Shareholder Derivative Lawsuits Target Microsoft and Adobe Over AI Copyright Practices

Artificial intelligence development has sparked a fresh wave of legal challenges, with corporate shareholders initiating derivative lawsuits against major tech companies over alleged undisclosed copyright infringements in AI training practices. In recent months, three shareholder derivative suits have been filed targeting executives at Microsoft Corp. and Adobe Inc., accusing them of providing false or misleading information about their AI strategies and failing to reveal the use of copyrighted materials in training their generative AI models.

The lawsuits contend that these undisclosed practices have subjected the companies to significant legal risks, contributing to declines in their stock prices. These shareholder actions follow extensive litigation brought by writers guilds, publishers, authors, and news organizations, who claim that AI companies have trained large language models on protected works without authorization or compensation.

Together, these parallel lines of litigation underscore the complex consequences arising from the rapid growth and adoption of generative AI technologies. Tech executives now face legal repercussions not only from copyright infringement claims but also from shareholders alleging breaches of fiduciary duty and securities fraud for failing to adequately disclose the risks associated with their AI training methods.

The derivative suits against Microsoft and Adobe reference numerous copyright lawsuits filed against other AI developers, which the plaintiffs argue should have served as clear warnings to corporate leadership. Despite these “red flags,” the complaints assert that executives failed to halt or correct the alleged misconduct, even as companies like Anthropic PBC agreed to multi-billion-dollar settlements in related disputes.

Ann Lipton, a law professor at the University of Colorado, described these early shareholder suits as “feelers” to gauge judicial responses amid ongoing legal uncertainty about whether training AI models on copyrighted works constitutes fair use. She noted that such suits could increase in frequency and severity if more tangible financial harm from copyright violations becomes evident.

Jill E. Fisch, distinguished professor of business law at the University of Pennsylvania’s Carey Law School, emphasized that the success of these derivative suits may not hinge solely on whether the companies committed copyright infringement. “A shareholder suit is based on a decision that causes harm to the corporation,” she explained, adding that it remains unclear whether the mere filing of copyright lawsuits will be sufficient to demonstrate harm.

Derivative lawsuits are brought by shareholders on behalf of the corporation, typically targeting directors or officers accused of breaching their fiduciary duties and harming the company. While derivative litigation is not new, the use of alleged AI-related copyright infringement as a basis represents a novel frontier, according to Jonathan Lazarow of Ambrose Lazarow PLLC.

Lazarow highlighted that some executives appeared to adopt an “ask forgiveness, not permission” approach by using unlicensed data to train AI models rather than securing proper licenses. He described these actions as “major governance issues,” referencing allegations in one of the complaints against Adobe executives.

Ann Lipton further noted that even if executives pursued these practices to enhance profits by improving AI capabilities, such conduct is impermissible if it violates shareholders’ interests or legal obligations. “It is simply not something you’re permitted to do on behalf of shareholders, even if you think it will make more money,” she said.

A Microsoft spokesperson responded via email, stating, “Microsoft stands by the integrity of its public statements and its responsible approach to AI innovation, and we will vigorously defend against these allegations in court.” The company characterized the shareholder claims as “without merit.”

Beyond fiduciary duty allegations, the suits also raise concerns about securities fraud, accusing executives of misleading investors in filings with the U.S. Securities and Exchange Commission regarding their AI strategies. For example, Adobe shareholders cite an alleged false statement in the company’s 2023 annual report, which described its Firefly generative AI model as “commercially safe” because it was “trained on licensed content, such as Adobe Stock, and public domain content for which copyright has expired.”

These derivative lawsuits mark a significant development in the evolving legal landscape surrounding AI and intellectual property, signaling increased scrutiny of corporate governance and disclosure practices as AI technologies continue to disrupt traditional copyright frameworks.