DealLawyers.com Blog

This recent Sheppard Mullin blog addresses a topic that’s becoming increasingly important in M&A transactions – how to draft reps & warranties that cover AI issues for deals that don’t involve AI-related businesses.  The blog points out that even non-AI companies frequently incorporate a lot of AI tools into their business, and that the AI-related issues that need to be addressed in the diligence and drafting process include infringement, confidentiality, IP ownership and protection, regulatory compliance, and other risks such as indemnity obligations or managing the use of AI by contractors.

That sure sounds like a lot, but the blog says the good news is that in many cases, drafting appropriate AI-related reps in these deals may simply involve some tweaks to the IP reps:

In some cases, existing IP representations and warranties can be expanded to address the definition of AI technology either as its own defined term or to be incorporated into other IP related definitions like “software” or “technology”, as needed. AI technology may include generative AI tools such as ChatGPT or tools which include AI like MSWord which has Co-Pilot integrated and the definitions should take the specific uses by the target into account. These types of tools use machine learning algorithms and large volumes of training data to develop models that can generate outputs in the form of high quality text, images and other content based upon user inputs.

If these tools are used by the target, it may also be necessary to include a concept of “Training Data” to flush out AI risks in the target business. Training Data is usually described as data, fine tuning and RAGS consent used to train, pretrain, validate, or otherwise evaluate, improve, modify or supplement a software algorithm or model. In general, the actual scope of the definitions will vary depending on the results of the target company diligence. For example, diligence may also reveal whether the target has an established policy for its employees on the use of AI in its business. Reviewing these policies can also influence these definitions as well as if the target uses contractors who create work product using AI.

The blog goes on to observe that buyers need to confirm rights to the use and ownership of the output of AI tools, and that reps covering infringement of and rights to Training Data, ownership of AI technology tools, ownership & protectability of outputs from those tools, licenses to inputs from AI technology and separate copyright & patent reps should be considered.

– John Jenkins