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The Legal Impact of AI on Entrepreneurs, Business Owners, and Franchisors

Artificial Intelligence (AI) is a powerful combination of computing power, linguistics, science, and software that replicates and replaces human learning and...

AI and Franchising

Artificial intelligence (AI) is a powerful combination of computing power, linguistics, science, and software that replicates and replaces human learning and intelligence. As AI systems like OpenAI’s ChatGPT go mainstream, it’s undeniable that AI will transform entrepreneurship, franchising, and business including, how businesses are created, how businesses operate, competitive advantages, training, automation, and customer engagement.

We know the the initial value of AI will start with increased efficiencies and improved profit margins but, how will it end? What will be the impact of AI on established businesses and franchise brands? What level of control will AI service providers possess over business owners? Who will own the content and data produced by AI? What are the legal implications of creating content and other business assets using AI?

So many questions, and right now AI and the legal implications of AI are evolving. Four important legal and business issues that entrepreneurs, franchisors, and business owners should be evaluating when using AI and evaluating the impact of AI in the marketplace, include:

  1. Terms of Use and Ownership of AI Content
  2. AI Driven Marketplace Dilution of Intellectual Property Assets
  3. Liability Obligations and Insurance
  4. Regulation

1. Terms of Use and Ownership of AI Content

Like the license agreements and usage terms that we all agree to when using computer software and signing up for social media accounts, the terms of use that you agree to when using an AI generated service will govern how you use the AI service and critical legal issues. When you play in an AI sandbox, you’re playing by their rules.

Using Chat GPT’s terms of use (updated as of March 14, 2023) as a baseline, important considerations include:

  • What are the Terms of Use – What are the rules, restrictions, and obligations that you are agreeing to.
  • Ownership of Content Input and Output – Who owns the content that you input into the AI service (i.e., your query and data that you enter into the system) and who owns the output, i.e., content generated by the AI service in response to your input. In the case of Chat GPT terms of use state that as between you and Chat GPT, Chat GPT agrees that you own your input and that Chat GPT does not claim ownership to the output. But is that the end of the story? Not really, issues yet to be more thoroughly evaluated include how Chat GPT may continue to use your input for learning purposes and Chat GPT’s disclaimer that content may be duplicated and that its possibly your competitors generate very similar content.
  • Confidentiality – whether or not your data become public domain?
  • Indemnification – Who’s responsible for the use, misuse, and errors in the AI generated content. Chat GPT’s terms of service state that you, as a user, are agreeing to indemnify ChatGPT from liabilities created by your use of their AI generated content.
  • Legal Terms – Important legal terms that cover a broad spectrum of legal obligations that include how disputes are resolved.

2. Intellectual Property Ownership and IP Marketplace Dilution

Every business is built around intellectual property assets. While these intellectual property assets include easily identifiable and protectable assets that include trademarks, trade dress, copyrighted content, and patents, they also include information, content, and data that is less protectable and more prone to AI marketplace dilution. AI dilution occurs when a competitor uses AI to create, without infringing on any currently recognized intellectual property right, data, content, and marketing copy that nullifies the earned advantages of a competitor that invested human capital and time in producing original content and generating original data.

Service based businesses that do not sell any physically discernable products and that are not operated from a physical retail location may be more susceptible to AI driven IP marketplace dilution. This is because service based businesses are more reliant on data, content, and systems that can be more easily replicated by AI. Consider the long-established service provider that has used its extensive history of operations, time and dollars to maintain detailed pricing data, customer service training and care systems, training systems, and unique content and copy on its website, digital marketing, and customer communications. Now consider a new competitor that uses AI to generate and create close alternatives to all of those intellectual property assets and systems. Although the new competitor will not possess the depth of the lived and earned experiences of the service business originator, customers – at least when selecting a service provider – may not know the difference.

Business owners must consider that when you use AI to create intellectual property, eventually, the data and information that you share will, in one form or another, improve the learning and knowledge base of AI systems that may be accessed by your competitors. Eventually, AI will undermine the unique differentiators of competing businesses and turn unique brands into generic service providers. To a different degree, this threat also exists for retail based businesses.

Other relevant questions and concerns that you should be considering relate to replication of AI generated content. In many instances the content output that you generate using AI will be identical or similar to the output generated for your competitors. Distinguishing content will be difficult and that data and content that you generate using AI will not, in our opinion, be protectable or copyrightable. You’ll be building your business on open source content and data that will be governed by terms of use imposed on you by the AI service provider.

3. Liability Obligations and Insurance

AI will automate many businesses processes and systems ranging from customer service to human resources to legal counsel and, even, healthcare. So what happens when an AI automated system gives the wrong information or creates a commercially recognized liability? The answer is that you, as the business owner using the AI, will be responsible and your terms of service with the AI service provider will probably disclaim liability. When using AI consider potential liability issues and as this industry progresses, consider liability insurance policies, coverage, and endorsements that will, eventually, be created around AI.

4. Regulation

Government regulation creates many issues and roadblocks for business efficiency and innovation. However, considering the power of AI, government regulation in the form of safeguards and regulations as to what an AI service provider may and may not mandate is, in our opinion, necessary. However, the problem with well-intentioned government regulation (assuming that politicians acted competently and for the interests of their constituents) is that AI is moving much quicker than any competent government agency. Regulation will come after the problem arises and, predictably may be too little and too late.

As a business owner you need to know that when you use and rely on AI, AI service providers will have significant control or influence over your business and that the rules that will govern your AI relationship will be dictated in the terms of service imposed on you.

For the record, this article was prepared using human intelligence and the assistance of AI.

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