Commercial Awareness Update – W/C 11th November 2024

AI WASHING

As the AI revolution continues to unfold, certain compani.es have been trying to unfairly capitalise on this trend by making misleading claims about the extent to which AI has been incorporated into their products and services.

This practice is known as ‘AI washing’.

Background

AI washing has been defined as a tactic companies employ to exaggerate the amount of AI technology used in their products and services, aiming to make a company’s offerings seem more advanced than they are.

A famous example of purported AI washing involves the online retailer Amazon.

Amazon has been running its Amazon Fresh grocery stores with ‘just walk out’ technology for years. This technology allows shoppers to take whatever items they need and walk out of the store without needing to check out their items at a till.

Amazon claims that this process is made possible by artificial intelligence, which tracks the items that shoppers take from the shelves and then adds these to shoppers’ ‘virtual carts’.

However, reports emerged in April 2024 alleging that Amazon needs around 1,000 workers in India to manually review nearly three-quarters of said transactions rather than solely relying on AI. Amazon was quick to label these reports as untrue.

Technology start-ups most commonly conduct AI washing. A report from venture capital firm MMC Ventures, published in 2019, revealed that 40% of new European tech firms calling themselves ‘AI start-ups’ had used virtually no AI.

One primary reason tech start-ups position themselves as ‘AI start-ups’ is to secure capital from investors. Studies show that AI start-ups attract 15-50% more capital in their funding rounds than other tech start-ups.

As technologist Bernard Marr noted, AI washing is deeply problematic because it creates difficulties for investors trying to move capital into the most innovative projects.

AI washing also stifles innovation, as real AI breakthroughs could go unnoticed amid the frenzy of overblown AI claims.

The issue with AI washing

The problem of AI washing is exacerbated because there still isn’t a universally accepted definition of AI. The EU’s new AI Act, adopted in July 2024, provide a definition via Article 3(1).

It construes an AI system as a machine-based system designed to operate with varying levels of autonomy that may exhibit adaptiveness after deployment, and that infers, from the input it receives, how to generate outputs that can influence physical or virtual environments.

However, no other country outside the EU has yet passed legislation which defines AI within its jurisdiction. Therefore, regulators outside the EU may struggle to prosecute cases of AI washing without a legal definition of AI that they can rely on.

Legal framework

In the UK, it is illegal to make misleading advertising communications. Under the Unfair Trading Regulations 2008, it is an offence to provide a consumer with untruthful information or information which is misleading in the sense that it deceives or is likely to deceive the average consumer.

The Advertising Standards Authority (ASA), responsible for enforcing UK advertising law, has begun prosecuting AI washing cases.

In October 2023, the ASA ruled against an Instagram advertisement promoting a product called ‘Enhance your Photos with AI.’ The ad stated that the company responsible had misleadingly exaggerated the product’s capabilities.

Moreover, the Digital Markets, Competition and Consumers Act, which received Royal Assent in May 2024, has boosted the Competition and Markets Authority (CMA)’s consumer protection enforcement powers.

Under this Act, the CMA can issue enforcement notices and impose financial penalties of up to 10% of a company’s global annual turnover for material breaches of consumer protection laws, including laws related to AI washing.

In recent months, US regulators have significantly ramped up enforcement action to crack down on AI washing. In March this year, the US Securities and Exchange Commission announced that it was charging two investment advisory firms with making false and misleading statements about their use of AI.

Additionally, in September, the Federal Trade Commission (FTC) announced a law enforcement sweep called ‘Operation AI Comply’ to take action against several companies which the FTC maintains have been relying on AI to perpetrate ‘deceptive or unfair conduct that harms consumers’.

How to mitigate AI washing risks

First and foremost, due to growing enforcement action, companies developing or using AI must ensure that any claims they make about their use/development of AI are accurate.

Moreover, companies must be prepared to provide solid evidence to back up every AI claim they make in case regulators decide to investigate.

Secondly, companies need to conduct thorough due diligence when interacting with a supplier regarding what appears to be AI services or products. Before engaging any AI supplier, companies need to verify any claims made regarding the performance and capabilities of the supplier’s AI.

Drafting warranties and/or indemnities in the supply contract to specifically cover an AI product’s precise capabilities and performance is essential in mitigating the risks of AI washing.

By Tommaso Johannes Forni

CMA’S ROLE IN THE VODAFONE – THREE MERGER

For companies, regulation can seem like a barrier to success, yet it plays a crucial role in keeping prices fair and markets open for consumers. In the UK, the Competition and Markets Authority (CMA) is a key regulator in maintaining these standards.

Recently, the CMA has scrutinised Vodafone and Three’s proposed merger, which would reshape the UK’s telecommunications landscape. After months of deliberation, the CMA has provisionally approved the merger, albeit with conditions.

