The AI Consumer Class Action Threat Is Not A Hallucination

This article originally appeared in Law360 Expert Analysis. Access may require a subscription.

Authors: Ronald J. Levine, Herrick senior litigator, and Richard Torrenzano of The Torrenzano Group.

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In the blink of an eye, artificial intelligence has erupted like a technological storm, turning industries upside down and making bold promises to reshape life as we know it.

Headlines scream of breakthroughs, each more revolutionary than the last, sparking a frenzy of excitement and speculation.

But behind the curtain of hype, something more complex brews — a powerful, mysterious force that few totally understand. And its ultimate impact is still a wild card.

Now, regulators are stepping up, sharpening their sights on tech titans and developers riding this wave, determined to keep the pace and control the chaos. The game has changed, and everyone's watching to see who will rise — or fall — next.

In September, the Federal Trade Commission launched Operation AI Comply, targeting companies accused of using AI to deceive and exploit consumers.[1]

The FTC reported that it zeroed in on five businesses allegedly exploiting AI hype — one claiming its AI could replace human lawyers, another promising guaranteed income through AI-driven online stores.[2]

Earlier this year, the U.S. Securities and Exchange Commission settled claims against two investment advisers, Delphia and Global Predictions Inc., accused of making false and misleading claims about their use of AI.

In announcing the settlement, SEC Chair Gary Gensler stated: "We've seen time and again that when new technologies come along, they can create buzz from investors as well as false claims by those purporting to use those new technologies." Gensler has referred to the making of false AI claims as "AI washing," similar to the greenwashing phenomenon.[3]

At the federal, state and local levels, scrutiny is intensifying over the use of AI in recruitment, hiring and firing — particularly regarding potential bias and discrimination.

Last year, the Consumer Financial Protection Bureau, the U.S. Department of Justice's Civil Rights Division, the U.S. Equal Employment Opportunity Commission and the FTC issued an unusual joint statement warning that "automated system outcomes can be skewed by unrepresentative or imbalanced datasets, datasets that incorporate historical bias, or datasets that contain other types of errors."[4]

Why These Moves Signal More Than Just Regulatory Pressure

When federal agencies such as the FTC, the DOJ or the SEC step in, it often triggers major class actions that send shock waves through entire industries.

Class action attorneys frequently monitor these government actions as a blueprint for launching large-scale litigation. Cease-and-desist orders and fines may just be the opening salvo in much bigger legal battles that follow.

Consumer products industries such as dietary supplements, pharmaceuticals and tobacco have already seen heightened scrutiny. Executives in these fields know all too well how a seemingly minor government review can quickly escalate into full-blown legal conflicts, with major public and investor consequences.

Until now, the AI industry's legal skirmishes have largely revolved around intellectual property, with copyright and trademark disputes dominating courtrooms.

But as scrutiny intensifies over whether AI systems can live up to their bold promises, the industry is on the verge of facing a new wave of class actions — this time targeting consumer fraud, unfair competition and breach of warranty claims.

Companies leveraging AI and emerging technologies should prepare for legal challenges surrounding their products' performance.

Take Tesla as a prime example — it's currently facing a proposed class action, In re: Tesla Advanced Driver Assistance Systems Litigation in the U.S. District Court for the Northern District of California, over allegations of false claims, including promises its vehicles would one day drive themselves coast-to-coast.

And in a different industry, a securities class action was filed in July — Hoare v. Oddity Tech Ltd. in the U.S. District Court for the Eastern District of New York — claiming that a beauty and wellness company overstated its AI technology capabilities before its IPO. A July report from Cornerstone Research saw a growing number of AI-related shareholder suits.

The stakes are escalating rapidly and companies that overpromise and underdeliver AI-driven capabilities risk becoming the focus of high-profile courtroom battles.

While a shift in presidential administrations might signal reduced enforcement from federal agencies, businesses should brace for increased scrutiny at the state and local levels, as well as more aggressive action in the courts.

Five Stages of Grief: Moving From Denial to Dollars

When executives find themselves entangled in class action litigation, they often go through their own corporate version of the classic five stages of grief.

No matter the industry, the pattern is strikingly familiar: denial ("This is baseless"), anger ("How dare they accuse us!"), bargaining ("Maybe we can quietly settle this"), depression ("These legal fees are crippling") and, finally, acceptance — typically marked by a hefty settlement.

But here's the truth: Corporate denial doesn't make lawsuits vanish — it just amplifies the fallout. Anger? It leads nowhere, fast.

While some companies successfully beat claims, fighting back hard often digs a deeper hole and sends legal costs through the roof. Smart executives understand that their definition of "right" rarely aligns with the opinions of their opponents, the courts, the public or investors.

Ignoring that reality only worsens the pain. If a company chooses to engage in battle, it is better to brace for a drawn-out war — astronomical legal bills, brutal media scrutiny and a social media circus that will challenge every move.

