By: Han Kwak | August 24, 2026
Artificial intelligence has quickly become part of everyday business operations. Business owners are using AI to draft correspondence, prepare marketing materials, summarize contracts, respond to customer inquiries, and assist with administrative tasks. Used properly, AI can increase efficiency and reduce operating costs. However, what many business owners do not realize is that using AI does not change their legal obligations.
California regulators have made this point clear. In January 2025, Attorney General Rob Bonta issued a legal advisory explaining that businesses remain subject to California's existing consumer protection, privacy, civil rights, and unfair competition laws when they use artificial intelligence. In other words, AI is simply another business tool. If its use results in unlawful conduct, the business, and not the software, is generally responsible.
One of the most significant risks involves confidential information. Businesses routinely possess customer data, financial records, proprietary information, trade secrets, and communications protected by attorney-client privilege. Before uploading any of this information to an AI platform, business owners should understand how that platform stores, retains, and processes user data. An employee who copies confidential business information into a public AI platform may unintentionally expose information that the business is legally obligated to protect. In some circumstances, the disclosure of trade secrets may jeopardize protections available under California's Uniform Trade Secrets Act (Civ. Code, § 3426 et seq.).
Businesses that collect personal information should also remember that California's privacy laws apply regardless of whether AI is involved. The California Consumer Privacy Act (Civ. Code, § 1798.100 et seq.) and the California Privacy Rights Act impose obligations concerning the collection, use, disclosure, and protection of personal information. A business does not avoid these obligations simply because customer information is processed through an AI platform. Depending upon the circumstances, violations may result in investigations by the California Attorney General or the California Privacy Protection Agency. Certain data breaches may also give rise to private lawsuits seeking statutory damages under Civil Code section 1798.150.
Marketing presents another area of potential liability. AI can produce polished advertising copy in seconds, but it has no independent ability to verify whether its statements are accurate. If an AI-generated advertisement exaggerates a product's capabilities, misstates pricing, or makes unsupported claims, the business remains responsible for those representations. California's Unfair Competition Law (Bus. & Prof. Code, § 17200 et seq.) prohibits unlawful, unfair, and fraudulent business practices, while the False Advertising Law (Bus. & Prof. Code, § 17500 et seq.) prohibits advertising that is false or misleading. Businesses should therefore treat AI-generated marketing materials no differently than materials prepared by a third-party advertising agency and should carefully review all material before publication.
Employers should exercise similar caution when using AI in employment decisions. Many software platforms are used to screen applicants, evaluate resumes, draft performance evaluations, or assist in disciplinary decisions. While these tools may streamline administrative tasks, they do not relieve employers of their obligations under California's Fair Employment and Housing Act (Gov. Code, § 12940 et seq.) or applicable federal anti-discrimination laws. If an AI-assisted hiring or employment decision results in unlawful discrimination, liability rests with the employer, not the developer of the software. Human oversight and independent judgment remain essential.
Businesses should also consider the intellectual property implications of AI-generated content. Logos, advertising materials, website content, and promotional images created by AI may inadvertently resemble copyrighted works or protected trademarks. Likewise, instructing an AI platform to mimic the style of a well-known artist, author, or company may increase the risk of infringement claims. Although the law governing AI-generated works continues to evolve, existing copyright and trademark laws remain fully applicable to commercial use of AI-generated content.
Another concern is the reliability of AI-generated information. AI systems are capable of producing responses that appear authoritative but are factually or legally incorrect. Courts across the country have sanctioned attorneys who submitted briefs containing fictitious cases generated by AI. The same principle applies to businesses that rely upon AI for legal, tax, regulatory, or technical advice. AI may assist with research and drafting, but important business decisions should be verified through reliable sources and, when appropriate, qualified professionals.
The most effective way to reduce legal risk is to use artificial intelligence systems responsibly. Businesses should establish internal policies governing the use of AI, prohibit the disclosure of confidential or privileged information through unapproved platforms, require human review of AI-generated work products, and ensure that employees understand the limitations of these tools. AI can improve productivity, but it cannot replace sound business judgment or careful legal compliance.
Business owners seeking guidance on how AI can impact their legal liabilities should contact the trusted Chugh, LLP attorneys. We can help develop internal policies that implement reasonable safeguards to take advantage of AI’s benefits while avoiding the legal pitfalls that accompany its misuse.
