Who Pays If Generative AI Runs Into Legal Troubles, You or Your Provider?

TL;DR: Customers often care that their SaaS user agreements protect them from claims. We looked at a bunch of generative AI user agreements to see how they were at this. Most weren’t very protective. LOTS of details below.

There’s a real risk that courts will find that generative AIs infringe other’s copyrights and/or website terms of use. (To read >3,000 more words on this, check out our recent (well-reviewed!) piece about it. New data points since our (recent) piece make it even more likely that generative AIs run into legal infringement difficulties.) If generative AIs are found to infringe, it’s possible that liability will flow downstream to end users.

As such, we thought it might be interesting to look at what generative AI customer contracts say about three things:

1. Indemnification.
2. Modification/replacement/refund in case software infringes a third party intellectual property right.
3. Limitation of liability.

These provisions matter because if generative AIs are found to infringe others’ IP:

• End users could be on the hook for damages, so they should know whether their vendor will indemnify them, and to what extent their vendor is obligated to cover their costs.
• End users may need replacement software or to get out of their contracts.

We thought it would be most useful to review these items in customer contracts of:

1. Generative AI providers.
2. Applications that publicly claim to heavily incorporate generative AI, with an emphasis on:
   • Prominent applications
   • Legaltech applications

What These Contract Terms Mean

In case you’re not familiar:

Indemnification is a promise to pay someone else’s specified law-related expenses. E.g., a vendor might pledge that they’ll pay any lawyer fees and damages [up to a cap] if their customer’s get sued because of a fault in vendor’s software. It’s a pretty common commercial contract term.

Limitation of Liability sets out the maximum liability one party has to another under a contract. E.g., Transocean says that their maximum liability to BP under their contract with BP is $1m. Even if BP’s damages are waaaaay higher, Transocean doesn’t have to pay BP any more that $1m. This is also a very standard contract term. It sometimes only applies to specific types of damages.

IP replacement language sets out what happens if a vendor can’t provide [part of] a piece of software due to IP issues. This term is less commonly known but very standard in software contracts. In software contracts, IP replacement language often lives in a contract’s indemnification section.

For an example of IP replacement language in an indemnification section, here is text from Zuva’s standard customer agreement:¹

Zuva shall indemnify, defend and hold harmless Customer and its officers, directors, employees and agents from any and all damages, liabilities, and reasonable costs or expenses, including reasonable attorneys’ fees, finally awarded by a court of competent jurisdiction resulting from any third-party claim that the Services, as used in accordance with this Agreement, infringes upon any third-party Intellectual Property Right. Notwithstanding anything to the contrary contained herein, the indemnification and other obligations of Zuva in this Section 7 shall not apply with respect to any claim related to any of the Customer Data, any use of the Services in a manner that does not comply with the provisions of this Agreement, any negligence or willful misconduct by Customer or any Users, or any combination of the Services with any software, hardware, data or other materials not provided by Zuva for use in connection with the Services. If a claim is made against Customer that is subject to indemnification under this Section, Zuva shall either: (i) obtain for Customer the right to continue to use the Services; or (ii) modify or replace the Services with a non-infringing substitute that provides substantially the same performance and functionality of the original Services; provided, however, that if Zuva reasonably determines that it is not commercially practicable to effectuate the actions described in the foregoing clauses (i) or (ii), Zuva shall have the right to terminate this Agreement, in which case it shall provide Customer with a refund of any prepaid sums with respect to the balance of the Term. This Section sets forth Customer’s sole remedy, and Zuva’s sole liability, in connection with claims of infringement.

Why We Included Coverage Of Legaltech Company Terms & Conditions

We felt a little apprehensive about including coverage of legaltech applications, since we’ve been in the space for a fair while. On the one hand, (1) we knew which applications have been talking most about incorporating generative AI, where we don’t know as well in martech or sales tech, say. Also, (2) a lot of people who read this piece are likely to be in the legaltech community, so would care more about legaltech companies. On the other hand, (i) we know and are friendly with many employees of several of these companies, and (ii) we are very wary of seeming like we’re talking trash about competitors (even though we don’t think Zuva really competes with any of the vendors mentioned). To mitigate our worries here, we tried to keep our coverage very fact-based, and included our own terms of use.

