Legal Battles: The Biggest Startup Lawsuits of 2024

Navigating the Startup Landscape

Startups are part of an ever-changing ecosystem influenced by rising technological trends, regulations, economic fluctuations, and social and political events. That’s because it’s not just about the companies, but about every moving piece that helps them thrive and deliver innovations worldwide. But what are some of the main influencers in the space?

Foundational Startup Players

Let’s begin with startups. These are formed by founders and co-founders with brilliant ideas that cater to unmet needs. For example, Uber solved a shortage of taxi cabs in New York that spread across the globe, and Airbnb met the need for customized lodging (initially due to a lack of hotel availability in San Francisco). These companies build a minimum viable product (MVP) they develop for investors to back and start gaining customer interest.

This brings us to our next key player: investors. These can come as solo backers (usually angel investors), venture capital firms, or hedge funds, among other specialized investors. Each one focuses on specific industries they’re experts on or passionate about, usually taking equity in the company in exchange for capital, and often advice.

Primary Supporters of Startup Growth

Other entities that provide advice and growth opportunities for startups are incubators and accelerators. These dedicated programs take promising startups and connect them with industry experts and investors, and even offer grants, to boost startup growth. Prominent ones include Y Combinator and Techstars, but others like Stella and the Refinery focus on specific groups, like female-led and diverse companies.

The next major influencers in the startup space are institutions — banks, governments, universities, and so on. These places help shape the success of emerging companies through loans, regulations (like the Securities and Exchange Commission in the US), and overall support from an early stage (like MIT’s delta v).

Other players include startup talent, which is directly responsible for growing the business in the right direction, and infrastructure like offices or telecommunications companies that provide internet.

The Importance of Balanced Ecosystems

Just like any biome that depends on the well-being of each member, any changes in the way each player operates will create a ripple effect across the startup ecosystem. This year was permeated by economic volatility, the US elections, ongoing crises in Europe and the Middle East, and the evolving supply chain industry. These trends, plus new tech like AI, massively influenced this year’s legal battles as well.

The Biggest Startup Lawsuits of 2024

In tandem with incessant investor hyperfocus on AI, companies in this subsector have also faced significant backlash due to increasing AI washing in 2024. From defrauding investors with exaggerated AI capabilities to unclear copyright disputes, this year’s legal battles have fully centered on cases where AI has taken a step too far. Additionally, economic turmoil has also taken center stage as a reason for major startup lawsuits. Let’s round up the most significant legal disputes from this year in the startup ecosystem.

1. LifeBrand

LifeBrand marketed itself as a company that searches and detects potentially harmful content to elevate brand reputation through advanced technology. The company rose to fame in 2022 when it struck significant sponsorship deals with sports teams, including baseball giants Philadelphia Phillies. Now, the team is suing the company for missing its 2024 sponsorship payment of $890,000.

LifeBrand’s CEO, Thomas J. Colaiezzi, didn’t dispute the claims, citing the Silicon Valley Bank collapse and an incomplete Series B round as the reasons for the missed payments. The company was liquidated in August 2024 — failing to pay staff — and acquired by Sentiment AI, a company that acquires startups in financial turmoil to help them bounce back.

2. Perplexity AI

In late October, major news conglomerate Dow Jones and the New York Post sued Perplexity AI, the popular AI search engine, claiming the company illegally copies copyrighted work and harms original news publications as a result. The news publishers claim in the suit that Perplexity is “freeriding on the valuable content the publishers produce,” often presenting search results with word-for-word copies of news articles.

The publishers previously sent Perplexity a notice of these legal concerns and offered a licensing deal, which the AI company didn’t respond to. They’re hoping Perplexity can be separated from search engines to avoid the copying of human work, substituting news publications with AI search results.

This is just one of many instances where news outlets sue AI engine companies due to blurry copyright limitations as the technology awaits regulatory frameworks.

3. Cooley

Gould Group, including Gould Ventures, is suing the international law firm Cooley, which is heavily involved in the startup space. The lawsuit was filed in the federal court in New Jersey claiming Cooley misled Gould investors into backing a company with a background of fraudulent activities, now-defunct startup Carbon IQ. The law firm seems to have been aware of activities like document forgery, securities fraud, and misrepresentation of financial information carried out by Carbon IQ’s CEO, Benjamin Cantey.

