Artificial Intelligence ("AI") is making its way into a wide variety of products, services, and business models. You've likely seen advertisements for AI-integrated products like laptops, refrigerators, and maybe even bird feeders. AI-powered services are also becoming more prevalent. There are now advertisements for a variety of investment services that claim to use novel AI-learning models and algorithms. When faced with a novel AI product or service, it is not uncommon for a tech-savvy consumer to ask: how exactly is artificial intelligence being used? This question is not always easily answered. When claims cross the line into false or misleading representations, there is a possibility of an "AI washing" allegation arising from the claim.
AI washing refers to the practice of falsely advertising or exaggerating the use of AI within products and services as a means to attract investment and/or consumers. A non-specific example of AI washing would be advertising a product as AI-driven or AI-powered, when in reality, the product barely uses any AI functions beyond basic algorithms, or where machine learning, not AI, has been leveraged. Put another way, it would also be AI washing to exaggerate the functionality of the AI that is being used in a product, service or business model. Brought down to basics, AI washing is the over-selling or over-promising of the AI functionality of a product or service to garner interest by leveraging the current excitement surrounding AI developments and investments.
AI washing is essentially an AI version of "Greenwashing", a similar practice which exaggerates or falsely advertises the environmental sustainability or carbon footprint of a product or service. Greenwashing is a practice many Canadians have heard of before, as the practice began in the 1980's, and has been more heavily enforced in the 21st Century to address the increased interest in sustainable products and investments. Canada's Competition Act was recently amended to introduce specific green-washing provisions.1
In the United States, AI washing enforcement has arrived. In March 2024, the Securities and Exchange Commission ("SEC") released two enforcement actions against investment advisor firms for making false and misleading statements about their purported use of AI. The basis of both SEC enforcement actions was that both firms misled their clients and prospective clients by describing uses of AI in marketing materials that were untrue. More specifically, the SEC's orders took into account statements from the firms' SEC filings, press releases, and its website relating to the use of AI. The SEC noted in their press release that "such AI washing hurts investors", and directed readers to their investor alert regarding artificial intelligence and investment fraud.
Looking to Canada, future enforcement actions or litigation attacking AI washing would likely come under securities law and/or competition law.
In the securities law context, there are disclosure obligations under each provincial securities law regimes that would catch false or misleading statements. For example, the civil liability provisions in Part XXIII of the Ontario Securities Act prohibit misrepresentations, defined as untrue statements of material fact, in a prospectus, offering memorandum, and in circulars. On the enforcement side, under section 126.2(1), misleading or untrue statements are an offence where:
- "[T]he person or company making the statement knew or
ought reasonably to have known
- in a material respect and at the time and in the light of the circumstances under which it is made, is misleading or untrue or does not state a fact that is required to be stated or that is necessary to make the statement not misleading, and
- would reasonably be expected to have a significant effect on the market price or value of a security, derivative or underlying interest of a derivative".
Similar to the basis of the SEC enforcement, Ontario securities law generally accounts for misleading and false statements both to primary and secondary markets. The disclosure obligations under Ontario securities laws are very clear, and have had a history of application against green washing. Accordingly, it is reasonable to expect that they would be applied to instances of AI washing.
In fact, the Nova Scotia Securities Commission ("NSSC") has already published an article on its website in response to the recent SEC enforcement. The article addresses concerns regarding the practice of AI washing, and alerts investors to the practice, and its associated risks and harms.2 This suggests that AI washing is now an issue the NSSC is monitoring.
In the competition context, AI washing could trigger two elements of the Competition Act: reviewable conduct (civil) and offences in relation to competition (criminal). It is reviewable conduct under section 74.01(1) of the Competition Act to make a material false or misleading representation to the public, or to make a representation to the public in the form of a statement of the performance or efficiency of a product that is not based on adequate and proper testing thereof. It is also an offence under section 52(1) of the Competition Act to knowingly or recklessly make a representation to the public that is false or misleading in a material respect for the purpose of promoting the supply or use of a product or any business interest.
Under the Competition Act, sections 36 and 52 establish a private cause of action for anyone who suffers losses or damages as a result of conduct contrary to Part VI of the Act. The cause of action available here is also able to be gathered together into a class action, which is particularly relevant where losses or damages are suffered by shareholders and investors in publicly traded companies amongst other situations.
Both of these prohibitions could capture AI washing practices. Such representations may be seen as "material" because the presence and use of AI is closely related to a perceived increase in value of the product, service, or business interest. In this sense, references to AI will play a material role in the consumer decision making process. However, the materiality standard for false or misleading representations disappears for email subject headers under section 52.01 of the Competition Act, creating a strict liability issue for AI washing communicated through electronic messages.
The disclosure obligations and prohibitions against false or misleading statements under Canadian securities and competition law are the most obvious enforcement avenues to address AI washing. This is partially thanks to the similarities between AI washing and greenwashing, and the history of enforcement in that area. However, criminal law may also have an application.
Should AI washing be used as a means to defraud Canadians for money, criminal law becomes a third source of law that could be used to address the practice. Fraud is an indictable offence under section 380(1) of the Criminal Code, and captures within it the defrauding of the public or any person of any property, money or valuable security or any service by deceit, falsehood or fraudulent means. The deceit at the core of AI washing could very well expose a person or company to criminal prosecution.
With all the excitement around AI, it is tempting to want to leverage the "buzz" when promoting new products or services. AI technology can also be quite complicated, and marketing and advertising teams may not fully appreciate the scope (and limitations) of an AI integration. For Canadian companies, let the recent SEC enforcements serve as a warning; enforcement against AI washing could well be on the horizon in Canada. Such enforcement could come under securities law, competition law, or in extreme cases, criminal law. Accordingly, the best practice is to exercise caution and to take care to confirm that any AI-related claims are true, accurate, and can be substantiated.
Footnotes
1. For more information see: Greener on the Other Side: Environmental Amendments to the Competition Act
2. We note that the securities law disclosure obligations in Nova Scotia are nearly identical to those in Ontario when it comes to misleading or untrue statements (see s.132B in the Securities Act, RSNS 1989 for Nova Scotia).
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