In this article, I will look into the CMA’s role, their decision-making process in this case, and key commercial insights for aspiring lawyers.

What is the CMA?

The CMA is a UK government agency tasked with ensuring markets remain competitive and consumers are protected. Here’s what the CMA does:

• Preventing anti-competitive practices: The CMA pursues businesses engaged in anti-competitive practices, such as price-fixing or abusing a dominant position. For instance, when Ticketmaster used “dynamic pricing” for the Oasis concert, the CMA stepped in, concerned that the practice might unfairly exploit fans’ enthusiasm.
• Merger control: The CMA reviews and, if necessary, blocks or modifies mergers that could harm competition. This is precisely why Vodafone and Three are in the spotlight.
• Consumer protection: The CMA also enforces consumer protection laws, clamping down on misleading ads and aggressive sales tactics.

The Vodafone-Three Proposition

Vodafone and Three, two of the UK’s four telecom giants, announced plans to merge in June 2023. Cue immediate scrutiny from the CMA.

As two of the “big four” (with O2 and EE as the others), merging would mean one fewer competitor in the market — and possibly fewer choices for consumers. After an investigation launched in early 2024, the CMA provisionally concluded in September that the deal could stifle competition.

However, the “provisional” part is key. Fast forward to November 2024, and the CMA has offered a way forward: Vodafone and Three could merge if they make commitments to protect prices and accelerate the UK’s 5G rollout.

Legal considerations in play

So, what does the CMA look at when it assesses a merger?

1. Horizontal vs. vertical mergers: Horizontal mergers, like Vodafone and Three’s, involve direct competitors and can lead to reduced competition, higher prices, or lower quality. Contrastingly, vertical mergers (between supply chain stages) raise concerns like restricting rivals’ resource access. The CMA initially worried that Vodafone and Three’s union might eliminate a key rival in an already small market.
2. Countervailing buyer power: If large buyers have enough leverage to negotiate better terms, it can counteract anti-competitive effects. But, realistically, the average Vodafone or Three customer holds little sway over these telecom giants. That’s a red flag for the CMA, meaning consumers could be left with higher prices and fewer options.
3. Efficiencies: The merging parties often argue that the deal will bring efficiency gains, cost savings, or spur innovation. However, to persuade the CMA, these benefits must be merger-specific and should reach the consumer. In this case, Vodafone and Three argue that the merger will speed up the UK’s 5G rollout, which may have swayed the CMA’s decision-making.

Commercial awareness takeaways

1. Consumer impact matters: The CMA balances business benefits with consumer protection. Knowing how to frame consumer advantages (like 5G rollout in this case) is crucial when navigating regulatory approval.
2. Law firm roles in mergers: Major mergers like Vodafone-Three require top law firms to navigate complex regulatory hurdles, negotiate with the CMA, and ensure full compliance. M&A deals demand a mammoth effort, bringing corporate and regulatory lawyers together. In this transaction, firms like Slaughter and May and Linklaters have taken lead roles, leveraging expertise across corporate, regulatory, and compliance areas.
3. Conditions can make or break deals: The CMA’s approval often depends on companies’ commitments to address competition concerns. Learning to craft and negotiate these conditions is key for aspiring corporate and competition lawyers.

Ultimately, the CMA’s job is to decide if the merger will lead to a Substantial Lessening of Competition — the threshold for blocking or modifying mergers in the UK. It’s not quite the all-clear yet for Vodafone and Three, but they’re closer to the finish line.

• By Avishai Marcus

CRITICAL NATIONAL INFRASTRUCTURES – DATA CENTRES

On September 12, 2024, the new Labour government in the UK announced its decision to designate data centres as ‘Critical National Infrastructure’ (CNI). This was the first CNI designation since 2015 when the Space and Defence sectors gained this classification.

The impact

The main effect of this move is that data centres will benefit from greater security support from the government in the form of protection from cyber-attacks and other critical incidents.

For example, the government will set up a dedicated CNI data infrastructure team composed of senior government officials who will ‘monitor and anticipate potential threats, provide prioritised access to security agencies including the National Cyber Security Centre, and coordinate access to emergency services should an incident occur’.

This security support from the government is vital because data centres house vast quantities of sensitive and non-sensitive data, ranging from NHS records to smartphone images and sensitive financial information.

Therefore, this designation means such sensitive information is less likely to be compromised during outages, cyber-attacks and adverse weather events. Increased security support is also warranted in light of recent unprecedented incidents, like the CrowdStrike global IT outage in July this year, severely disrupting the IT systems of hospitals, airports, payment platforms and businesses worldwide.

The government hopes that this change will stimulate economic growth by boosting the security and resilience of the UK data centre industry. Data centres are essential for AI development since they can hold the enormous data sets that AI models rely on for training.

