FTC Signals Section 5 Deception Authority Against Undisclosed AI Output Steering

The FTC's July 1 proposed policy statement — reported in the JD Supra August 10 Washington Report — has direct implications for law firms advising technology clients and for law firms using AI tools themselves. The FTC stated that AI companies may violate Section 5 of the FTC Act when they covertly steer AI outputs toward unexpected objectives or away from objectives reasonably expected by users, characterizing such steering as meeting the three-part deception test: a representation (AI produces the best output possible), an omission (the covert steering), and materiality. The FTC explicitly stated that Section 5 contains no state-law safe harbor, meaning compliance with Colorado's AI Act or any other state AI law is not a defense — companies must provide clear and conspicuous disclosure of any output modification. For general counsel and innovation leaders at law firms evaluating AI platforms, the FTC statement signals that vendor selection due diligence must now include assessing whether the vendor's AI systems engage in undisclosed output steering — a question that is difficult to answer without access to audit logs, transparency documentation, and third-party certification.