Gould Group is now requesting the $140,000 they invested in the company, attorney fees, and punitive damages.

This isn’t the company’s first rodeo. Carbon IQ was previously sued by Refinery Management, which invested $3 million in it without knowing of the CEO’s illegal activities. Gould Group is also pursuing indemnification from this lawsuit.

4. OpenAI

OpenAI, the trailblazing startup founded in 2015, has been causing serious waves around the world of tech and beyond. Recently, they’ve been in hot water with five Canadian publishers who are accusing the $157 billion startup of copyright infringement. In November, ​​Torstar Corp., Postmedia Network Canada Corp., Globe and Mail Inc., the Canadian Press, and CBC/Radio-Canada, filed a suit claiming that OpenAI illegally scraped their content to train its AI tools.

But this isn’t the first time that the startup has been challenged in court over copyright: At the end of 2023, the New York Times sued OpenAI and Microsoft Corp for a similar infringement.

And it isn’t the only company that has come under fire for using existing data and content from the internet to train its AI algorithms. Microsoft has also been called out for the practice, but they insist they’re not violating any copyright laws and this practice is legal under fair use laws.

5. Anthropic

Anthropic is best known for its AI tool, Claude.ai, which earned the startup $4 billion worth of investments from the likes of Amazon. With a total valuation of more than $18 billion, Anthropic is heralded as a leader in AI safety.

Ironically, however, the startup doesn’t seem to be immune to copyright infringement either. Earlier this year, Anthropic was hit with a class-action lawsuit by three authors claiming that it misappropriated their books (and hundreds of thousands of others) to train its AI tool, Claude.

In their lawsuit, the authors claim that Anthropic knowingly used pirated copies of their work to train Claude to respond to prompts. Unfortunately for the startup, this is the second court case in as many years for exploiting others’ intellectual property: The company was also sued by music publishers in 2023.

If Anthropic is found guilty, it will not only have to pay an unspecified amount in monetary damages but will also be permanently banned from using the authors’ material.

What to Expect in the New Year

Lots of changes are looming large on the horizon, and 2025 is set to usher in new regulations and opportunities for players across the industry to improve their reporting. AI startups have been attracting the lion’s share of global venture funding, accounting for 28% of total investment across Q3 of 2024.

Yet where there’s money, there’s often potential mayhem, particularly if companies aren’t on the ball when it comes to compliance. Regulatory bodies are trying to keep up with growing risks of attacks and threats to the startup landscape. Let’s dive into what’s on the horizon for startup compliance.

Increased Regulatory Scrutiny

With cyber threats on the rise, it’s no surprise that regulators are tightening rules around cyber security, data privacy, and AI. That’s why some of the world’s leaders are gearing up to implement stricter laws around cybersecurity and reporting.

The driving force behind this heightened scrutiny is the urgent need for more transparency, particularly when considering crises like AI washing, where companies grossly exaggerate how much AI plays a role in their solutions and services. We can expect to see more stringent regulations around reporting and ensuring startups are walking the walk when it comes to compliance.

Importantly, the Cyber Incident Reporting for Critical Infrastructure Act (CIRCIA) is currently under a March 2025 deadline to establish its final rules. Once the CIRCIA is finalized, organizations across sectors critical to US infrastructure, like healthcare, communications, and energy, will be subject to stricter rules and tighter timelines for incident reporting, whether that’s for ransom payments or cybersecurity issues.

Across the pond, the European Union (EU) is cracking down on everything cyber- and AI-related and is set to introduce a number of acts in 2025, such as its AI Act, Cyber Resilience Act (CRA), and Digital Operational Resilience Act (DORA). These acts are all designed to keep companies in line with risk management, transparency, and reporting to help make them more digitally resilient and safe for all.

Cross-border Operational Challenges

As regulations continue to evolve in the new year, it’s only natural that there will be growing pains on the operational side, especially for startups that are expanding their reach across borders.

