Earlier this week, a plaintiff shareholder filed a securities class action lawsuit against ad-buying platform The Trade Desk after the company announced revenues lower than anticipated due to delays in the rollout of the company’s AI-based forecasting tool. As discussed below, this new lawsuit arguably represents a potential new direction in AI-related securities lawsuits. A copy of the February 19, 2025, lawsuit can be found here.
Background
The Trade Desk is a cloud-based ad-buying platform that allows marketers to plan, manage, and measure data-driven ad campaigns. In June 2023, the company introduced and began the rollout of a generative artificial intelligence (AI) forecasting tool – Kokai — designed to enable users to more effectively deploy advertising spending. Kokai’s AI capabilities include predictive clearing, which enables traders to bid at the optimal level, scoring ad impressions on the relevance to the advertiser, budget optimization, and key performance indicator scoring.
As the company rolled out the Kokai tool, company officials allegedly made positive statements about the seamlessness of the switch over to the new Kokai platform from the firm’s older platform, Solimar. The switch to the new tool was going forward, the company officials said, “without the disruption that comes from yanking something out of the box,” and further that the company expected “full adoption of Kokai” over the course of 2024.
Company officials also allegedly made statements about the anticipated positive effect of the Kokai rollout on company revenue, saying, for example, that “our revenue growth acceleration in the first quarter speaks to the innovation and value that we are delivering to our clients with Kokai.”
However, on February 12, 2025, in the company’s announcement of its financial results for the fourth quarter and the full year 2024, the company reported revenues below analysts’ projections and the company’s own revenue guidance. In explaining the results, company officials said, among other things, that the company “is maintaining 2 systems, Solimar and Kokai. This slows us down.” Company officials also acknowledged that “Kokai rolled out slower than we anticipated,” adding that “in some cases, the slower Kokai rollout was deliberate.” According to the subsequently filed securities class action lawsuit complaint, the company’s share price decline more than 32% on this news.
The Lawsuit
On February 19, 2025, an institutional company shareholder filed a securities class action lawsuit in the Central District of California against the company; the company’s co-founder, CEO, and Chairman; and the company’s CFO. The complaint purports to be filed on behalf of investors who purchased the company’s shares between May 9, 2024, and February 12, 2025.
The complaint alleges that during the class period the defendants failed to disclose that: “(1) Trade Desk was experiencing significant, ongoing, self-inflicted execution challenges rolling out Kokai, including transitioning clients to Kokai from the Company’s older platform Solimar; (2) such execution challenges meaningfully delayed that Kokai Rollout; (3) Trade Desk’s inability to effectively execute the Kokai Rollout negatively impacted the Company’s business and operations, particularly revenue growth; and (4) as a result of the above, Defendants’ positive statements about the Company’s business, operations, and prospects were materially false and misleading and/or lacked a reasonable basis at all relevant times.”
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
At one level, this lawsuit is about the company’s alleged overstatement of claims about the potential benefits to the company from its new AI-powered tool, Kokai, and also about the success of the company’s rollout at Kokai. In that sense, this case arguably could be characterized as a classic “AI-Washing” case.
At another level, however, this lawsuit is about the company’s alleged failure to disclose the risks associated with the rollout of company’s AI-powered tool, as well as the company’s alleged failure to disclose the difficulties the company was having with the rollout of the AI tool.
The distinction between the two ways this case could be characterized is important, for the following reason. Up to this point, the AI-related lawsuits mostly (and perhaps entirely) fit within the group of AI-washing-related cases. That is, the cases involved companies’ alleged misrepresentation of the companies’ AI-related prospects or opportunities.
I have long thought that there is a different category of AI-related cases just over the horizon: cases that involve allegations of the failure to disclose AI-relate risks – that is, the problems the company could face for execution-error in connection with AI deployment or allegations of AI failure, misuse, or abuse.
So while I recognize that there is a way in which this case could fairly be characterized as another example of AI-washing-related litigation, I think the better way to view this case is as an example of a different kind of AI-related lawsuit – that is, a lawsuit based on allegations of failure to disclose AI-related risk (as opposed to overstatement of AI-related benefit or opportunity).
The reason I think it is important to recognize this aspect of this case is that I think that going forward we are likely to see more AI-related cases based on the alleged failure to disclose AI-related risk. The reason why I think this recognition is important is that we are still just in early stages of AI deployment in the economy and in the business environment. At the same time, we are also in the early stages of understanding what AI may represent as a potential source of corporate and securities litigation.
Recognizing the potential for future AI-related litigation based on companies’ alleged failure to disclose AI-related risk – along the lines of the allegations in this new lawsuit – is going to be an important part of understanding what AI may represent as far as D&O risk. I suspect strongly that in the weeks and months ahead, we will see further cases based on allegations of alleged failure to disclose AI-related risk.