In light of their crucial role in the AI revolution, McKinsey estimates that European demand for data centres will grow to around 35 gigawatts by 2030, up from 10 gigawatts in 2024.

The Labour government acknowledges the important role played by data centres in powering today’s digital economy and hopes that this CNI designation will boost business confidence in investing in the UK data centre industry, which already generates an estimated £4.6 billion in revenues each year.

Legal framework

Infrastructure sectors with CNI status are subjected to enhanced regulatory scrutiny. Under the Network and Information Systems Regulations 2018, operators of essential services, including digital infrastructure, to take measures to manage the risks to critical technologies, prevent incidents and minimise the impact of incidents should they occur.

Moreover, an operator of essential services is under a duty to notify the competent authority about any incident that significantly impacts the continuity of the vital service that the operator provides.

These regulations will require data centre operators to implement more sophisticated security measures, including biometric access controls, more advanced monitoring technology and persistent surveillance systems.

Operators must also comply with regular risk reporting requirements and obligations to develop and maintain thorough contingency plans.

Commercial awareness takeaways

This announcement underscores the government’s commitment to supporting the UK data centre industry and the technology sector more broadly. In addition to increased security, this CNI designation offers further benefits for the data centre industry.

As pointed out by Slaughter and May, data centre operators could now also expect to see greater policy support in the form of a more streamlined planning process, which could speed up project approvals. Operators and investors could also see the introduction of fiscal incentives, like grants and tax relief, to encourage investment in data centre infrastructure.

Hence, this decision has the potential to catalyse the growth of an already robust industry, with the UK being home to the largest number of data centres in Western Europe.

At the same time, data centre operators must comply with more stringent security and operational standards, as mentioned above, which will require operators to develop comprehensive compliance strategies.

Implementing such strategies could be costly initially but will lead to greater long-term security.

• By Tommaso Johannes Forni

JUDGES’ MENTAL HEALTH NETWORK SET TO ADDRESS GLOBAL WELLBEING CHALLENGES

• Establishment of a new support network
  • Judges across multiple jurisdictions have united to form an international network focused on mental health support and peer mentorship. This initiative, led by Her Honour Judge Kalyani Kaul KC, was announced recently and is designed to provide judges with a secure environment to raise concerns, seek psychological support, and access peer resources without fear of professional fallout.
  • Growing mental health crisis
    • Judicial well-being has become a critical focus in recent years, particularly considering reports detailing bullying, harassment, and other workplace stresses. A survey conducted by the UN Office on Drugs and Crime’s Global Judicial Integrity Network indicates that these issues are widespread, affecting the judiciary of England and Wales and judicial communities worldwide, from Uganda to the United States.
  • A ‘safe space’ for judges
    • This network will serve as a vital support system where judges can access confidential guidance and mental health resources. By establishing “triage judges” who uphold strict confidentiality agreements, the network can connect a judge in one country with peers and mental health experts in another. This cross-border approach allows judges to seek help discreetly, preserving their professional reputation and maintaining the integrity of their roles.

Steps toward improved judicial wellbeing

• Annual reports to promote transparency and reform
  • The newly established Judicial Support Network committee plans to publish annual reports detailing positive and negative trends in judicial wellbeing. These reports aim to highlight successful initiatives, advocate for best practices, and address recurring issues that hinder judicial mental health.
  • Addressing ‘judges without borders’ concerns
    • Kaul has termed this initiative “Judges Without Borders,” reflecting the shared responsibility to create a fair and supportive environment for judges globally. The network is committed to upholding the principles of the Nauru Declaration on Judicial Wellbeing and the UN Bangalore Principles, striving to create a judiciary that is “stronger, healthier, and safer.”

Confidential mental health resources and peer support

• A network of confidential resources
  • The support network will offer judges access to a comprehensive list of mental health professionals, including psychiatrists, psychologists, and counsellors. The “triage judges” will facilitate these connections, ensuring confidentiality and providing judges with an environment to seek the support they need.
• Promoting resilience in the judiciary
  • The initiative represents a proactive step toward addressing the global mental health challenges judges face. In addition to fostering resilience, this network encourages a culture of openness and support, essential for judicial mental wellbeing.

Positive changes for judicial well-being on a global scale

• A commitment to long-term judicial health
  • As this initiative gains momentum, its impact on judicial culture and wellbeing could extend to regions worldwide. Annual reports, cross-border mental health resources, and peer mentorship are essential to strengthening judicial resilience and maintaining a fair, supportive legal system.
• Potential global impact on legal systems
  • By promoting mental health awareness and supporting judicial professionals, this initiative aims to create a legal environment where judges can thrive. Through this support network, judges are empowered to continue their roles without facing the psychological toll of isolation, fear, or stigma, ultimately fostering a more robust legal system on an international scale.

• By Nawal Abdul Wahab