The FTC And G7 Competition Authorities Take Aim At AI Market Power And Deception

G7 Communiqué: Focus on Digital Competition and AI

On October 4, 2024, the U.S. Federal Trade Commission (FTC) and other competition authorities from the G7 countries issued a communiqué addressing regulatory challenges posed by AI and digital markets. Coming just one week after the FTC's announcement of "Operation AI Comply," this communiqué underscores why companies using AI products need to prepare now for heightened regulatory scrutiny.

Key Concerns Raised by the G7

• Market Power Concentration: The communiqué described how high research and development costs, reliance on proprietary datasets, and substantial economies of scale are contributing to the consolidation of market power in the hands of a few dominant firms. The concentration of power enables established players to exploit bottlenecks or engage in exclusionary practices.
• Barriers to Entry: G7 authorities identified significant barriers to entry in the AI industry, such as the need for extensive data collection and high computational capabilities.
  • These barriers were identified as presenting an inherent risk of market power being concentrated among a few key players
  • This concentration potentially lead to anti-competitive behaviors like gatekeeping and self-preferencing.
• Recommendations for Competition Authorities:
  • Open Standards and Interoperability: Promote open standards to counter the entrenchment of dominant firms.
  • Support for New Market Entrants: The communiqué urged competition authorities to pursue policies that encourage the participation of new market entrants and support innovative business models, emphasizing proactive regulatory measures.

Regulatory Approaches and Challenges

• Complexity of Regulating AI: One significant challenge to regulation of AI is the evolving nature and complex supply chain of AI.
  • The communiqué called for enhanced cooperation among competition authorities, both internationally and domestically, to establish guidelines that ensure a level playing field.
  • Public-Private Collaboration: The communiqué stated regulators need to craft policies that safeguard market competition, while industry players should actively contribute to discussions to ensure innovation is not unduly hindered.

The FTC's Operation AI Comply Enforcement Actions

The G7 recommendations came on the heels of the Federal Trade Commission's recent launch of "Operation AI Comply," an enforcement sweep aimed at curtailing deceptive practices involving AI. The initiative, formally announced on September 25, 2024, targeted five companies accused of misleading claims about their AI technologies.

• AI Washing Allegations: The FTC's actions include allegations of "AI washing"—where companies falsely market ordinary services as AI-enhanced, misleading consumers about the product's capabilities.
  • DoNotPay Case: DoNotPay marketed itself as the "world's first robot lawyer" and falsely claimed its tools could perform functions like generating legally valid documents. The company settled the FTC's claims for $193,000 without admitting wrongdoing.
  • Online Storefront Cases: The FTC brought cases against Ascend Ecom, Ecommerce Empire Builders, and FBA Machine, alleging that they falsely stated to consumers that they could earn money quickly by opening online storefronts.
• AI-Powered Deception Allegations:
  • Rytr Case: Rytr, offering an AI writing assistant, faced FTC scrutiny for generating content for consumer reviews. Rytr's service allegedly generated detailed reviews that contained specific, often material details that had no relation to the user's input. Although the FTC did not allege actual consumer deception, it pursued Rytr under a "means and instrumentalities" theory, leading to a proposed order barring Rytr from offering AI services for consumer reviews or testimonials.
• Dissent Within the FTC
  • Commissioner Concerns: The FTC's decision regarding Rytr sparked dissent from Commissioners Melissa Holyoak and Andrew Ferguson.
  • Overreach and Innovation Concerns: Holyoak and Ferguson characterized the enforcement as overreach that could stifle innovation in the AI industry.
  • Lack of Consumer Harm: Holyoak argued that the decision disregarded the absence of consumer harm and pushed an expansive, untested legal theory.
  • Potential Chilling Effect: Ferguson warned that by extending liability to any technology that could theoretically be used for deception, the FTC risked imposing undue burdens on legitimate AI applications and chilling beneficial innovation.

Implications for Businesses

The combined message from the G7 communiqué and the FTC's latest enforcement actions is clear: companies leveraging AI must be transparent, avoid deceptive practices, and be prepared for heightened scrutiny regarding their competitive practices.

• Transparency and Accuracy:
  • Companies should ensure that statements about their AI capabilities are accurate and supported by evidence.
  • Misleading claims—even those based on vague or aspirational descriptions—could expose businesses to enforcement actions.
• Market Competition and Data Practices:
  • Firms must consider how their practices impact market competition.
  • Transparency in data practices, adherence to interoperability standards, and active participation in industry efforts to foster fair competition are becoming not just best practices but regulatory expectations.
• Regulatory Warning:
  • "There is no AI exemption from the laws on the books," said FTC Chair Lina Khan. She emphasized that AI, despite its novelty, will be held to the same standards as other technologies.
  • Companies should heed this warning and take proactive steps to mitigate risks—not only by ensuring compliance but also by engaging with policymakers and industry peers to help shape a fair and competitive AI ecosystem.

Takeaways for Companies at Risk of Enforcement

• AI Claims Must Be Substantiated: Avoid vague or exaggerated claims about AI capabilities.
• Prepare for Heightened Regulatory Scrutiny: Expect more rigorous examination of AI products, particularly where consumer deception or anti-competitive practices may be involved.
• Collaborate Proactively: Engage with regulators and participate in industry-wide discussions to help shape a responsible and competitive AI landscape.
• Monitor Internal Compliance: Regularly evaluate marketing materials, data use practices, and AI implementation to ensure compliance with existing consumer protection and competition laws.