The opinions expressed here are those of the author, a columnist for Reuters.

By Jenna Greene

Feb 5 (Reuters) - In the sometimes-formulaic world of securities class action litigation, there’s a buzzy new reason for shareholders to sue: "AI washing."

Lawsuits alleging companies misled shareholders about their use of artificial intelligence, the technology’s ability to propel their future growth or other AI-related claims more than doubled last year, according to a report released by Cornerstone Research and the Stanford Law School’s Securities Class Action Clearinghouse last week.

AI washing — derived from the term “greenwashing” — occurs when a company, knowing that the public has a limited understanding of what the technology can do, invokes it as a marketing gimmick rather than a reflection of genuine AI-powered products or services.

The universe of cases is still small, with 15 federal court actions in 2024, up from seven in 2023, according to the report. As a person old enough to remember the dot.com bubble 25 years ago, when investors swooned over new internet-related businesses (“Pets.com because pets can’t drive”) only to be disappointed at times in the results, some have a familiar feel.

Hype, hysteria — and burn.

Investors tend to get “overexcited” over new technology, Alexander (Sasha) Aganin, a Cornerstone senior vice president and co-author of the report, told me. “When market expectations are really high and a lot of optimism is being built into the stock price, that means the stock is very vulnerable to even a slight change in outlook.”

Cue the shareholder suits.

The 2024 cases are still in the early stages of litigation. If past patterns hold true, about 50% will get tossed on motions to dismiss, Aganin said, though it could take another year or more to get there.

In the meantime, perhaps the most scathing AI-related allegations have been leveled against data engineering company Innodata, which was sued in New Jersey federal court last February.

According to the amended complaint, which alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, Hackensack, New Jersey-based Innodata led investors to believe that it had developed a “proprietary, state-of-the-art” AI platform called Goldengate.

In reality, according to plaintiffs’ lawyers from Block & Leviton and Carella Byrne Cecchi Brody & Agnello, who point to a report by short seller Wolfpack Research, Goldengate was just “rudimentary software.”

Innodata’s operations “were powered by thousands of low-wage offshore workers, not proprietary AI,” the lawyers wrote, asserting that the company “did not have a viable AI and was not effectively developing the technology.”

The company and its lawyers at Morgan, Lewis & Bockius did not respond to requests for comment. Their answer to the complaint, which covers investors who purchased Innodata stock from May 9, 2019 through Feb. 14, 2024, is due March 7.

Another notable AI-related securities class action is pending against Evolv Technologies, and includes claims that the company deceived investors about the efficacy of its flagship AI-powered security screening system, Evolv Express.

According to the complaint filed in March in Boston federal court, the Waltham, Massachusetts-based company said in its registration statement, for example, that it uses AI “to reliably detect real threats and ignore harmless items” in screening people for weapons. The system allows people to walk “side-by-side while carrying their bags, without emptying their pockets” rather than being funneled through traditional metal detectors, Evolv said.

But media reports began to question the limits of the technology, alleging that it failed to flag certain types of knives, as well as some bombs and components.

“Unbeknownst to investors, Express’ ability to detect different types of weapons depended on the circumstances,” the complaint states.

In November, the U.S. Federal Trade Commission settled a lawsuit against Evolv. The deal bars the company from “making unsupported claims about its products’ ability to detect weapons by using artificial intelligence” and gives certain K-12 school customers the option to cancel their contracts with Evolv.

An Evolv spokesperson said via email that the company “stands behind our technology and our system’s ability to leverage sensors, software, and AI.” The spokesperson also noted that the FTC acknowledged that Evolv does in fact use AI in its technology and "did not challenge the fundamental effectiveness of our technology."

Another pending AI securities case that caught my eye names Israel-based beauty and wellness company Oddity Tech, which owns the Il Makiage and Spoiled Child brands.

Filed in Manhattan federal court in July, the complaint alleges that the company, which went public in 2023, differentiates itself from other cosmetics industry players by touting its “proprietary AI technologies to target consumer needs.”

But plaintiffs' lawyers point to a report last spring by short-seller Ningi Research alleging that the company’s AI — which claims to use algorithms and machine learning models to match customers with accurate complexion and beauty products — is “nothing but a questionnaire.”

An Oddity spokesperson did not respond to a request for comment. In a public statement released after the Ningi report, the company said it “firmly stands behind its use of technology to deliver a personalized beauty experience.”

The AI securities litigation trend is continuing in 2025, though the most recent case, per the Securities Class Action Clearinghouse, has a twist.

Canadian data analytics software maker Telus, which did not respond to a request for comment, was sued last week in Manhattan federal court – but not for AI washing.

Instead, according to the complaint, the company failed to disclose that its new "AI data solutions" required the "cannibalization" of its higher-margin, non-AI offerings, causing revenue to decline.

As the year unfolds, I'll be watching to see if similar cases claiming AI is hurting legacy lines of businesses will follow.

(Reporting by Jenna Greene)