In my recent year-end wrap up, I noted that one of last year’s top stories was the rise of artificial intelligence (AI) as a source of corporate and securities litigation risk. Among the evidence reflecting the rise of AI as a source of risk was the onset of securities class action litigation containing AI-related allegations. Last week, in a new lawsuit filing showing that AI-related litigation risks are continuing, a plaintiff shareholder filed a securities suit against a Canadian technology services company whose revenues declined and whose margins shrunk as the company shifted its services to an AI-based model. A copy of the January 30, 2025, complaint against Telus International (CDA) Inc. can be found here.

Background

Telus is a British Columbia-based company providing digital customer experience solutions. The company’s primary business is providing customer experience management services and solutions for business call centers. The company’s “subordinate voting shares” trade on the NYSE.

Beginning in December 2020, the company introduced “AI Data Solutions” for its customer experience management services. As part of this shift toward AI-based services, the company made several acquisitions to bolster its AI-related capabilities.

On May 9, 2024, the company released its 1Q24 results, reporting that the company had experienced a $29 million decrease in year-over-year revenue. During its earnings call, company management acknowledged that the margins generated by its AI offerings “can be a bit below average.” The company share price fell over 18% on this news.

On August 2, 2024, the company released its 2Q24 results, announcing further reductions in revenue, EBITDA, and margins. The company also significantly reduced its 2024 fiscal guidance, and announced further that its then-CEO would retire effective September 1, 2024. In the company’s earnings call, management noted that its shift to an AI-based services model had resulted in the “cannibalization” of some higher margin work, and that the AI-based model entailed the “complete eradication of margin yields,” in order for the company to try to realize “the revenue upside” of AI. The adoption of the AI model means that the Company “is going to have to take it on the chin a little bit in terms of our historical margin profile.” The company’s share price fell 38% on this news and fell an additional 20% the next trading day.

The Lawsuit

On January 30, 2025, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against Talus and certain of its directors and officers. The complaint purports to be filed on behalf of investors who purchased the company’s securities between February 16, 2023, and August 1, 2024.

The complaint alleges that during the class period the defendants failed to disclose that: “(1) the Company’s AI Data Solutions offerings required the cannibalization of its higher-margin offerings; (2) that Talus International’s declining profitability was tied to the Company’s drive to develop AI capabilities; (3) that Talus International’s shift toward AI put greater pressure on the Company’s margins than previously disclosed; and (4) that, as a result of the foregoing, Defendants’ positive statements about the company’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis.”

The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the class.

Discussion

As noted at the outset, securities class action lawsuit filings involving AI-related allegations were among the key developments in the corporate and securities litigation arena in 2024. But while this latest lawsuit also involves AI-related allegations, it arguably differs in important ways from much of the litigation that was filed in 2024.

Much of the 2024 AI-related litigation involved so-called “AI Washing” allegations – that is, allegations that the defendant company misrepresented its AI capabilities or AI prospects. By contrast, this complaint does not involve allegations that the company overstated its AI capabilities or prospects; rather, the allegation is that the company omitted to disclose that its adoption of an AI-based service delivery model would result in the company cannibalizing its own business, as well as in the reduction of the company’s revenues and margins.

In other words, the company isn’t alleged to have overstated its AI capabilities; rather it is alleged to have understated its AI-related risks.

In my year-end review of the top stories, in my discussion of AI as an area of corporate and securities litigation risk, I had conjectured that misrepresentations with respect to AI-related risk, rather than misrepresentations with respect to AI capabilities or prospects, could be a growing area of corporate litigation risk going forward. This new lawsuit provides a good example of the ways in which AI-related risks (and in particular disclosures with respect to AI-related risk) can translate into litigation.

As far as I know, this new lawsuit against Talus International is the first AI-related federal court securities class action lawsuit to be filed so far in 2025, after 15 AI-related securities lawsuits were filed in 2024. While this new suit appears to be the first of the year of its type, I do not think this suit will be the last. The likelihood is that there will be further AI-related securities suits filed in the weeks and months ahead. While some of these future suits are likely to involve AI-washing allegations, I suspect a significant number will also involve alleged misrepresentations or omissions with respect to AI-related risk.