FTC takes action against AI claims by DoNotPay and others

The Federal Trade Commission (FTC) on Wednesday announced a crackdown on “misleading claims and practices in the field of artificial intelligence” by three business opportunities and two companies, including legal services firm DoNotPay.

The FTC said the five cases it initiated showed how the companies and ventures “exploited the hype surrounding artificial intelligence and used it to lure consumers into fraudulent schemes.”

“Using AI tools to trick, mislead, or defraud people is illegal,” FTC Chair Lina Khan said in a statement.

“The FTC’s enforcement actions make clear that there is no exception to existing laws for AI,” Khan said. “By cracking down on unfair or deceptive practices in these markets, the FTC is ensuring that honest companies and innovators get a fair chance and consumers are protected.”

In a complaint, the FTC stated that DoNotPay, which had touted its AI service as the “world’s first robot lawyer,” had failed to live up to that claim.

While DoNotPay said its service allows customers to sue someone for personal injury without a lawyer and produce valid legal documents “in a very short amount of time,” the company has not tested whether the “results of its AI chatbot are equivalent to those of a human lawyer,” the FTC said in a statement.

The FTC also said that DoNotPay’s service, which purported to check a small business’s website for federal and state violations using a customer’s email address, failed to effectively detect these potentially costly violations.

DoNotPay has admitted no wrongdoing and agreed to settle the FTC’s allegations by paying $193,000. The company also provided a notice to consumers who subscribed to the service between 2021 and 2023 alerting them to limitations on the service’s legal-related features.

“The proposed order will also prohibit the company from making claims about its ability to substitute for any professional service without providing evidence to support that claim,” the FTC said.

In one of the four other cases announced Wednesday, the FTC is suing a business opportunity scheme that operated under names such as Ascend Ecom, Ascend CapVentures and ACV Nexus and was run by two men named William Basta and Kenneth Leung.

The FTC alleges in a lawsuit filed in federal court in Los Angeles that the Ascend system “defrauded consumers of at least $25 million” by “making misleading earnings statements to induce consumers to spend tens of thousands of dollars each to invest in what the defendants claimed was a surefire e-commerce or online store business opportunity.”

“Since approximately 2023, Defendants have been claiming in their deceptive sales pitch that their business model is based on artificial intelligence (“AI”),” the lawsuit states. “Defendants claim that consumers will quickly earn thousands of dollars in passive income generated through sales in online stores on e-commerce platforms such as Amazon.com and Walmart.com.”

After consumers invest in the scheme, “the promised profits are never realized and they are left with empty bank accounts and high credit card bills,” the lawsuit states.

The FTC said that as a result of the lawsuit, a judge issued an order temporarily halting the system and placing it under the control of a bankruptcy trustee.

In a second lawsuit filed under seal in a New Jersey federal court in June, the FTC took aim at an opportunity program operating under the names “Passive Scaling” and “FBA Machine” that allegedly cost customers around $16 million or more based on misleading claims of guaranteed income through online stores that supposedly used AI-powered software.

In a third lawsuit filed in federal court in Pennsylvania, the FTC accuses Ecommerce Empire Builders of “falsely claiming that it helps consumers build an ‘AI-powered e-commerce empire’ by taking its training programs, which can cost nearly $2,000, or by purchasing an online store ‘built for them’ for tens of thousands of dollars,” the agency said.

As in the Ascend case, a judge placed the system under the control of a bankruptcy trustee, the FTC said.

“The scheme … claims that consumers can potentially earn millions of dollars, yet the FTC’s complaint alleges that those profits do not occur,” the FTC said.

As with the other two lawsuits, a judge placed the system under the control of a bankruptcy trustee, the FTC said.

In a regulatory complaint, the FTC targeted Rytr, a company that sells an AI writing assistant that generates, among other things, testimonials and customer reviews.

The FTC stated that the service “generated detailed reviews that contained specific, often material
Details that had no relation to the user’s input, and those ratings would almost certainly be false to the users who copied them and posted them online.”

“In many cases, subscriber reviews generated by AI contained information that misled potential consumers who used those reviews as the basis for their purchasing decisions,” the agency said.

Rytr has agreed to settle the case through a settlement that prohibits the company from offering or selling services that generate customer reviews or testimonials.