In recent months, a number of companies have been hit with AI-washing securities class action lawsuits alleging that the defendant companies overstated their AI-related capabilities or opportunities (such as, for example, the securities suit filed late last week against Tempus AI, as discussed here). While there have been quite a number of AI-washing related securities suits, I have long though that the larger and longer-term AI-related securities litigation risk is not as much with respect to allegations that companies overstated their AI capabilities, as from allegations that companies understated their AI-related risks.
In a new securities class action lawsuit that reflects these latter kinds of risk, last week a plaintiff shareholder sued online platform Reddit, alleging that the company misled investors by downplaying the impact on the company’s site traffic and ad revenue from Google’s adoption of artificial intelligence search results. As discussed below, these kinds of AI-risk related allegations could represent a potential new area of AI-related securities litigation risk. A copy of the June 18, 2025, complaint against Reddit can be found here.
Background
Reddit is a social media platform and forum-style website on which users share and discuss content through posts and comments. Reddit’s primary source of revenue is from advertising on its website. Site traffic directly affects the company’s revenue. The company tracks and reports user metrics. One user metric is “daily active unique” (DAUq) which measures unique visitors to the Reddit website. Another measure is “average revenue per unique” (ARPU), which is a ratio of quarterly revenue to average DAUq.
A significant portion of Reddit’s user traffic comes from individuals seeking answers to questions, using Google Search. In 2024, Google Search began implementing new Artificial Intelligence capabilities, such as AI Overviews, a feature in Google Search that uses generative AI to provide concise search results. These AI-generated results seek to quickly answer user queries by synthesizing information from multiple sources, including Reddit. These results may answer a user’s question without any need for the user to click through to any external website, an outcome known as a “zero-click search.”
According to the complaint, in quarterly conference calls with analysts beginning with the 3Q24 call on October 29, 2024, analysts began asking Reddit management about the impact of Google’s changes. The company’s management acknowledged that Reddit has a “symbiotic” relationship with Google. The management also acknowledged that from time to time Google alters its search algorithms and protocols, and that the company had always navigated through these changes. Among other things, management reassured analysts that the company’s core users will come to Reddit regardless, and that the company’s business “has been very stable” with “reliable growth,” and that is “what we see looking forward as well.”
In the company’s 4Q24 and full-year 2024 conference call, company officials acknowledged that it did “experience some volatility from Google Search triggered by a periodic algorithm change,” again providing reassurance that the company has managed past algorithm changes. In response to analysts’ questions, a Reddit executive said with respect to the changes at Google that “I’m not worried about it,” saying the changes would have “no revenue impact.”
On May 1, 2025, the company reported its 1Q25 results. Among other things, its 1Q25 earnings release reflected a third consecutive quarter slowdown in daily active user growth. In response to questions about the impact of the Google changes, a company manager said, among other things, “We believe we’re in great shape over the medium and long term” and that in the current quarter (that is during 2Q25) “we’re seeing total DAUs growing in the high-teens range year-over-year.” The same manager also asked rhetorically, “is there a long-term risk to Reddit here?” answering the question “In my view, the answer is no.”
On May 19, 2025, Wells Fargo analysts downgraded Reddit’s stock, saying that Google Search’s implementation of new AI features are likely “permanent” disruptions on Reddit’s user traffic. The analysts stated further that traffic to Reddit from Google Search is likely to decline as a result of the changes, which ultimately, the analysts said, would hurt Reddit’s advertising revenue. On May 21, 2025, Baird analysts downgraded Reddit, citing similar concerns. The complaint alleges that the company’s share price declined due to these developments.
The Lawsuit
On June 18, 2025, a plaintiff shareholder filed a securities class action lawsuit in the Northern District of California against Reddit and certain of its executives. The complaint purports to be filed on behalf of investors who purchased the company’s securities between October 29, 2024, and May 20, 2025.
The complaint alleges that during the class period, the defendants failed to disclose that: “(i) changes in Google Search’s algorithm and features like AI Overview were causing users to stop their query on Google Search; (ii) these algorithm changes were materially different than prior instances of reduced traffic to the Reddit website; (iii) Defendants were aware that the increase in the query ‘Reddit’ on search engines was because users were getting the sought answer from Google Search without having to go to Reddit, and not because they intended to visit Reddit; (iv) this zero-click search reality was dramatically reducing traffic to Reddit in a manner the Company was unable to overcome in the short term; (v) Defendants, therefore, lacked a reasonable basis for their outlook on user rates and advertising revenues; and (vi) as a result, the Company’s public statements were materially false and misleading at all relevant times.”