Denials may feel powerful in the boardroom, but crumble in the court of public opinion, especially when amplified by media and online commentary. While executives may feel secure in their defense, outside those walls, public perception is relentlessly shredded by scrutiny and skeptics.

Meanwhile, the legal machine grinds on. Motion after motion, each piling up legal fees. What seemed like a solid strategy behind closed doors spirals into a public disaster. The harder you fight, the bigger the bill — and the deeper the hole you're digging with every delay.

In the end, corporate exhaustion sets in, and after months or years of motions and discovery — assuming the case isn't tossed — outside counsel will inevitably be told, "Just settle this and get it behind us." By then, the damage is done.

Swimming in a Regulatory and Judicial Shark Tank: Stay Sharp or Become Bait

AI companies can dodge the looming litigation trap by learning from the hard lessons of other industries, and taking swift, decisive action before it's too late.

Businesses leaders must prioritize fundamental best practices that are often overlooked. Neglecting these essentials not only endangers company reputation — a most valuable asset — but also exposes it to significant financial repercussions and risk.

Brace for Impact

Domestic and global regulations are shifting at lightning speed. What's legal today might be banned tomorrow, and international standards are evolving even faster.

If you're developing, marketing or deploying AI, stay ahead of changes. By the time your product hits the market, regulatory landscapes may have shifted — leaving your company exposed and unprepared.

Establish a Platinum Standard

Relying on industry self-regulation might seem ambitious, but it's no longer optional. Creating strong ethics, compliance and nondiscrimination policies is critical.

Do you have a publicly available AI code of conduct?[5] If not, you're already behind.

Taking a proactive stance isn't just smart governance — it's vital for keeping regulators off your back and preventing operational disasters.

Lead, Don't Follow

Waiting for issues to arise is a recipe for disaster. Conduct regular risk assessments, audits and scenario-based crisis simulations. These practices expose weaknesses before they spiral into crises.

Every AI tool, especially with public-facing applications, must undergo rigorous, real-world testing. And a well-trained customer service team is ready to act swiftly, using user feedback to identify patterns of potential risk.

Ensure the company has robust liability insurance and ironclad contracts with vendors, customers and third parties to cover bases.

Control the Message

In marketing AI promises, every word counts. Flashy headlines may grab attention, but they must be rooted in reality.

A single off-script comment can spark a firestorm of legal and reputational chaos, with consequences that may take years to repair.

Every piece of marketing material or public communication, including social media posts, must be meticulously reviewed to ensure accuracy and alignment with business objectives and values.

Every stakeholder has access to the internet and employees represent the organization in some capacity, so comprehensive training is essential to instill an understanding of the critical importance of honest, transparent communication.

In this advancing digital world, with information and data traveling globally at warp speed, ongoing education and oversight are not optional — they are the first line of defense against preventable crises.

Stick to approved, accurate messaging and resist the temptation to embellish. If claims are scrutinized by regulators or in court, there's no room for hyperbole — everything you say must be backed up by solid proof points.

Overpromising AI capabilities can lead to disaster, especially when unauthorized claims are posted and go viral on social media. Companies must be proactive in making sure that what is being called AI is not basic automation but is actually incorporating machine learning.

Transparency isn't simply important — it's nonnegotiable. Be upfront about what AI products and services can deliver and, crucially, what they can't. Clear, honest communication isn't just best practice — it's your strongest shield against erosion of trust.

Equally vital is staying laser-focused on client and customer feedback. Complaints about misleading information aren't just noise — they're early warning signals. Addressing these concerns quickly not only prevents a crisis from expanding, but also reinforces the commitment to accountability and integrity.

Disrupt or Be Disrupted: AI Race Comes With Lawyers

Winning in AI demands more than just technological brilliance. It requires a deep understanding of the shifting legal landscape, and the readiness to navigate it.

The future of AI is boundless — but only for companies that anticipate regulatory and legal storms. Those that blend innovation with foresight and transparency will lead. Those that don't will be left battling lawsuits, compliance breakdowns and tarnished reputations.

Remember the famous words of Warren Buffet 20 years before AI: "It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently."

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Ronald J. Levine is counsel at Herrick Feinstein LLP.

Richard Torrenzano is chief executive at the Torrenzano Group. He was previously a member of the New York Stock Exchange management and executive committees.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] https://www.ftc.gov/business-guidance/blog/2024/09/operation-ai-comply-continuing-crackdown-overpromises-ai-related-lies.

[2] https://www.ftc.gov/news-events/news/press-releases/2024/09/ftc-announces-crackdown-deceptive-ai-claims-schemes.

[3] https://www.wsj.com/articles/sec-head-warns-against-ai-washing-the-high-tech-version-of-greenwashing-6ff60da9?reflink=desktopwebshare_permalink.

[4] https://www.eeoc.gov/joint-statement-enforcement-civil-rights-fair-competition-consumer-protection-and-equal-0.

[5] https://torrenzano.com/news/unlocking-the-power-of-artificial-intelligenceunlocking-the-power-of-artificial-intelligence/.