AI Vendor Liability Squeeze: Courts Expand Accountability While Contracts Shift Risk

The landscape of AI vendor liability is undergoing a fundamental shift, creating an uncomfortable position for businesses deploying AI systems. Federal courts are pioneering legal theories that hold AI vendors directly accountable for discriminatory outcomes, while vendor contracts become more aggressive in shifting liability to customers. The result is a "liability squeeze" leaving businesses responsible for AI failures that they cannot fully audit, control, or understand.

The Mobley Precedent: Vendors as Legal Agents

The Mobley v. Workday case fundamentally altered AI liability frameworks. In July 2024, Judge Rita Lin allowed the discrimination lawsuit to proceed against Workday as an "agent" of companies using its automated screening tools. This marked the first time a federal court applied agency theory to hold an AI vendor directly liable for discriminatory hiring decisions.