Decades in Business, Technology and Digital Law

AI Licensing and Liability

by | Apr 3, 2024 | Firm News

The rapid advancement of artificial intelligence (AI) has propelled its integration into various sectors, making it a crucial component of many products and services. As businesses increasingly incorporate AI into their offerings, the complexities of licensing agreements for AI technology have come to the forefront. This article explores the liability considerations inherent in such agreements, shedding light on the nuances that both licensors and licensees must navigate to ensure their interests are safeguarded.

Defining the Scope and Performance Expectations

At the heart of any AI licensing agreement is the definition of the AI’s scope and performance expectations. This includes detailed descriptions of the AI’s functionalities, limitations, and intended use cases. Clearly articulating these elements is essential to set realistic expectations and mitigate liability risks. For instance, an AI designed for financial forecasting has different risk implications compared to one used in healthcare diagnostics. Therefore, the agreement must explicitly detail the AI’s capabilities and the contexts in which it can be used, along with any known limitations or risks.

Intellectual Property Rights

AI systems are often the result of significant investment in research and development, making intellectual property (IP) rights a critical component of licensing agreements. The agreement must clearly delineate the ownership of the AI technology, including any underlying algorithms, datasets, and generated outputs. Furthermore, it must address the handling of derivative works and improvements to the AI, which can be particularly contentious in collaborative or iterative development environments.

The important issue of ownership of the generated output of AI systems will be the subject of a separate post.

Liability for Malfunctions and Misuse

AI systems, by their nature, can produce unexpected results or fail in unforeseen ways. Licensing agreements must, therefore, include provisions that address liability for malfunctions, errors, or damages arising from the use of the AI. This includes defining the extent of the licensor’s liability for direct, indirect, incidental, or consequential damages. Additionally, the agreement should consider the potential misuse of the AI, outlining the responsibilities of the licensee to prevent unauthorized or unethical use, which could lead to legal complications and reputational damage.

Indemnification and Warranty Provisions

Indemnification clauses are crucial in AI licensing agreements, as they outline the protections against third-party claims related to IP infringement, data breaches, or other liabilities. These clauses specify the conditions under which the licensor or licensee must defend and compensate the other party. Similarly, warranty provisions assure the licensee of the AI’s performance as per the agreed standards, including assurances related to the absence of malware or other harmful components.

Compliance with Laws and Ethical Guidelines

AI systems are subject to a variety of legal and ethical considerations, including privacy laws, data protection regulations, and sector-specific compliance requirements. Licensing agreements must ensure that the use of AI adheres to all relevant legal frameworks, such as the General Data Protection Regulation (GDPR) in the European Union, which imposes strict rules on data handling and privacy. Additionally, the agreement should align with ethical guidelines for AI, ensuring that the technology is used in a manner that is fair, transparent, and accountable.

Dispute Resolution Mechanisms

Given the complex and evolving nature of AI technology, disputes may arise regarding the interpretation of the agreement, the performance of the AI, or compliance with the outlined terms. Effective licensing agreements should include mechanisms for dispute resolution, outlining the steps for mediation or arbitration before resorting to litigation. This can help avoid costly and time-consuming legal battles, providing a clearer path to resolving disagreements. In particular, arbitration clauses can specify the required knowledge and experience of the selected arbitrators, which can be critical in achieving a reasonable result for disputes involving the evolving and complex issues surrounding AI relationships.


Licensing agreements for AI technology are intricate documents that require careful consideration of various liability aspects. By thoroughly addressing issues such as scope definition, IP rights, liability for malfunctions, indemnification, compliance, and dispute resolution, parties can establish a solid legal foundation for their collaboration. As AI continues to evolve, staying abreast of legal, technological, and ethical developments will be paramount in crafting agreements that protect the interests of all involved while promoting the responsible use of AI.