Shortly after short-seller Ningi Research issued a report in May alleging Oddity Tech has been overstating the role of artificial intelligence in its sales success, an investor filed a proposed class-action lawsuit in federal court in New York accusing the company of violating securities laws.
Relying heavily on the Ningi report, the lawsuit claims Oddity’s use of AI to match consumers with the best type and shade of cosmetics for their skin, among other things, was essentially smoke and mirrors because what the company was calling AI was a basic algorithm that made recommendations based on a questionnaire consumers filled out.
“Oddity’s … quizzes are simply rule-based and not artificial intelligence like Microsoft’s Copilot, which is what a consumer would expect by any AI claim that says [it] determines the exact products you need by combining millions of data points with your personal profile,” says the lawsuit, quoting the Ningi report.
Oddity didn’t immediately respond to a request for comment on the allegations.
The Securities and Exchange Commission in January issued an investor alert that said it was taking a hard look at these kinds of AI claims. Since then, almost half a dozen private lawsuits, by one count, have been filed against companies, and the SEC has taken its own legal action.
In two agency cases, the SEC settled allegations against investment firms that they had made unsupported claims about using AI to match products to investors.
“Those purporting to use those new technologies … should not mislead the public by saying they are using an AI model when they are not,” SEC Chair Gary Gensler said in March, when announcing the agency’s agreements with Delphia and Global Predictions.
It’s not clear what will happen in the Oddity case. The company said the Ningi report was based on factual inaccuracies. “Oddity firmly stands behind its use of technology to deliver a personalized beauty experience to consumers to drive conversion, customer loyalty, repeat purchase rates, and business results,” the company said in a statement. “Any other claim is purely false.”
Although the company’s stock price at the time took a hit, dropping about 4 percentage points over the course of a few days, according to the lawsuit, the company has so far appeared to mostly weather the storm. In late July, shares traded at around $40 a share, higher than the roughly $37 it traded at when Ningi issued its report.
The case shows that the spotlight the SEC has trained on AI-washing is likely going to lead to more lawsuits like this one, Kevin LaCroix, an attorney and executive vice president of RT ProExec, says.
“Because of all of the hype in the investment markets surrounding AI, shares of companies with a good AI story have soared,” LaCroix said in an analysis of the Oddity lawsuit. As a result, “there is a high likelihood that companies whose AI credentials are questioned, causing a drop in the price of the company’s shares, are likely to get hit with a securities suit.”
RT ProExec is an intermediary for companies operating in the directors and officers liability insurance space.
The almost half-dozen AI-washing cases filed so far this year include a power company touting its role in another company’s AI platform and another involving a robotics company that rebranded itself as an AI company, among others.
In-house legal role
There’s a place for general counsel in helping to protect their company from stumbling into an AI-washing conflict like these by working with their technology counterparts, Lena Kempe of LK Law Firm has said.
The goal is to ensure that what a company is calling AI is really that and not merely an algorithm that uses statistical analyses or predetermined rules without incorporating machine-learning techniques. “Is the technology a basic automation or rule-based system that lacks authentic learning and adaptive capabilities?” Kempe said in an April column for Legal Dive. “If the answer is yes, then the product is not AI-powered.”
This is the kind of question LaCroix recommends D&O insurance underwriters start asking when they consider writing insurance for a company that touts the role of AI in its business.
“Underwriters may … want to develop questions designed to determine … the extent to which an applicant company’s claimed AI credentials are based on actual technological investments and the extent to which the AI-based claims represent only a marketing approach,” LaCroix says.
LaCroix said he thinks there will be more Oddity-like lawsuits filed before the year’s out.
“The number of AI-related securities suit filings will prove to be a significant factor in the overall number of securities class-action lawsuit filings during the year,” he said.
That makes it important in-house counsel not let companies over-promise on the kind of technology they have and the role it plays in their business.