AI legal risks for dealerships: navigating compliance and adoption

Artificial intelligence is no longer a futuristic idea for dealerships. It is here, evolving at remarkable speed and raising new questions that extend beyond operational efficiency. This brings up significant AI legal risks for dealerships in areas concerning customer transactions, compliance and data security. For dealers, the challenge is not simply how to use AI to save time or reduce costs, but how to understand and mitigate the legal and compliance risks that come with powerful tools capable of generating voices, images and even entire identities.

On this month’s episode of Up to Speed, Mike Mader, principal with Baker Tilly’s dealerships advisory service team, is joined by Mike McMahan, attorney and partner at ArentFox Schiff, to explore the legal implications of AI in automotive retail.

Over the past year, dealership leaders have heard about new products promising faster sales processes, automated customer interactions and back-office efficiencies. But technology is developing faster than awareness. Dealers may not even know the latest tools available, much less the risks they may pose. AI has quickly shifted from text generation to highly realistic audio and video capabilities - tools that can blur the line between authentic and fabricated communications.

One of the most pressing concerns is deepfake technology – AI generated audio or video impersonations. For dealers who increasingly rely on online-only transactions and remote customer engagement, this risk is especially significant. A fraudulent customer presenting falsified identity documents through AI-generated video could expose a dealership to liability, damaged reputation and financial loss. The solution may be as straightforward as re-introducing in-person checkpoints for certain high-value transactions, even as digital retailing expands in the dealership industry.

Chatbots is another technology that carries its own set of overlooked challenges. While AI-powered chat functions can improve responsiveness, they are also vulnerable to manipulation. This is a clear illustration of the AI legal risks for dealerships, where even simple customer interactions can spiral into liability if systems are not closely monitored. In one case, a dealership’s chatbot was tricked into making what appeared to be a legally binding sales offer for a vehicle at one dollar. Though the scenario was more of a demonstration than a real sale, it illustrates how easily AI systems can be exploited by customers who know how to bypass safeguards. For dealers, this demonstrates the importance of vendor vetting, contractual protections and internal oversight of every AI tool adopted in the store.

Shadow AI is another risk area dealers may not anticipate. Even if leadership is cautious about adopting AI, employees may already be experimenting with it on personal devices or dealership networks. By pasting customer information into a chatbot or using AI tools to draft communications, staff could unknowingly expose sensitive data. Dealers must establish clear policies that govern AI use, backed by IT controls and monitoring. Without this discipline, unauthorized use of AI could open the dealership to data breaches, compliance violations and lawsuits.

Data security is clearly a big concern when it comes to AI. Dealerships handle customer information that is comparable in sensitivity to what banks process: social security numbers, credit data and bank account details. When that information is shared with AI vendors, stored in external servers or fed into evolving models, the risk of leaks multiplies. Dealers need to know whether AI tools store data, how it is transmitted and whether customer information becomes part of the vendor’s training model. These are questions that should be asked before any contract is signed. Indemnification clauses in vendor agreements must be carefully reviewed. Dealers should not take on liability for systems they cannot control.

Dealers should be aware of the regulatory environment. Federal discussions about AI oversight have not yet produced a consistent national framework. Instead, states and municipalities are moving ahead with their own regulations. New York City, for example, has implemented rules addressing bias in technology-assisted hiring, and Colorado has followed similar legislation. For dealers operating across state lines, this patchwork creates uncertainty and the potential for overlapping compliance obligations. Staying informed and seeking legal guidance will be critical as AI laws evolve.

A technical issue to be aware of is the varying reliability of AI outputs. Many AI systems tend to “hallucinate” generating answers, cases or references that sound convincing but are ultimately fabricated, serving to align with user expectations rather than striving for accuracy. For attorneys, this could mean false citations. For dealers, it could lead to inaccurate sales or compliance information being presented to staff or customers. Blind reliance on AI without human oversight can create business and legal exposure. Dealers must treat AI as a tool to assist, not replace, professional judgment.

Despite the risks, AI can be useful to dealerships with thoughtful adoption. AI may eventually streamline complex, repetitive processes such as warranty reimbursement calculations. These areas present real opportunities for efficiency, though customer-facing interactions, the human elements that distinguish dealerships from direct-to-consumer models, should be preserved. The dealer network’s value lies in relationships, trust and service, not just transaction speed. Losing the human element in pursuit of automation could undermine the very reason dealerships exist.

Ultimately, when it comes to implementing AI in your dealership, slow down, think critically and seek trusted advice. Evaluate vendors carefully, ask tough questions about data usage, review indemnification clauses, establish policies to govern internal AI use and above all, remember that while AI adoption may feel like a race, not every dealership decision needs to be made today. Taking the time to adopt AI thoughtfully can prevent costly mistakes tomorrow.

The rise of AI is both an opportunity and a test for dealerships. It is a chance to harness innovation for efficiency while also requiring leaders to sharpen their approach to risk, compliance and governance. By recognizing the AI legal risks for dealerships and planning ahead, retail automotive leaders can ensure technology adoption strengthens customer trust instead of undermining it. By staying engaged with these conversations and proactively addressing the legal implications, dealerships can ensure that AI becomes a tool for growth rather than a source of liability.

The information provided in this video and article is for general information purposes only and does not constitute legal advice. You should consult with a qualified legal professional for advice regarding your individual situation.