What We Found

This analysis is based on public terms of use that we were able to find in April and May 2023. We suspect that many customers are not signed up to these public terms of use: high-value customers have likely been able to negotiate custom agreements with better terms (especially with more niche vendors, like most of the legaltech ones).

Provider	Indemnity	Remediation if 3rd Party IP Violation	Limitation of Liability
Generative AI Providers
Anthropic	User indemnifies only		6 months fees or $100
Cohere	Two-way		12 months fees
Midjourney	User indemnifies only		No cap
OpenAI	User indemnifies only		12 months fees or $100
Stability AI	User indemnifies only		12 months fees or $100
Generative AI-Using Tech
Github Copilot	User indemnifies only		No cap
Jasper	User indemnifies only		No cap
Microsoft Copilot	Two-way defense of claims		12 months fees or $5,000 for free users
Generative AI-Using Legaltech Tools
Casetext	None		$100
DoNotPay	User indemnifies only		No cap
Ironclad	User indemnifies only		12 months fees or $100
Rally Legal Spellbook	User indemnifies only		12 months fees
Zuva	Two-way		6 months fees

Generative AI Providers

Anthropic

Terms of Use date and link: March 29, 2023, v 2.0

Indemnification: One way: user indemnifies Anthropic.

Remediation if app violates another’s IP: None.

Limitation of liability: One way limitation of liability on user claims: greater of (i) amount paid in preceding six months or (ii) $100.

Anything else interesting:

• User warrants that their prompts do not violate “intellectual property laws and any privacy or data protection laws governing personal information contained in [their prompts].”

• This is kind of neat:

  • Nature of Results. Responses that the Services generate based on materials submitted by third parties (“Third-Party Results”) may be identical or similar to third-party materials or Results that the Services generate based on your Prompts. You acknowledge that Third-Party Results are not your Results and that you have no right, title, or interest in or to any Third-Party Results.

  We think it is a CYA statement that basically says “if you and some other party provide a prompt that generates the secret to cold-fusion then you can’t go after the other party.” Essentially, if two users generate the same results one can’t be said to have “stole” from another.

Cohere

Terms of Use date and link: April 8, 2022

Indemnification: Two way: each party indemnifies the other. Cohere specifically indemnifies the user for IP violations.

Remediation if app violates another’s IP: None.

Limitation of liability: Two way: the amount of fees paid in the preceding 12 months.

Anything else interesting: User’s restricted uses include accessing Cohere in violation of IP rights.

Midjourney

Terms of Use date and link: Feb 10, 2023

Indemnification: One way: user indemnifies Midjourney.

Remediation if app violates another’s IP: None.

Limitation of liability: One way limitation of liability on user claims, no cap stated.

Anything else interesting: The Terms of Service are written in very plain language—as much so as any agreement we’ve ever seen.

OpenAI

Terms of Use date and link: March 14, 2023

Indemnification: One way: user indemnifies OpenAI.

Remediation if app violates another’s IP: None.

Limitation of liability: One way limitation of liability on user claims: the greater of (i) fees paid in the preceding 12-months or (ii) $100.

Anything else interesting:

• Note section 3 of the OpenAI terms and conditions, which transfers ownership of Output to the user, and purports to thus make copyright compliance the user’s problem.²
• API usage will not be used by OpenAI for product improvement purposes but non-API usage (e.g., chat.openai.com) can be.

Stability AI

Terms of Use date and link: December 14, 2022

Indemnification: One way: user indemnifies Stability, including for IP infringement claims made against Stability concerning the materials that users input.

Remediation if app violates another’s IP: None.

Limitation of liability: One way limitation of liability on user claims: the greater of (i) fees paid in the preceding 12-months or (ii) $100.

Anything else interesting: Users represent and warrant that they own the rights to images that they upload. Responsibility is on the user to ensure that their content doesn’t violate any third-party’s IP rights. User grants Stability a license to use materials for any Stability-related purpose. This means that Stability can claim that training materials they get through this are okay. TBD if a court will buy this as a Stability defense against infringement if users upload images they don’t have rights to.

Generative AI-Using Tech

Github Copilot

Terms of Use date and link: November 16, 2020 and Github Copilot Product Specific Terms (March 2023)

Indemnification: One way: user indemnifies Github.

Remediation if app violates another’s IP: None.

Limitation of liability: One way limitation of liability on user claims, no cap stated.

