{"id":1638,"date":"2024-07-08T18:41:51","date_gmt":"2024-07-08T22:41:51","guid":{"rendered":"https:\/\/blogs.duanemorris.com\/classactiondefense\/?p=1638"},"modified":"2024-07-08T18:41:51","modified_gmt":"2024-07-08T22:41:51","slug":"california-federal-court-refuses-to-dismiss-wiretapping-class-action-involving-companys-use-of-third-party-ai-software","status":"publish","type":"post","link":"https:\/\/blogs.duanemorris.com\/classactiondefense\/2024\/07\/08\/california-federal-court-refuses-to-dismiss-wiretapping-class-action-involving-companys-use-of-third-party-ai-software\/","title":{"rendered":"California Federal Court Refuses To Dismiss Wiretapping Class Action Involving Company\u2019s Use Of Third-Party AI Software"},"content":{"rendered":"

By Gerald L. Maatman, Jr., Justin R. Donoho, and Nathan Norimoto<\/strong><\/p>\n

\"\"<\/a>Duane Morris Takeaways:<\/em><\/strong> \u00a0On July 5, 2024, in Jones, et al. v. Peloton Interactive, Inc., No. 23-CV-1082, 2024 WL 3315989 (S.D. Cal. July 5, 2024), Judge M. James Lorenz of the U.S. District Court for the Southern District of California denied<\/a>\u00a0a motion to dismiss a class action complaint alleging that a company\u2019s use of a third party AI-powered chat feature embedded in the company\u2019s website aided and abetted an interception in violation of the California Invasion of Privacy Act (CIPA).\u00a0 Judge Lorenz was unpersuaded by the company\u2019s arguments that the third-party functioned as an extension of the company rather than as a third-party eavesdropper. \u00a0Instead, the Court found that the complaint had sufficient facts to plausibly allege that the third party used the chats to improve its own AI algorithm and thus was more akin to a third-party eavesdropper for which the company could be held liable for aiding and abetting wiretapping under the CIPA.<\/em><\/p>\n

Background<\/strong><\/p>\n

This case is one of the hundreds of class actions that plaintiffs have filed nationwide alleging that third-party AI-powered software embedded in defendants\u2019 websites or other processes and technologies captured plaintiffs\u2019 information and sent it to the third party.\u00a0 A common claim raised in these cases is a claim under federal or state wiretap acts and seeking hundreds of millions or billions of dollars in statutory damages.\u00a0 No wiretap claim can succeed, however, where the plaintiff has consented to the embedded technology\u2019s receipt of their communications.\u00a0 See, e.g., Smith v. Facebook, Inc.<\/em>, 262 F. Supp. 3d 943, 955 (N.D. Cal. 2017) (dismissing CIPA claim involving embedded Meta Pixel technology because plaintiffs consented to alleged interceptions by Meta via their Facebook user agreements).<\/p>\n

In Jones<\/em>, Plaintiffs brought suit against an exercise equipment and media company.\u00a0 According to Plaintiffs, the defendant company used third-party software embedded in its website\u2019s chat feature.\u00a0 Id. <\/em>at *1.\u00a0 Plaintiffs further alleged that the software routed the communications directly to the third party without Plaintiffs\u2019 consent, thereby allowing the third party to use the content of the communications to \u201cto improve the technological function and capabilities of its proprietary, patented artificial intelligence software.\u201d\u00a0 Id. <\/em>at **1, 4.<\/p>\n

Based on these allegations, Plaintiffs alleged a claim for aiding and abetting an unlawful interception and use of the intercepted information under California\u2019s wiretapping statute, CIPA \u00a7 631.\u00a0 Id. <\/em>at *2.\u00a0 Although Plaintiffs did not allege any actual damages, see <\/em>ECF No. 1, the statutory damages they sought totaled at least $1 billion. \u00a0See id. <\/em>\u00b6 33 (alleging hundreds of thousands of class members); Cal. Penal Code. \u00a7 637.2 (setting forth statutory damages of $5,000 per violation). \u00a0The company moved to dismiss under Rule 12(b)(6), arguing that the \u201cparty exception\u201d to CIPA applied because the third-party software \u201cfunctions as an extension of [the company] rather than as a third-party eavesdropper.\u201d\u00a0 2024 WL 3315989, at *2.<\/em><\/p>\n

