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Summary:  In the evolving realm of generative artificial intelligence (GenAI), companies and business people spanning many business sectors are increasingly likely to provide and/or utilize computer-generated content to advance their business activities and goals. This increasing use of GenAI in the business world creates potential new risks that vary depending on the party’s contractual perspective. For example, service providers – spanning from content creation to all forms of consulting to customer service and sales – seek broad exonerations and expansive IP rights to limit liability and increase productivity for the content output they provide to customers, while customers often desire a more limited contractual scope, stringent data protection and robust warranties for liability protection and data security for the data input they provide to get the output. With GenAI usable in a wide range of industries and jobs now, it is important to underscore the importance of consulting experienced legal counsel to negotiate business agreements to maximize a party’s rights and minimize their duties arising from the different types of uses of GenAI.  Use of AI-generated content is probably already happening in your business whether you know it or not – think not only the content that may be your company’s work product but also all content that supports business operations.  Legal expertise is crucial to draft tailored contracts that seek to maximize legal rights, manage risk, ensure legal compliance and leverage the promise of GenAI while appreciating its challenges in the changing legal landscape that relates to GenAI.

Much like a puzzle can reveal unexpected images when pieces are placed together, the use of GenAI in business — all forms of business activity — can bring unforeseen twists to standard and routine contract terms, disrupting conventional frameworks for contract drafting.  Further, contract negotiations between content providers and customers – which includes most businesses – are marked by distinct, often contrasting priorities. Examining contractual perspectives across key contract terms affected by the use of GenAI sheds light on the nuances of various contractual considerations that have not been revisited for decades.

Contrary to initial instinct, GenAI technology is not confined to any single niche — for example, entering into a relationship with the company OpenAI in order to use its GenAI drafting technology.  Content providers and customers/utilizers of GenAI span a diverse range of industries and business functions, each with unique applications and requirements. Different types of businesses and functions share the common trait of providing content to their own consumers, spanning many business types and teams including sales, marketing, management, PR, technical writing, consulting, translation, voiceover, sales, customer service, and more.  The list of potential applications of GenAI in the business world is literally as broad as the business world itself.

With such a wide array of businesses and positions turning to GenAI to achieve their goals, the drafting of contracts regarding business activities that may involve the use of GenAI makes contract negotiation trickier than before GenAI existed.  Each party to a contract brings its own set of expectations, requirements, and concerns to the table, influencing how GenAI-related contracts are negotiated and drafted.  As a result, terms and conditions in contracts previously considered obvious and standard need to be reevaluated in light of the new issues raised by the use of GenAI in the business world.  Here are some examples:

Scope of Contract

Provider’s Viewpoint:
Content providers favor a broader application of contractual terms in order to harness the full potential of GenAI, allowing for adaptability to product offerings as the technology evolves. This flexibility is seen as crucial for staying competitive and responsive to new technology and market trends. Providers may be concerned that overly limited contracts might limit their ability to innovate and respond to emerging opportunities and thus may wish to reserve contractual “space” to operate more freely in the future.

Customer’s Perspective:
Customers, seeking tailored solutions, tend to desire a more specific and limited contract scope. Their primary concern is ensuring that the use of GenAI meets their needs without overstepping boundaries such as the security and use of data. They are wary of broad scopes that could lead to their data being used in unintended ways, potentially leading to compromising sensitive information and risking liability.

IP Ownership and Licensing

Provider’s Viewpoint:
Providers emphasize retaining expansive IP rights over AI models and outputs to protect their R&D investments and sustain market position. They view these rights as integral to maximizing the potential of their technologies. This stance often stems from the significant resources invested in developing AI technologies, on which they seek to capitalize through broad licenses and related contractual provisions.

Customer’s Perspective:
Customers prioritize protecting their own IP, especially regarding proprietary data used in AI learning. They are concerned about losing control over their valuable assets and should be keen to ensure that their contributions are only used within agreed contexts. This concern is often rooted in the need to safeguard competitive edge and prevent unauthorized use of their data that could benefit competitors.

