SEC officials have for months been signaling their concerns about companies overstating their AI credentials, a phenomenon that the officials and others have called “AI washing.” As set out and partially transcribed in a September 5, 2024, TheCorporateCounsel.net post (here), SEC Chair Gary Gensler recently recorded a video in which he reiterated concerns about public company AI-related disclosures and the need for companies to match AI-related claims to their actual capabilities. Nor are concerns about companies’ AI-related disclosures limited to the SEC; the tech community is also concerned about companies that overhype their AI qualifications, as illustrated in a September 4, 2024 TechBrew post (here).
Another audience is also monitoring public companies’ AI-related disclosures – the class action plaintiffs’ lawyers. The number of securities class action lawsuits based on allegedly misleading statements concerning AI continues to grow. In the latest example, on September 4, 2024, a plaintiff shareholder filed a securities suit against software development platform GitLab alleging that the company misled investors by overstating the company’s ability to develop AI software features that would increase market demand for the company’s software development platform. A copy of the complaint can be found here.
Background
GitLab is a web-based platform that helps companies develop and deploy software. According to the complaint, in connection with its revenue projections for fiscal year 2025, the company included in its projection disclosures statements about the company’s incorporation of AI throughout its DevSecOps platform. These statements included representations about how the company’s development of AI features would increase software development efficiency, making it more affordable for customers, as a way for the company to monetize its various AI capabilities.
The complaint alleges that these statements about the company’s AI-related initiatives “created the false impression that” the company “possessed reliable information pertaining to the Company’s ability to develop and incorporate AI throughout the software development cycle in order to optimize code generation thereby increasing market demand.” In truth, the complaint alleges, there was “weak market demand for Gitlab’s touted AI features,” and the company was incurring increased expenses involving its China joint venture, JiHu.
The complaint alleges that “the truth emerged” on March 4, 2024, when the company released its first fiscal quarter 2024 earnings report. Among other things, the company announced that it needed more time to build its pipeline and close deals on new products. The company also lower its 2025 guidance. The complaint alleges that the company’s share price declined 21% on this news.
The Complaint
On September 4, 2024, a plaintiff shareholder filed a securities class action lawsuit complaint in the Northern District of California against GitLab and certain of its executives. The complaint purports to be filed on behalf of a class of investors who purchased the company’s securities between June 6, 2023, and March 4, 2024. The complaint alleges that the company misrepresented its ability to develop AI features that would generate code more efficiently and increase market demand for the company’s platform.
The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the plaintiff class.
Discussion
There is no doubt that concerns about the possibility of AI-related hype is running high in many quarters. One reason to be concerned about various companies’ claims concerning their AI capabilities is that these kinds of AI claims increasingly are attracting the unwanted attention of plaintiffs’ lawyers.
In my recent round of the top stories in the world of directors’ and officers’ liability and insurance, I noted that the rise in AI-related litigation is one of the top trends in 2024. Although there were AI-related lawsuits filed prior to 2024, AI-related lawsuit filings are increasing this year. Based on the data tallied on the Stanford Law School Securities Class Action Clearinghouse website (here), this lawsuit is the 11th AI-related securities suit to be filed this year. When the time comes to count all the securities lawsuits to be filed this year, AI-related securities suit filings clearly will be a significant factor in the total number of suits filed.
The transformation anticipated from the arrival of AI technology may still be underway, but the litigation is already here. I suspect that as the year progresses, we will see more lawsuits like this one. I am also going to go out on a limb here; I predict that before year-end, we will see the first AI-related SEC enforcement action filed against a reporting company. Behind these predictions are the pervasive concerns about companies’ AI-related disclosures.