DealLawyers.com Blog

Over the past few years, nothing’s been hotter than AI.  In fact, I haven’t seen anything generate as much buzz among lawyers since the height of the dotcom craze, when some members of my old law firm’s management began to dress like Steve Jobs & wander the halls talking about how we needed to “get the Internet space.” Since we were based in Cleveland, about 95% of our clients at the time were traditional rust belt businesses & the 1% or so that were dotcoms didn’t have any money, but that still didn’t stop us from having fun while the craze lasted.

Anyway, this brief Vinson & Elkins memo provides some helpful insights into the risks associated with buying or investing in tech businesses focusing on AI and some guidance on how to manage them.  This excerpt addresses the IP-related risks that buyers and investors need to scope out:

Transactions involving AI pose intellectual property (“IP”) and ownership risk in three significant areas: the AI models, the data used to train them, and the output. Prior to acquiring a business that uses an AI model, decision-makers should conduct diligence to assess how the model was created, by whom and the resources used. AI models can be developed using internal company resources, but many also use open source software code or commercial third-party software in the development of the model. The model may be created or modified by employees, contractors or other third parties.

The AI model is then trained, sometimes with large and varied datasets. AI providers may obtain the training data from internal resources, but many also obtain training data from customers, vendors, employees, websites (through crawling and scraping), books, photographs, maps, or otherwise from third parties. A model may then be fine-tuned for a specific application. Any use of training data, code or other information from others creates a risk that the others may have an IP ownership stake in the model.

Buyers should also carefully review customer agreements and licenses where third-party rights are obtained for use in training AI models. If an AI model is used to generate output, that output will also be subject to IP rights. The owners of the model and training data may have a claim to IP rights in the output, as may anyone prompting or running the AI model. Generative AI models may also generate content that infringes IP rights of third parties who had nothing to do with the AI model, its training or running the model.

The memo says that it’s essential not to assume that the AI model, training data or output is owned by the target or that it’s free to use. The law in this area is unsettled, and the memo urges buyers who want to minimize risk to confirm that the target either owns or has valid licenses covering any uses of the model, training data and output.

– John Jenkins