Representations and Warranties

Provider’s Viewpoint:
Content providers typically offer limited representations and warranties, balancing promises about AI capability with realistic expectations. They are cautious of overcommitting in areas like performance or accuracy, given the experimental nature of GenAI. Providers are mindful of the unpredictable outcomes that can arise from AI’s autonomous learning capabilities and seek to mitigate potential legal repercussions.

Customer’s Perspective:
Customers demand strong, reliable and all-encompassing representations and warranties to protect against the uncertainties of GenAI. They seek assurances that the content and increased functionality will be reliable, compliant with laws, and suitable to their purpose. Customers often view these terms as critical safety nets that protect them from the risks associated with integrating AI into their businesses.

Data Protection and Privacy

Provider’s Viewpoint:
Providers seek balanced data protection clauses that comply with regulations while allowing for the internal use of data to improve AI models and functionality. They often highlight the need for data to continually enhance AI technology, pushing for terms that don’t overly restrict their internal operations.

Customer’s Perspective:
Customers insist on stringent data protection, driven by concerns over data inaccurate GenAI drafting, and potential legal liabilities from data misuse and exposure. They demand clear, transparent terms on data usage, focusing on compliance with laws like GDPR and CCPA. This emphasis reflects a growing concern over data privacy and the need to maintain public trust, especially when dealing with sensitive or personal data.

Liability and Indemnification

Provider’s Viewpoint:
Providers seek to limit their liability, particularly in emerging areas of AI application where usage and outcomes can be unpredictable. They aim to protect themselves from potential lawsuits and losses that could arise from the novel and sometimes untested nature and unanticipated use of AI applications.

Customer’s Perspective:
Customers, aiming to safeguard their interests, negotiate for broader liability protections. They are especially concerned about AI malfunctions or data misuse that could lead to business interruptions or legal problems. Comprehensive indemnification clauses are seen as essential to cover these various risks, providing a layer of financial security.  Providers are, of course, loathe to offer such protections.

Termination Rights

Provider’s Viewpoint:
Providers often prefer longer-term contracts with minimal termination rights to ensure a stable and predictable business environment. They argue that the continuity of long-term relationships is vital for providing effective AI-based services and recouping their substantial investments in AI development.

Customer’s Perspective:
Customers advocate for flexible termination rights to maintain agility in a fast-paced AI landscape where alternative AI solutions become increasingly available. They view the ability to adapt to new GenAI options or shift strategies as critical to their business success. Flexible termination rights are often seen as essential to avoid being locked into a service that may become outdated or less effective over time.

Dispute Resolution

Provider’s Viewpoint:
In disputes between Providers and Customers, Providers seek to limit public exposure and control the venue and sometimes the manner in which disputes are resolved, as Providers are the more likely target in a dispute if only because there are more Customers for every Provider.  Thus, Providers often opt for mandatory mediation and arbitration provisions and seek jury trial waivers in any eventuality.

Customer’s Perspective:

Customers often stand in the less powerful position and are often presented with “take it or leave it” terms. So they are often stuck in the less advantageous contractual position regardless of the issue because the Provider secured better terms at the outset.  Customers, therefore, tend to want to parade disputes in a public forum – a court, and to desire jury trials, to introduce elements of uncertainty and jury sympathy as “the little guy,” which can sometimes overcome even the tightest contract provisions.

Conclusion

The advent of GenAI introduces new layers to the conceptual framework and drafting of contract terms, adding novelty and nuance to traditional terms and necessitating a sophisticated and experienced approach to assist with contract negotiation and drafting. Every business and businessperson must navigate these waters with precision, striving for contracts that are tailored to their unique interests and the current legal landscape and also adaptable to current and future trends in GenAI applications and technology. Just like a puzzle growing in complexity, contracts in the era of GenAI require careful assembly, ensuring that each piece aligns with your business and legal interests when GenAI is being used in your business.  To solve these challenges, it is best to consult with counsel who has the proper perspective, experience and knowledge to assist you in this endeavor.

Disclosure: This blog post was written with the assistance of GenAI.