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A new lawsuit is calling foul on the developers of an artificial intelligence (“AI”)-powered e-commerce personalization app, accusing them of falsely characterizing the app’s capabilities in order lure in investors and customers. According to the complaint that they filed with a California federal court early this month, RETAILERX, Inc. d/b/a Pantastic Networks and its founder Neil S. Rafer (collectively “Pantastic”) claim that LimeSpot Solutions Inc.’s founders Aidin Tavakkol and Essan Parto, among others (the “defendants”) engaged in “extensive fraud” by misrepresenting and/or omitting LimeSpot’s “supposedly ‘state of the art’ neural network, machine learning, and/or deep learning technological capabilities over a period spanning approximately seven years.” 

Setting the stage in the complaint, Pantastic claims that beginning in 2016, Mr. Tavakkol explicitly misled Mr. Rafer as to the core of his company LimeSpot, telling Rafer that LimeSpot “was centered around its machine and deep learning technology that was revolutionizing online marketplaces and, unlike its competitors, contained a system of neural networks that allowed its platform to analyze large sets of data and function and learn in an automated manner without any manual human input and/or adjustment.” Fast forward to 2022 and the parties reached an agreement in furtherance of which Pantastic would acquire LimeSpot so that it “could utilize the neural network and machine and deep learning technology that LimeSpot had been touting for many years.” 

Such AI-centric representations about LimeSpot came in the form of “pitch decks and related scripts that the defendants created and presented to [it], investors, and prospective customers,” Pantastic claims. Among some of the alleged misrepresentations included in these decks … 

– LimeSpot’s technology is different from competitors, who only offer “a manual mix of technology and human intervention;”

– LimeSpot’s implementation has “deep personalization;”

– LimeSpot’s “patent-pending technology” and “core IP” is powered by “machine learning” and “artificial intelligence;” 
– AI is “being automated and taken over by learning systems … we’ve been a part of it for the past 4 years;” 

– “Most importantly we wanted to build a global network effect for our AI brain”; and 

– The chart “clearly shows the network effect, and how the machine is learning and doing a better job.”

Additionally, Pantastic maintains that the defendants made representations regarding LimeSpot’s “‘automated artificial intelligence, machine learning, and deep learning technology’ … in written and oral communications, including but not limited to in person, emails and online chats, telephone and videoconferences, webpages, blog posts, investor updates, slide decks and presentations, and marketing and promotional materials up until the date of this complaint.”  

Not long after the acquisition was finalized, things went south after, per Pantastic, which alleges that once its team began working with the defendants and others on the LimeSpot team to complete a series of tasks to begin integrating LimeSpot’s technology into Pantastic’s platform, they “began to uncover that apparently the technology which Defendants had claimed they had for over seven years never existed.” (Emphasis courtesy of the complaint.)

To the contrary, Pantastic asserts in its new lawsuit that “LimeSpot’s technology did not include the promised AI, machine learning, and deep learning capabilities that consisted of a system of neural networks and could analyze large sets of data and function and learn in an automated manner.” In fact, LimeSpot’s tech was “an utter failure because numerous and frequent human input was constantly required and no neural networks existed, thus negating the entire alleged value of LimeSpot and its purported ‘technology.’”  

Despite such “shocking discoveries,” Pantastic contends that it “still attempted in good faith to work with the defendants for approximately six months to come up with an alternative solution that would at least allow Pantastic to obtain some value from LimeSpot’s technology, although still nothing close to the essential capabilities repeatedly promised.” However, the company claims that it has been left with “no choice but to file this action seeking declaratory relief and money damages related to the defendants’ myriad of wrongful acts.” 

With the foregoing in mind, Pantastic sets out claims of fraud, negligent misrepresentation, unfair business practices, restitution/unjust enrichment, conversion, breach of contract, breach of covenant of good faith and fair dealing, promissory estoppel, and declaratory judgment. Among other things, Pantastic is seeking a declaration from the court that the parties’ deal “never legally came into being, and/or [is] wholly tainted, invalid, illegal, void, rescinded, and/or unenforceable,” and that as a result, LimeSpot owes Pantastic all monies paid under the agreements related to the purchase of LimeSpot by Pantastic, a sum that is redacted in the complaint. 

THE BIGGER PICTURE: The lawsuit comes on the heels of the Federal Trade Commission releasing guidance in February, in which it alerted companies to avoid making unsupported claims about “new tools and devices that supposedly reflect the abilities and benefits of AI.” In a post published on the FTC’s site on February 28, the FTC Division of Advertising Practices’ Michael Atleson stated that while AI is “an ambiguous term with many possible definitions,” often referring to a variety of “tools and techniques that use computation to perform tasks such as predictions, decisions, or recommendation,” one thing is for sure: AI is currently a hot marketing term that will inevitably be “overus[ed] and abus[ed].”  

Against that background, this lawsuit might prove to be the first of many lawsuits that take issue with the merits of companies’ marketing of AI products, especially amid increased allocation of angel and venture funding to AI startups and growing M&A activity in this space.  

The case is RetailerX, Inc. v. Aidin Tavakkol, et al., 3:23-cv-01705 (N.D. Cal.)