FTC’s ‘Operation AI Comply’ Takes Down Companies Misusing AI for Fraudulent Claims

FTC’s ‘Operation AI Comply’ Takes Down Companies Misusing AI for Fraudulent Claims

On September 25, 2024, the Federal Trade Commission (“FTC”) launched Operation AI Comply, a major initiative aimed at tackling deceptive practices in the realm of artificial intelligence. This operation includes five significant law enforcement actions against companies that have exploited AI technology to engage in unfair and misleading conduct.

Among the cases announced, the FTC is taking action against a company that promoted an AI tool for generating fake reviews, as well as another claiming to offer “AI Lawyer” services. Additionally, multiple businesses are being scrutinized for misleading claims that their AI could help consumers make money through online storefronts.

FTC Chair Lina M. Khan emphasized the seriousness of these actions, stating, “Using AI tools to trick, mislead, or defraud people is illegal. There is no AI exemption from the laws on the books.” The FTC’s commitment to cracking down on deceptive practices ensures that honest businesses can thrive and that consumers are protected from scams.

Below is a brief summary of the FTC actions against deceptive AI claims:

• DoNotPay. The FTC is taking action against DoNotPay, which marketed itself as the world’s first robot lawyer. However, the service failed to deliver on its promises, such as enabling consumers to sue without a lawyer or generating valid legal documents quickly. The complaint claims DoNotPay did not test its chatbot’s effectiveness against human lawyers and lacked any retained attorneys. They also offered ineffective services that claimed to identify legal violations on business websites. As part of the settlement, DoNotPay will pay $193,000 and notify consumers about the service’s limitations.

• Ascend Ecom. The FTC has filed a lawsuit against Ascend Ecom, which falsely claimed that its AI tools could help consumers earn substantial passive income through online stores. The scheme, run by William Basta and Kenneth Leung, allegedly defrauded consumers of at least $25 million by charging exorbitant fees to start online businesses, while promised earnings rarely materialized. The FTC has temporarily halted operations, and the case is ongoing.

• Ecommerce Empire Builders. Ecommerce Empire Builders (EEB) is facing FTC charges for claiming it could help consumers build an “AI-powered Ecommerce Empire” through costly training programs and storefront purchases. The FTC alleges that CEO Peter Prusinowski enriched himself while failing to deliver on income promises. Many consumers reported little to no returns, and the case is currently under court review after a temporary halt was issued.

• Rytr. The FTC is charging Rytr for marketing an AI writing assistant that generated potentially deceptive consumer reviews. Subscribers could create reviews that were often misleading or false. The FTC claims this practice could harm consumers and honest competitors. The proposed settlement would prevent Rytr from offering any service related to generating consumer reviews without proper safeguards, pending public comment.

• FBA Machine. The FTC has taken action against FBA Machine, a scheme promising guaranteed income through AI-driven online storefronts. Operated by Bratislav Rozenfeld, this scheme has reportedly cost consumers over $15.9 million. The FTC alleges deceptive marketing that guaranteed profits which rarely materialized. A federal court has temporarily halted the operation, and the case is still active in court.

With the cases announced above, the FTC said that Operation AI Comply builds on previous cases they have recently pursued.

• Automators. Automators is an online storefront scheme that faced scrutiny from the FTC. The company allegedly misled consumers by promoting AI-driven tools that promised easy success in establishing online businesses. Under the terms of the settlement, the defendants will face a lifetime ban on offering business opportunities or coaching services related to e-commerce. They are also prohibited from making deceptive earnings claims in the future and must back up any earnings statements with credible evidence. Additionally, the settlement bars them from imposing restrictions on customers who wish to leave negative reviews about their services. The total monetary judgment of over $21.7 million, which is a large financial repercussion.

• Career Step. The FTC has taken action against Career Step, a company accused of using AI technology to lure consumers into enrolling in misleading career training programs. The advertising promoted unrealistic job placement promises, externships, and inflated claims about the duration and effectiveness of its programs.  The settlement will require the company to pay a total of $43.5 million in cash and debt cancellation to address allegations of deceptive advertising practices aimed primarily at servicemembers and their families. This settlement includes the cancellation of approximately $27.8 million in student debt and $15.7 million in refunds for consumers who were misled by the company’s false claims about job placement and employer partnerships.

• NGL Labs. The FTC alleges that the company falsely claimed that it used AI to moderate content in an anonymous messaging app aimed at children and unlawfully marketed this app without proper oversight, raising significant concerns about child safety and data protection. The focus of the action is their anonymous messaging app, “NGL: ask me anything,” which has been accused of unfairly marketing to children and teens, leading to a settlement of $5 million. Moving forward, NGL Labs will be banned from offering their app to anyone under 18.

• Rite Aid. The FTC has also alleged that Rite Aid implemented AI facial recognition technology in its stores without appropriate safeguards. This raises privacy concerns, as the company may not have adequately protected consumer data while using such technology. In a landmark decision, the Federal Trade Commission (“FTC”) has imposed a five-year ban on Rite Aid’s use of facial recognition technology for surveillance in its stores. This action comes after the FTC found that Rite Aid had deployed this technology without adequate safeguards, leading to significant harm for consumers.

• CRI Genetics. CRI Genetics is facing allegations of deceiving users regarding the accuracy of its DNA reports. The company purportedly claimed to utilize an AI algorithm for genetic matching, but the FTC contends that these claims were misleading and not supported by evidence.

The FTC’s recent guidance on the use of AI tools offers several important takeaways for companies looking to integrate artificial intelligence into their operations. As businesses navigate the evolving landscape of AI, it’s crucial to adopt responsible practices that prioritize transparency and honesty.

First and foremost, businesses must resist the temptation to manipulate consumer reviews. The integrity of customer feedback is essential for maintaining trust and fostering fair competition. Using AI to generate fake reviews undermines not only consumer confidence but also the reputations of honest businesses striving to succeed based on the quality of their products and services. Companies should adhere to the FTC’s rules regarding consumer testimonials, focusing on genuine feedback rather than artificial enhancement.

When it comes to marketing and advertising, clarity and honesty are paramount. Businesses should avoid claiming the use of AI unless it is genuinely integrated into their products or services. Misrepresentations can lead to significant legal repercussions. Companies should also remember that established advertising principles still apply in the context of AI; this means having a reasonable basis for any claims made about product capabilities.

Lastly, businesses must provide substantiated evidence for any claims regarding the financial benefits of their products or services, particularly in the realm of business opportunities. Misleading consumers by suggesting that new technologies will lead to substantial profits without concrete data to support such assertions can result in legal challenges and loss of credibility.

The FTC’s guidance highlights the need for companies to approach AI with a sense of responsibility and integrity. By prioritizing transparency in their use of AI, ensuring the authenticity of customer reviews, and adhering to established advertising principles, businesses can build a foundation of trust that not only complies with legal standards but also fosters long-term success in an increasingly competitive market.

If you would like to read more about this case and others, visit our Case Studies Library.

(Image Credit: iStock Photo)

This article is for information purposes only. It is not intended to be and should not be relied on as legal advice for any particular matter.