AI Legal Risks 2025: Essential Considerations for Businesses
- Jeff Chang
- Jul 1
- 6 min read
What You Need to Know
Quick Answer: AI may create several legal risks including potential liability for AI decisions, data privacy concerns, IP uncertainties, employment discrimination exposure, and regulatory compliance challenges.
Key Takeaway: Standard vendor contracts may not adequately protect against AI risks - businesses should consider specialized legal frameworks.
Timeline: Federal oversight expanding rapidly, multiple state laws now in force
Who's Affected: Any business using AI for decisions, customer interaction, hiring, or operations
When AI systems make costly errors, businesses often discover their vendor agreements explicitly disclaim liability for algorithmic decisions. A single AI failure could trigger regulatory investigations, discrimination lawsuits, and significant operational losses. With federal and state AI regulations emerging rapidly in 2025, businesses may face unprecedented legal exposure from their AI deployments.
The Evolving AI Regulatory Landscape - Legal Risks
Federal Oversight Intensifies
Federal agencies have signaled increasing focus on AI-related issues:
The FTC has indicated concern about "AI washing" - potentially deceptive claims about AI capabilities - and has authority to pursue companies whose AI systems may harm consumers through unfair or deceptive practices.
The EEOC has issued technical guidance making clear that employers may be liable for discriminatory AI outcomes in hiring and employment decisions, regardless of intent or algorithmic complexity.
Banking regulators have emphasized the importance of model risk management for AI systems, particularly in credit decisions. The SEC has indicated that public companies should assess whether AI risks require disclosure in their filings.
Multiple agencies appear to be developing AI-specific enforcement priorities, though the regulatory landscape continues to evolve.
State Laws Create Potential Compliance Challenges
Several states have enacted or proposed AI-related regulations with varying requirements:
New York City Local Law 144 requires bias audits for AI used in employment decisions, with results posted publicly. Non-compliance may result in penalties.
Illinois Biometric Information Privacy Act covers AI analysis of biometric data including faces, voices, and potentially behavioral patterns. The law includes a private right of action with statutory damages.
Various states have introduced AI transparency legislation that could require disclosure when AI makes significant decisions about consumers - potentially covering loan approvals, healthcare recommendations, and other automated decisions.
This developing patchwork of state requirements may create compliance complexity for businesses operating across multiple jurisdictions.
Five Critical Legal Risks
1. Liability for AI Decisions
When AI systems make decisions affecting individuals - denying loans, rejecting job candidates, or determining services - businesses may face liability for adverse outcomes. Key considerations include:
Businesses typically cannot avoid responsibility by attributing decisions to algorithms
Vendor disclaimers may not protect against third-party claims
Insurance policies might exclude or limit coverage for AI-related incidents
A single instance of algorithmic bias could potentially trigger class action exposure
The complexity of AI decision-making may make it difficult to defend against discrimination claims or demonstrate compliance with applicable regulations.
2. Data Privacy Violations
AI's data requirements may create privacy law compliance challenges:
Biometric Laws: Using AI to analyze faces, voices, or behavior could trigger requirements under biometric privacy laws in Illinois, Texas, and Washington. Violations may result in statutory damages.
CCPA/GDPR: Consumer data deletion rights may be difficult to implement when data has been incorporated into trained AI models.
HIPAA: Healthcare organizations using AI must consider audit trail requirements and minimum necessary standards.
Breach Risks: AI-related incidents could expose not just data but also algorithms, decision patterns, and potentially problematic logic.
3. Intellectual Property Uncertainties
AI-generated content presents evolving legal questions:
The U.S. Copyright Office has indicated it will not register works produced solely by AI
Use of AI systems trained on unlicensed data could raise infringement concerns
Ownership of AI outputs may depend on various factors including human involvement
Transparency requirements might conflict with trade secret protections
Organizations using AI for content generation should consider potential IP risks.
4. Employment Discrimination Risks
AI hiring and employment tools may create discrimination liability exposure. The EEOC has issued technical guidance indicating that employers may be responsible for discriminatory outcomes from AI systems. Potential risk areas include:
Resume screening that could disparately impact protected groups
Video interview analysis that might show bias based on protected characteristics
Performance evaluation systems using factors that correlate with protected classes
Automated screening tools that may ask impermissible questions
Each instance of potential discrimination could lead to EEOC complaints, litigation, or reputational harm.
