Sometimes life imitates art, or more pointedly, the lives we live mirror the movies we watch.
Even if you have never seen 2001: A Space Odyssey, you are probably familiar with the evil embodiment of Artificial Intelligence (“AI”) and most famous character in the film, HAL. With his all-seeing red eye and unnervingly calm voice, HAL has, over the ensuing decades, come to represent certain deep fears we all harbor regarding AI. Few will forget the iconic scene in which the once-helpful HAL turns homicidal and, as the stranded-in-space and desperate astronaut implores – “Open the pod bay doors please, HAL …”, HAL responds with chilling finality – “I’m sorry, Dave. I’m afraid I can’t do that.” This embodies the fear that AI may employ a reasoning process obscured from our assessment that leads it to the conclusion that it knows better than us and, thereby, brings about the ultimate end for all of us.
Leaving aside apocalyptic visions of the future, the cinematic HAL also provides a real-world lesson regarding an increasingly dystopic present as Enterprise Resource Planning (“ERP”) technology rapidly incorporates AI capabilities. One need look no further than Oracle Corporation, which just this May rebranded its database upgrade of 23c to “23ai” to underscore the rapidly growing AI capabilities of its standard database releases. It is through subtle integrations such as Oracle’s (and other ERP vendors) that all companies are rapidly finding themselves facing indeterminate risks that uniquely arise as AI – quietly and out of direct sight – makes decisions and adjustments regarding enterprise operations.
In this four-part blog series on AI in the ERP world, we hope to show how you can best keep the pod bay doors open and thwart the creeping existential threats to your business and operations. We will first discuss how AI presents risks with intellectual property, including issues of “stickiness” that impact your contractual right to ongoing use of AI output created by your ERP solution. Later, among other things, we will address AI in ERP technologies and the unique financial and legal peril presented with commercial transactions.
The potential of AI to positively transform ERP technologies is nothing short of staggering. But with revolutionary transformation inevitably comes risk. Going forward, it will be incumbent on your counsel to ensure that your company is positioned to enjoy the full scope of potential benefits while diligently fending off vendor attempts to impose a disproportionate amount of risk on the licensee.
AI in ERP technologies means that, in effect, you are licensing AI applications from a third party – a commercial arrangement which triggers a myriad of intellectual property and/or data risks, including: (1) becoming the unwitting infringer of another party’s intellectual property; (2) losing control of your own sensitive data; and (3) losing control of the right to use the very solution that AI tailored to your business needs.
1. Protecting Against IP Infringement
AI solutions are not created out of whole cloth but are the product of what is often called "training data." To avoid intellectual property infringement claims related to the training data used for the AI application in your ERP system, you need to become aware of what data is being used to “train” the AI application and that the data has been properly licensed. Of course, if your company submitted data to facilitate the training of the AI applications, you will need to confirm that that data has been properly licensed for such use.
To assure protection of your business against intellectual property claims by third parties for your use of AI training data or output, it is critical that you vet and diligently negotiate with the ERP vendor the appropriate limitations of liability, warranties, disclaimer of warranties, and indemnities from the licensor, especially including any actions your company must take to obtain indemnification from the licensor. While most ERP agreements contain indemnity provisions regarding infringement caused by the vendor, it is unknown whether these long-standing provisions will continue to offer protections for your company considering advancing AI technologies – an uncertainty which cries out for the appropriate legal counseling and focused negotiations with ERP vendors.
Your company will need to figure out what’s to be done with the output to protect against intellectual property claims by third parties. Will the output be reviewed by a human being or through an assistive tool (e.g., open-source software) to detect whether it incorporates protected content? Does your company intend to own and register the output for its own intellectual property protection, including patents and/or copyrights?
2. Protecting Your Sensitive Data from Disclosure
Output from AI is solicited by what is called “prompts,” which create their own world of intellectual property risk exposure for your company. When inputting prompts to obtain outputs from AI, you must guard against any that include or disclose confidential information of your company, such as trade secrets, business plans, and financial data. Similarly, your company must adequately evaluate prompts used with AI applications in your ERP system to confirm that no privileged information is being used to obtain the desired outputs. Finally, a proper due diligence is required to assure that the prompts you use do not include or disclose confidential or protected data belonging to third parties.
3. Protecting Your Right to Continued Use of an AI-Generated Solution
AI is largely valued for the complex output it generates assisting your company’s specific operations. Therefore, it is critical for you to establish with the ERP vendor whether the output is owned by your company or owned by the licensor of the AI applications and licensed back to you.
If your company owns the output, you should confirm that your agreement with the vendor requires that the right to use the output and any additional intellectual property embodied therein be assigned to you and available for your use going forward. By contrast, when the output is owned by the licensor of the AI application and licensed back to your company, you’ll need to become very familiar with any restrictions on use of the output.
A failure to do so can leave your company unusually vulnerable to a vendor’s threat to terminate your license and/or eviscerate your company’s ability to freely move between ERP vendors. It is a truly dystopian vision of the present to realize that you may be paying for an ERP solution that uses AI to create mission-critical efficiencies specifically tailored to your business, only to find that your company has retained no ongoing right to use the improved solution should relations with the vendor turn sour.
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Whether you intend to make the output available externally or provide access only to internal personnel and resources, intellectual property risks abound and require strict due diligence to avert harm to your business. Pleading for the life of your company in the face of existential intellectual property claims generated by your use of an AI application will be to no avail. If you want the pod bay doors to remain open for your business, rely on the best practices set forth above rather than being at the mercy of HAL.
Next up: How AI Creates Financial and Legal Peril in Commercial Transactions, Including Mergers and Acquisitions.
Published on July 10, 2024
Software licensors are known for vague contracts—they’ve made a business of it.
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