Anything else interesting:

Jasper

Terms of Use date and link: February 27, 2023

Indemnification: One way: user indemnifies Jasper, including for violations of IP rights specifically.

Remediation if app violates another’s IP: Jasper may: (I) obtain the right for the user to continue using the infringing item; (II) substitute with a non-infringing item, (III) modify the item to make it non-infringing, or (IV) terminate the agreement and refund prepaid unused fees for infringing items to the user.

Limitation of liability: One way limitation of liability on user claims, no cap stated.

Anything else interesting: The Terms state that users warrant their content does not infringe any third-party IP rights.

Microsoft Copilot

Terms of Use date and link: March 19, 2023

Indemnification: No indemnification but terms include a two-way defense of claims obligations.

Remediation if app violates another’s IP: Microsoft will seek to: (I) obtain permission for the user to continue using or (II) modify or replace the infringing item with a non-infringing one.

Limitation of liability: Two way with some exceptions: limited to the amount paid during the preceding 12-months. One way limitation on claims by free users of $5,000.

Anything else interesting:

• It’s hard for us to tell how Microsoft’s Copilot is actually integrated with their other products and what terms it falls under, but we think these are the terms that apply.
• Generally, these terms stood out against others as pretty reasonable.

Generative AI-Using Legaltech Tools

Casetext

Terms of Use date and link: April 11, 2023

Indemnification: None.

Remediation if app violates another’s IP: None.

Limitation of liability: One way limitation of liability on user claims up to $100, with an exception for damages arising from infringements of IP rights.

Anything else interesting:

DoNotPay

Terms of Use date and link: February 14, 2023

Indemnification: One way: user indemnifies DoNotPay.

Remediation if app violates another’s IP: None.

Limitation of liability: One way limitation of liability on user claims, no cap stated.

Anything else interesting:

Ironclad

Terms of Use date and link: March 20, 2023

Indemnification: One way: user indemnifies Ironclad, third-party IP rights violations by user are included.

Remediation if app violates another’s IP: None.

Limitation of liability: One way limitation of liability on user claims: the greater of (I) $100 or (II) fees paid in the preceding 12-months.

Anything else interesting:

Rally Legal Spellbook

Terms of Use date and link: Undated, accessed on April 17, 2023

Indemnification: Rally has no obligation to defend users against IP infringement claims. Customer indemnifies Rally against all customer-usage-related claims (including, seemingly, if Rally gets hacked).

Remediation if app violates another’s IP: Warrants that Rally has IP rights to its tech, and has standard IP replacement language if Rally loses rights to necessary IP, however, explicitly excludes any issues with OpenAI-related IP.

Limitation of liability: Liability is capped at customer’s fees paid in the 12 preceding months.

Anything else interesting: The Spellbook Terms of Service are overall worth a read for some items that we had never seen described the way they are, including their representation on data security.

Zuva

Terms of Use date and link: January 12, 2023

Indemnification: Two way: both parties indemnify. Zuva indemnifies the user for claims that the Services infringe a third-party’s IP rights.

Remediation if app violates another’s IP: Zuva will either obtain permission for the user or modify or replace the Services with a non-infringing substitute.

Limitation of liability: Two way: limited to the amount paid (Zuva liability) or payable (users’ liability) within the preceding 6-months. Excludes infringement of IP rights.

Anything else interesting:

What Happens If The Provider Can’t Fulfill Its Indemnity Obligations?

This seems outlandish to consider right now, but when liability hits, it can really hit. Consider asbestos litigation. Generally, parties are on the hook for damages awards. Indemnification sits on top of that - somewhat like insurance. If there are damages (or a claim for damages), and there’s indemnification in place, the indemnifying party has to cover the claim/damages, up to the extent of any limits in the contract. If the indemnifying party can’t pay (e.g., because they had a whole bunch of similar indemnification claims against them and are bankrupt), then the indemnified party is (basically) on the hook. The indemnified party can try to go after the indemnifying party for any covered money they had to pay out, but there may not be any money to pay them with. Users could consider ensuring that their vendor has adequate insurance to cover potential claims, but the possible liability here is so large that it could dwarf insurance coverage.

Thanks

Thanks to Dr. Adam Roegiest, Dr. Sam Fletcher, and Ben O’Halloran for their comments on this post.

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