5. Industry-Specific Compliance Considerations
Regulated industries may face additional AI-related requirements:
Financial Services: Potential fair lending obligations, adverse action notice requirements, model risk management expectations
Healthcare: Possible FDA oversight for certain AI applications, HIPAA considerations, state medical practice limitations
Insurance: Potential requirements for actuarial justification, rate filing disclosures, unfair discrimination prohibitions
Generic AI tools may not meet industry-specific regulatory expectations, potentially creating compliance gaps.
Potential Vendor Contract Gaps
Standard software agreements may not adequately address AI-specific risks. Common limitations include:
Broad Disclaimers: Vendors may disclaim responsibility for AI outputs or decisions Limited Liability: Liability caps might be insufficient relative to potential AI-related exposure No Performance Standards: Unlike traditional software, agreements may lack accuracy guarantees Data Rights Gaps: Contracts might not address training data ownership or licensing Update Risks: Models may change without notice or testing requirements
Example of AI-specific contract language to consider:
"Vendor represents that AI system outputs will comply with applicable
anti-discrimination laws and agrees to indemnify Company for claims
arising from AI decisions, subject to the limitations set forth herein."Note: This is sample language only. All contract provisions should be reviewed and customized by qualified legal counsel familiar with your specific business requirements and applicable state law.
Situations That May Require Legal Guidance
Consider Contacting Legal Counsel When:
Government Inquiries: Any regulatory contact about AI practices may benefit from legal involvement to help manage potential investigations.
Discrimination Concerns: Allegations of AI bias could require careful legal analysis to assess exposure and response strategies.
Vendor Disputes: When AI performance issues arise, enforcing or negotiating contract terms may require legal expertise.
New AI Implementations: Before deploying AI for sensitive decisions involving credit, employment, healthcare, or other regulated areas.
Multi-State Operations: Varying state law requirements may make compliance planning complex without legal guidance.
Data Incidents: AI-related breaches might require specialized response strategies beyond traditional cybersecurity protocols.
Initial Considerations
While comprehensive AI governance typically requires legal expertise, businesses might consider:
Inventory AI Use: Understanding what AI tools are in use across the organization
Assess Risk Areas: Identifying AI applications that affect individuals or involve sensitive data
Review Agreements: Examining whether vendor contracts address AI-specific considerations
Evaluate Practices: Considering whether current AI deployments align with emerging regulatory expectations
These preliminary steps may help identify areas where legal guidance could be beneficial.
Industry Warnings
Healthcare Notice: Medical AI faces FDA, HIPAA, and state medical practice requirements. Healthcare organizations should not rely on general AI guidance without specialized healthcare counsel.
Financial Services Notice: AI credit decisions trigger fair lending, UDAAP, and model risk requirements. Financial institutions need specialized compliance expertise.
Employment Notice: AI hiring tools face strict scrutiny under federal and state discrimination laws. HR use of AI requires careful legal review.
Important Legal Disclaimers
This information is for educational purposes only and does not constitute legal advice. Chang Law Group is licensed to practice law in Massachusetts only. Laws governing artificial intelligence vary significantly by jurisdiction, and AI compliance requirements differ based on industry, use case, and implementation details.
AI legal compliance involves complex considerations that require individualized analysis. Generic governance frameworks or contract provisions may not provide adequate protection for specific business requirements or regulatory obligations.
For specific legal questions regarding your AI implementation and compliance needs, contact Chang Law Group to discuss your situation. Chang Law Group is licensed to practice law in Massachusetts and can assist with your AI implementation and compliance needs.
AI law continues to evolve rapidly through new legislation, regulatory guidance, and court decisions. This article reflects the legal landscape as of January 2025. Federal AI legislation remains under consideration, and state laws continue to proliferate, potentially changing compliance obligations significantly.
Sources and References
NIST Artificial Intelligence Risk Management Framework resources
New York City Local Law 144 regarding automated employment decision tools
Illinois Biometric Information Privacy Act, 740 ILCS 14/1 et seq.
General information on state AI legislation and proposals
Update Schedule: This article may be reviewed and updated quarterly to reflect evolving AI legal standards and regulatory developments.