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.
Discussion
What is interesting to me about this new lawsuit, and what to me makes it noteworthy, is that the complaint is AI-related but it does not involve AI-washing allegations. The plaintiff is not alleging here that Reddit overstated its AI-related capabilities or opportunities. Rather, the allegation is that the company downplayed the risks and potential impacts on the company from AI-related changes in Google Search, including in particular with respect to Google’s AI Overviews.
What makes this case even more interesting to me is that the AI-related risks to Reddit here did not arise from Reddit’s own use or deployment of AI. Instead, the risks here arose from AI adoption and implementation by one of its suppliers. (I use the word “supplier” to refer to Google because that was what Google was effectively doing for Reddit, supplying users.)
This element of corporate risk arising from third-party AI adoption is particularly important to note. The fact is that AI is quickly becoming pervasive. AI is transforming a wide variety of industries: healthcare and health services; transportation and logistics; asset management; legal services; education, and a host of other industries. All are being altered in ways that could change the way business gets done. While these changes may indeed present many companies with opportunities, these changes also involve a host of risks, as well. And it is not just companies’ own adoption of AI that presents risks. AI adoption by customers, competitors, vendors, suppliers, and even regulators could reshape many fundamental characteristics of the way business gets done – as the facts of this case demonstrate.
I am going to go out on a limb here.
Even though to this point most of the AI-related D&O litigation has involved AI-washing type allegations, going forward I think AI-washing cases will become relatively less important, and AI-risk related cases are going to become much more important. I think future AI-related D&O litigation is going to be about allegedly undisclosed or understated AI-related risks, as companies and their competitors, customers, vendors, suppliers, and regulators increasingly adopt AI.
I think by now we all recognize that AI is a very big deal. AI is also going to be a very big deal from a D&O claims exposure standpoint as well. And many (if not most) of the AI-related D&O claims going forward are going to involve AI-related risk.
Other AI-Related Reddit Litigation: The new securities class action lawsuit filed last week against Reddit is not the only AI-related litigation in which Reddit is involved. As discussed in a June 17, 2025 post on the AI Law and Policy blog (here), in early June, Reddit filed a lawsuit in California state court against AI developer Anthropic, alleging that it trained its AI models (e.g., Claude) on public Reddit posts and comments scraped between December 2021 through October 2024. As the blog post points out, Reddit unusually did not assert copyright other intellectual property allegations, but instead asserted several common law claims, including breach of contract, unjust enrichment, and unfair competition.
Apple Hit with AI-Related Securities Suit: It turns out the new securities suit against Reddit was not the only AI-related securities class action lawsuit filed late last week. On Friday last week, a plaintiff shareholder filed a securities class action lawsuit in the Northern District of California against Apple and two of its executives, alleging that the defendants misled investors into believing that the company would launch AI-based Siri features on the iPhone 16. The plaintiff further alleges that the company’s share price fell after the promised rollout was repeatedly delayed. The complaint alleges that, in violation of the securities laws, the defendants made misleading statements about the company’s timeline for integrating the new AI-based Siri features into its devices. A copy of the June 20, 2025 lawsuit against Apple can be found here.
The new suit against Apple is much closer to the AI-washing kind of AI-related securities suit. Essentially, the complaint alleges that in order to boost the buzz around the iPhone 16 launch, the company promoted the new AI-enhanced Siri features. As in the case with other AI-washing cases, the complaint in this new lawsuit alleges the company misrepresented its AI capabilities and prospects.
Or — alternative theory here — it could be argued that the Apple lawsuit is another example of the kind of AI-risk related lawsuit I discussed above. Apple, it could be argued, got sued because it failed to disclose the risk that it could not develop Siri’s AI capabilities in time to meet its previously announced deadlines. A lot of risk involved with AI adoption and implementation these days.
All of the sudden, it is starting to feel as if there is going to be an awful lot of AI-related litigation.