At this point, everyone has dealt with a chatbot of some nature. Whether you’re trying to change a flight or get a prescription, they are everywhere. As AI, and generative AI in particular, become more and more prevalent, AI-powered chatbots have become ubiquitous tools for customer service, sales and even internal corporate functions. This AI-driven technology can offer efficiency and cost savings. However, chatbots do bring with them significant legal and compliance risks that should be proactively addressed. Issues surrounding misinformation, privacy, intellectual property and liability are increasingly coming under regulatory scrutiny. Understanding these risks and implementing appropriate safeguards is critical.
Regulatory Landscape
Regulators worldwide are paying closer attention to AI-powered interactions, particularly in consumer-facing applications. The Federal Trade Commission (FTC) has issued guidance emphasizing the importance of transparency and accuracy in AI-driven tools. In a 2025 blog post, the FTC warned companies against making deceptive AI-related claims. Companies deploying AI-powered chatbots must ensure that they do not overpromise capabilities, mislead users or facilitate deceptive business practices. To note, however, this blog post was written before the second Trump presidential term began, and the FTC’s current appetite for enforcement actions is not yet clear – though it is likely safe to assume that enforcement will be deprioritized.
In the European Union, EU AI Act classifies AI systems based on risk levels, with chatbots and virtual assistants potentially falling under regulations concerning high-risk AI applications. The law emphasizes accountability, requiring organizations to document AI decision-making processes and ensure human oversight. Meanwhile, in the United States, President Trump's 2020 Executive Order on AI focuses on maintaining American leadership in AI development, encouraging innovation while downplaying regulation – especially as compared to the prior administration.
Privacy and Data Protection Risks
AI chatbots may process vast amounts of personal data, making privacy compliance a primary concern. Laws such as the General Data Protection Regulation (GDPR) and the California Consumer Privacy Act (CCPA) impose strict requirements on how personal data is collected, used and shared. Businesses must ensure chatbots comply with these laws by implementing robust data governance practices, including, for example:
- Transparency and Notice: Users should be informed when they are interacting with an AI-driven system and provided with clear disclosures on how their data is being used.
- Data Minimization: Chatbots should collect only the information necessary to fulfill their purpose and avoid retaining excessive user data.
- User Consent and Control: Businesses must provide users with opt-in/opt-out mechanisms and allow them to access or delete their data upon request.
A notable example of privacy risks involved OpenAI’s ChatGPT, which was temporarily banned in Italy in 2023 due to concerns over how it collected and processed user data.
A frequent concern surrounding AI chatbots is their tendency to generate inaccurate or misleading information, a phenomenon known as "AI hallucination." In some cases, AI-powered systems have fabricated legal citations, medical advice and financial recommendations. This risk is particularly high when chatbots are used in regulated industries such as health care, finance, and legal services.
Companies deploying AI chatbots must implement safeguards such as:
- Human in the Loop: For some particularly high-risk applications, it may be prudent to have human oversight over AI-generated responses.
- Disclaimers and Limitations: When appropriate, businesses should clearly communicate that chatbot responses are for informational purposes only and not professional advice. It should be made clear to users that they are dealing with artificial intelligence, not a real person. To minimize liability, companies should prominently display disclaimers in chatbot interactions, clarifying that AI-generated content should not be relied upon for critical decisions, such as financial, legal or medical matters. Additionally, businesses should ensure chatbots recognize and escalate complex inquiries to human representatives when necessary. Periodic review and updates to disclaimer language, in alignment with evolving regulations and industry standards, can further mitigate legal risks.
- Restricted Use Cases: Organizations should carefully limit chatbot deployment in sensitive areas where misinformation could lead to liability.
Mitigating Bias and Discrimination Risks
AI chatbots can inadvertently perpetuate biases embedded in their training data, leading to discriminatory or offensive outputs. AI-driven tools used in hiring and HR functions must comply with anti-discrimination laws. To mitigate these risks, businesses should:
- Audit AI Training Data: To the extent possible, assess datasets for biases.
- Implement Bias-Detection Mechanisms: Use tools to identify and mitigate discriminatory outcomes.
- Provide Human Oversight: Maintain human involvement in decision-making processes where bias could have legal ramifications.
Best Practices for Legal and Compliance Teams
Given the constantly evolving regulatory landscape, in-house counsel should take proactive steps to mitigate legal and compliance risks associated with AI chatbots:
- Conduct AI Risk Assessments: Evaluate chatbot functionalities for compliance with applicable laws and industry standards.
- Develop AI Governance Policies: Establish clear guidelines on chatbot deployment, data collection and content moderation.
- Ensure Transparency and Accountability: Clearly disclose AI involvement in customer interactions and provide users with recourse for errors or disputes.
- Monitor Regulatory Developments: Stay informed about emerging AI regulations in any jurisdictions where the services are available.
- Engage with AI Vendors and Partners: Negotiate AI service agreements that address liability, IP rights and compliance responsibilities.
