FTC Chairwoman Lina Khan testifies during the House Appropriations Subcommittee on Financial Services and General Government hearing titled “Fiscal Year 2025 Request for the Federal Trade Commission,” in Rayburn Building on Wednesday, May 15, 2024.
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The Federal Trade Commission on Wednesday announced a crackdown on what the regulator called “deceptive AI claims and schemes” by three business opportunity ventures and two companies, including the legal services firm DoNotPay.
The FTC said the five enforcement cases it has filed show how the companies and ventures “have seized on the hype surrounding” artificial intelligence “and are using it to lure consumers into bogus schemes.”
“Using AI tools to trick, mislead, or defraud people is illegal,” FTC Chair Lina Khan said in a statement.
“The FTC’s enforcement actions make clear that there is no AI exemption from the laws on the book,” Khan said. “By cracking down on unfair or deceptive practices in these markets, FTC is ensuring that honest businesses and innovators can get a fair shot and consumers are being protected.”
In a complaint, the FTC said that DoNotPay, which touted its AI service as “the world’s first robot lawyer,” failed to live up to that claim.
While DoNotPay said its service would allow customers to sue someone for assault without an attorney, and generate valid legal documents in “no time,” the company did not test whether its AI chatbot’s “output was equal to the level of a human lawyer,” the FTC said in a statement.
The FTC also said that DoNotPay’s service that purportedly checked a small business website for federal and state violations, using only a customer’s email address, was not effective in detecting those potentially costly violations.
DoNotPay, which did not admit wrongdoing, agreed to settle the FTC’s charges by paying $193,000 and giving consumers who subscribed to its service from 2021 through 2023 a notice that warns them about the limitations of the service’s law-related features.
“The proposed order also will prohibit the company from making claims about its ability to substitute for any professional service without evidence to back it up,” the FTC said.
In one of the four other cases announced Wednesday, the FTC is suing a business opportunity scheme that has operated under names including Ascend Ecom, Ascend CapVentures, and ACV Nexus, which has been operated by two men named William Basta and Kenneth Leung.
The FTC, in a lawsuit filed in Los Angeles federal court, alleges that the Ascend scheme has “defrauded consumers of at least $25 million” by making “deceptive earnings claims to persuade consumers to shell out tens of thousands of dollars each to invest in what Defendants claim is a surefire business opportunity in e-commerce, or online stores.”
“Since about 2023, Defendants’ deceptive sales pitch has said their business model is powered by artificial intelligence (“AI”),” the suit says. “Defendants claim consumers will quickly earn thousands of dollars in passive income, which will be generated from sales in online stores on e- commerce platforms such as Amazon.com and Walmart.com.”
After consumers invest in the scheme “the promised gains never materialize, and consumers are left with depleted bank accounts and hefty credit card bills,” the suit says.
The FTC said that as a result of the lawsuit, a judge has issued an order temporarily halting the scheme and put it under the control of a receiver.
In a second lawsuit, filed under seal in June in New Jersey federal court, the FTC targeted an opportunity scheme that operated under the names Passive Scaling and FBA Machine, which allegedly cost customers around $16 million or more based on deceptive claims of guaranteed income through online storefronts that purportedly used AI-powered software.
In a third lawsuit, filed in Pennsylvania federal court, the FTC accuses Ecommerce Empire Builders of “falsely claiming to help consumers build an ‘AI-powered Ecommerce Empire’ by participating in its training programs that can cost almost $2,000 or by buying a ‘done for you’ online storefront for tens of thousands of dollars,” the agency said.
As with Ascend, a judge has put the scheme under the control of a receiver, according to the FTC.
“The scheme … claims consumers can potentially make millions of dollars, but the FTC’s complaint alleges that those profits fail to materialize,” according to the FTC.
As with the other two lawsuits, a judge has put the scheme under the control of a receiver, according to the FTC.
In a regulatory complaint, the FTC targeted the company Rytr, which offers for sale an AI writing assistant, which among other things generated testimonials and customer reviews.
The FTC said that the service “generated detailed reviews that contained specific, often material
details that had no relation to the user’s input, and these reviews almost certainly would be false for the users who copied them and published them online.”
“In many cases, subscribers’ AI-generated reviews featured information that would deceive potential consumers who were using the reviews to make purchasing decisions,” the agency said.
Rytr has agreed to settle the case through a consent order, which would bar the company from offering or selling services generating consumer reviews or testimonials.
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