engaged in an unfair business practice by offering a service that is likely to pollute the marketplace with a glut of fake reviews that would harm both consumers and honest competitors. The proposed order settling the FTC’s complaint would bar the company from advertising, marketing, promoting or selling any review or testimonial generation service. Interestingly, two commissioners—Commissioner Melissa Holyoak and Commissioner Andrew N. Ferguson—dissented to the filing of the complaint and settlement agreement.
Commissioner Holyoak, joined by Commissioner Ferguson, dissented because the allegations are only that Rytr furnished the “means and instrumentalities” by which someone else could make false statements in violation of Section 5. In her dissent, she argues that the means-and-instrumentalities liability theory does not apply to unfair or deceptive acts or practices, especially here where Rytr’s tool has both lawful and unlawful potential uses. She also argues that a Section 5 action is not in the interest of the public, because “the aggressive move into AI regulation is premature” and the action implicates First Amendment interests.
Commissioner Ferguson, joined by Commissioner Holyoak, dissented arguing that there is a low likelihood of substantial injury in this case because the complaint assumes, but does not allege facts showing that “all users mechanically posted drafts without modifying them to refine potential inaccuracies regarding the underlying product and the user’s experience with the product.” In his dissent, he also argues that in banning Rytr’s user review service, the complaint fails to weigh the countervailing AI-related benefits that Rytr’s service offers to consumers and competition. He also echoed Commissioner Holyoak’s disagreement with the FTC’s use of the means-and-instrumentalities liability theory.
- FBA Machine: According to the FTC, the defendants operated a business opportunity scheme under several names, including FBA Machine. The defendants allegedly falsely promise consumers that they would make thousands of dollars in passive income through online storefronts that utilized “AI-powered” tools to help price products in the stores and maximize profits. The FTC filed a lawsuit against the company, its owner and several other related companies in the US District Court for the District of New Jersey. However, according to the complaint, the promised gains never materialize. The FTC’s complaint includes eight counts against FBA Machine for violations of the FTC Act, the Business Opportunity Rule and the CRFA. The counts are for (i) false or unsubstantiated earnings claims; (ii) unfairness; (iii) misrepresentations regarding income or profits; (iv) disclosure document violations; (v) earnings claims to prospective buyers violations; (vi) industry financial, earnings or performance information violations; (vii) general media earnings claims violations; and (viii) CRFA violations. The case is ongoing, and the court has issued a temporary restraining order on the defendants, temporarily halting the alleged scheme and putting the business under the control of a receiver.