The Court\u2019s Opinion<\/strong><\/p>\n

The Court denied the company\u2019s motion and allowed Plaintiffs\u2019 CIPA claim to proceed to discovery.<\/p>\n

The CIPA is a one-party consent statute, meaning that there is no liability under the statute for any party to the communication. \u00a0Id. <\/em>at *2.\u00a0 To answer the question for purposes of CIPA\u2019s party exception of whether the embedded chat software provider was more akin to a party or a third-party eavesdropper, the Court found that courts look to the \u201ctechnical context of the case.\u201d\u00a0 Id. <\/em>at *3.\u00a0 As the Court explained, a software provider can be held liable as a third party under CIPA if that entity listens in on a consensual conversation where the entity \u201cuses the collected data for its own commercial purposes.\u201d\u00a0 Id.\u00a0 <\/em>By contrast, the Court further explained, if the software provider merely collects, refines, and relays the information obtained on the company website back to the company \u201cin aid of [defendant\u2019s] business\u201d then it functions as a tool and not as a third party.\u00a0 Id.<\/em><\/p>\n

Guided by this framework, the Court found sufficient allegations that the software provider used the chats collected on the company\u2019s website for its own purposes of improving its AI-driven algorithm.\u00a0 Id. <\/em>at *4.\u00a0 Therefore, according to the Court, the complaint sufficiently alleged that the software provider was \u201cmore than a mere \u2018extension\u2019\u201d of the company, such that CIPA\u2019s party exemption did not apply and Plaintiffs sufficiently stated a claim for the company\u2019s aiding and abetting of the software provider\u2019s wiretap violation.\u00a0 Id.<\/em><\/p>\n

Implications For Companies<\/strong><\/p>\n

The Court\u2019s opinion serves as a cautionary tale for companies using third-party AI-powered processes and technologies that collect customer communications and information.\u00a0 As the ruling shows, litigation risk associated with companies\u2019 use of third-party AI-powered algorithms is not limited to complaints alleging damaging outcomes such as discriminatory impacts, such as plaintiffs alleged in Louis v. Saferent Sols.<\/em>, LLC, 685 F. Supp. 3d 19, 41 (D. Mass. 2023) (denying motion to dismiss claim under Fair Housing Act against landlord in conjunction with landlord\u2019s use of algorithm used to calculate risk of leasing a property to a particular tenant).\u00a0 In addition, companies face the risk of high-stakes claims for statutory damages under wiretap statutes associated with companies\u2019 use of third-party AI-powered algorithms embedded in their websites, even if the third party\u2019s only use of the algorithm is to improve the algorithm and even if no actual damages are alleged.<\/p>\n

As AI-related technologies continue their growth spurt, and litigation in this area spurts accordingly, organizations should consider in light of Jones<\/em> whether to modify their website terms of use, data privacy policies, and all other notices to the organizations\u2019 website visitors and customers to describe the organization\u2019s use of AI in additional detail.\u00a0 Doing so could deter or help defend a future AI class action lawsuit similar to the many that are being filed today, alleging omission of such additional details, raising claims brought under various states\u2019 wiretap acts and consumer fraud acts, and seeking multimillion-dollar and billion-dollar statutory damages.<\/p>\n","protected":false},"excerpt":{"rendered":"

By Gerald L. Maatman, Jr., Justin R. Donoho, and Nathan Norimoto Duane Morris Takeaways: \u00a0On July 5, 2024, in Jones, et al. v. Peloton Interactive, Inc., No. 23-CV-1082, 2024 WL 3315989 (S.D. Cal. July 5, 2024), Judge M. James Lorenz of the U.S. District Court for the Southern District of California denied\u00a0a motion to dismiss … <\/p>\n

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