Firstly, there’s the matter of staying on top of compliance, and this can vary between different states and regions. Governments and authorities are continuously updating their trade regulations and compliance requirements, and increasingly complex compliance can cause higher operational costs and possible legal risks if not managed properly.

Besides compliance, there are also more nuanced cultural and market differences to consider. Startups might struggle to adapt their products and services to local preferences and regulations. That means startups looking to expand their operations to new markets in 2025 need to do their homework ahead of time.

Another key consideration is logistics and supply chain management. A few questions to ask are:

• What kind of shipping solutions are available in a new territory?
• Who are reputable vendors for supporting on the ground logistics?
• What are possible disruptors that can affect how goods and services are delivered?
• What local regulations are there to be mindful of, and how can they shape supply chain operations within a market?

Once again, thorough research is a must here, and working with a local expert can greatly help to guide startups in tackling these challenges. Not knowing this information can impede operations while running the risk of reputational damage and incurring fines.

Legal Barriers to Emerging Tech

Historically, lawmakers have played catchup to constantly evolving technology, implementing new laws and regulations way after problems have arisen from new solutions. That’s changing, as regulations are now aiming to close that gap and be more proactive in managing risk around emerging technologies, particularly those like cryptocurrency, blockchain, and biotechnology.

Laws around patenting and licensing are expected to become more complex, and startups need to make sure they’re meeting these evolving requirements or pay hefty penalties.

Unfortunately, these are not likely to be uniform across regions, and dealing with various regulatory approaches is going to be a significant legal challenge for many companies. For example, startups in cryptocurrency might continue to walk a fine line in a fragmented compliance landscape where regulations often vary between jurisdictions, particularly in places like the US.

What’s more, startups in emerging markets must also deal with already complicated licensing processes in anti-money laundering, counter-terrorist financing, and know-your-customer regulations.

Of course, there’s also the ever-present question of data privacy, which is a pervasive challenge across industries. Startups that use any kind of personal data will have to keep navigating stringent data protection laws like the EU’s GDPR and the CCPA in the US.

Risk Management Strategies for Startups

Legal battles are prime examples of why risk management strategies are vital in the startup world. With so much at stake while startups grow at neck-breaking speed, projects don’t run as smoothly or go exactly as planned, ending up in unfulfilled promises or major errors.

A good way to get started on reducing risk is by identifying the right insurance coverage for a startup.

For instance, whether a product wasn’t ready for the market, failed to meet expectations, or incurred copyright violations, insurance policies like Errors & Omissions and Directors & Officers can help emerging startups recover from legal claims made against their products or executive teams and stakeholders.

The latter insurance is also vital in cases involving cybersecurity incidents such as data breaches or compromised services due to hacking. Executives are often caught in the crossfire when security requirements pertaining to top-level decisions aren’t met, resulting in costly issues and ensuing lawsuits.

It could go without saying, but paying careful attention to how AI systems are enforced in a startup is also a major risk management pain point. Is staff trained to use AI? How is the company representing its use of the technology? Is AI truly adding value to a product? As the SEC and the EU double down on regulating AI washing and other tech-related issues, these are important considerations when adopting AI.

Supply chain considerations are also crucial when crafting risk management plans. If recent geopolitical events have taught us anything, it’s that a staggered supply chain industry can have unimaginable consequences in every other sector, from project delays to a lack of resources to make a product or service. This is why building resilient supply chain systems by diversifying suppliers and doing proper due diligence can mitigate threats in this field.

Managing environmental, social, and governance (ESG) issues is also a major factor in reducing risks at a startup. From environmental regulations to company culture and suitable governance strategies, ESG matters can have many legal implications within an organization. This is why this aspect should never be overlooked when mapping out company risks, especially with the rapidly evolving societal shifts industries undergo.

Startups face an increasingly promising yet murky territory when it comes to legal battles and regulatory frameworks across the globe. The rise of AI is making this matter even trickier as companies bandwagon the technology in search of higher customer satisfaction and investor interest. This year’s cases have taught the industry that transparency above all, sustainable growth, and responsible AI adoption should be a constant for a startup to truly succeed.