Start-ups and other growing businesses across many industries are technology centred or harness technology to power their growth and drive innovation. However, as businesses' use of technology grows and the speed of technological development increases, the risk of businesses becoming embroiled in litigation increases.
Technology related disputes are increasingly making news headlines, with high-profile litigation, such as the Horizon scandal and Tesla being sued for autopilot failures, highlighting the risk of blind faith in technology. Technology-related cases also often involve novel issues and questions that cannot be answered by existing caselaw and legislation, which can in turn lead to a large degree of uncertainty about how a court might decide any given issue.
This article summarises some of the developing trends in tech litigation, and sets out a number of steps that can be taken to help companies mitigate the risk of litigation.
Whilst AI can be a powerful tool for growing businesses, over the next few years there is likely to be a significant increase in AI-related litigation. This will primarily be in the form of a breach of contract or misrepresentation claim where performance is not as expected.
The recent case of Tyndaris SAM v MMWWVWM Limited (VWM) highlights the type of cases we are likely to see. VWM contracted with Tyndaris SAM to manage a trading account using its AI-powered platform. VWM sought $22m in damages alleging that Tyndaris SAM’s statements about the AI platform’s capabilities were untrue.
Whilst this matter settled before trial, it is likely to be indicative of type of claim the courts will be required to consider in the coming years. Businesses can mitigate the risk of such claims by trading on their own carefully-drafted terms and ensuring that there are suitable limits on liability.
Limited resources are one of the many hurdles faced by start-ups and other growing businesses, so it is not uncommon for these businesses to partner with third party companies in order to procure certain products or services. Whilst outsourcing can have many benefits, such as reducing costs and increasing efficiencies, it is critical for young businesses to fully consider and manage the risks associated with partnering with third party companies.
In most cases a business will still be liable for failure to deliver to its customers, even if responsibility for the fault lies with the third party. The business may be able to claim against the third party for their failure to deliver, however, there is no guarantee that the third-party will pay out, particularly if that third party is financially troubled or insolvent. Limiting reliance, careful vetting and appropriate contractual protections are fundamental in minimising exposure to litigation risk.
Personal data is often used and processed by growing businesses. If this data is not adequately protected or if there is not a legal basis to use the data, then businesses may face significant regulatory fines and compensation claims.
The recent example of Clearview, an AI search engine for faces, provides a stark warning against technology businesses using personal data without requisite consent or lawful basis to do so. In May 2022, the Information Commissioner’s Office fined Clearview £7.5m and issued an enforcement notice in light of Clearview’s use of the personal data of UK data subjects. It was alleged that Clearview was collecting and unlawfully storing facial images of people in the UK. Whilst the decision was appealed on technical grounds and overturned, the principle remains clear; if you do not have a lawful basis to use the personal data on which you are training an AI tool then you could face regulatory action from the Information Commissioner’s Office. It is imperative that you carry out this assessment before starting to use data.
However, even if you do have a lawful basis to process personal data but adequate security measures aren’t in place and a cyber-attack or data breach occurs, then you could face regulatory action and/or a damages claim. It is therefore incumbent on firms to ensure that they have adequate data security protection in place along with up-to-date response management procedures to mitigate the impact of a security incident should it occur.
For start-ups developing new technologies involving proprietary intellectual property, it is imperative that protections are in place to prevent misuse of that IP or it falling into the hands of competitors. Employees with knowledge of a start-up’s IP may look to move to other companies, but are subject to a duty of confidence and are not free to take IP with them. However, additional restrictive covenants and data security can strengthen these basic legal protections and minimise risk.
That said, it is an unfortunate reality that litigation is sometimes necessary to enforce confidentiality or restrictive covenants. In such cases it is imperative to act quickly. Businesses should also remind leavers of their obligations and have procedures in place to allow for immediate action should it be required.
Managing technology-related risk in such a rapidly evolving landscape will always be challenge. As well as the steps set out above, firms can take advantage of regulatory sandboxes and test any innovative products and services in a controlled environment under supervision.
If you would like to discuss how to mitigate your litigation risk, please reach out to a member of our technology and digital transformation team.
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