The state is drafting regulations to limit artificial intelligence software in marketing and business operations to protect consumer privacy. It comes with an estimated $3.5 billion upfront price tag, and critics argue it would place a substantial burden on small businesses.
Grocers, for one, warn it would upend critical investments in targeted ads and potentially raise food prices.
The proposal would establish a right to opt out of the use of automated decision-making technology. Business trade groups are calling the definition of ADMT overly broad, encompassing most software programs. The protections would trigger when ADMT decisions involve extensive profiling or when they impact a consumer’s access to essential goods, such as groceries or gas, or when denied a loan or employment, for example.
Companies would also have to identify, document and mitigate any potential privacy risks, while reporting that information to the California Privacy Protection Agency. The CPPA rules would require businesses to conduct annual cybersecurity audits as well.
After debating for two years the appropriate path for regulating AI, the agency voted last month to initiate the rulemaking process, opening up public comment on the proposal through February. Colorado and New Jersey are also considering regulations, and the CPPA regulations ride a wave of activity in the California Legislature over adding guardrails to AI.
The proposal has gained the backing of the UC Berkeley Labor Center. Testifying at the November hearing, Annette Bernhardt, a director at the center, said California has an opportunity to lead the country in protecting basic rights over worker data.
“With the advent of big data and artificial intelligence, employers in a wide range of industries are increasingly capturing, buying and analyzing worker data, electronically monitoring workers and, importantly, using algorithmic management to make critical employment-related decisions,” said Bernhardt. “That's why labor groups and other worker advocates are paying such close attention to the CPPA rulemaking process, because the stakes are high.”
Leading the country, however, comes with a price.
CPPA staff estimate the regulations would cost $3.5 billion to implement in the first year alone and $1 billion each subsequent year and lead to employment losses of up to 126,000 through 2030. The state would also lose about $2.8 billion in tax revenue. The agency reasons the rules would save companies and consumers money by avoiding more than $66 billion in losses from cybercrimes.
Ronak Daylami, CalChamberLast year a coalition of businesses, including the California Farm Bureau, warned the regulations could lead to harmful disruptions “for all internet users in California.”
Spearheading the business opposition, the California Chamber of Commerce charges that forcing broad behavioral changes in consumer engagement would ignore massive ongoing costs and losses in business productivity.
“We firmly believe overregulation hurts everyone, and unfortunately, these regulations continue to miss the mark in achieving any semblance of balance,” said CalChamber policy advocate Ronak Daylami. “The regulations clearly continue to exceed the express authority voters granted to the agency stretching far beyond the realm of what's commonly understood to be privacy regulations and veering into general AI regulations, at times even rewriting the law.”
In 2020 voters approved Proposition 24 to extend the 2018 California Privacy Rights Act, while establishing an agency dedicated to consumer privacy protection. The act prevents businesses from sharing personal data and limits the use of sensitive information like race, ethnicity, religion and sexual orientation.
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Daylami noted that state lawmakers plan to introduce legislation on ADMTs in the legislative session that began on Monday and said any decisions on such “incredibly critical issues like AI” should go first through the Legislature, where policymakers can publicly debate the implications, CPPA’s legal authority and the competing interests, before setting the overall direction for the state.
“The reason many of us are feeling jammed and that these regulations are not ready for rulemaking is that to us, this hasn't been an entirely iterative and interactive process,” said Daylami, who argued CPPA has ignored the trade group’s input on previous iterations of the proposal and that significant deficiencies still need to be fixed.
Leticia Garcia, director of state government relations at the California Grocers Association, shared strong concerns over allowing consumers to opt out of ADMT campaigns and about the potential costs.
“We are very concerned about the high price tag of the implementation, particularly in the face of rising costs and consumer dissatisfaction with how much everyday needs impact their bottom line, including groceries,” said Garcia.
High food prices are driving grocery stores to rely more on rewards and savings programs, using ADMT to customize those advertisements and create tailored coupons that save customers money, she said.
“The choice to opt out of automated decision-making tools not only hurts the retailer, but also hurts the consumer's wallet,” said Garcia.
One of the association’s members, a family-run grocery in a rural, disadvantaged area, recently implemented a rewards and discount program after saving up for the technology, which was “extremely costly” even though it is now commonplace.
“Their hefty investment into this technology will be in vain if they are not allowed to provide their customers with their own personalized coupons and ads,” she said. “In an industry that depends on a very small profit margin, our members are very calculated on what investments they make to satisfy their customers.”
The many business concerns reiterated to the CPPA over the years has created division within its governing board. Alastair Mactaggart, who has founded an advocacy group on consumer privacy and authored Prop. 24, cast the sole dissenting vote on opening the rulemaking on the proposed regulations. Throughout the year, Mactaggart has voiced concerns of overreach, lack of privacy protections and a high likelihood for legal challenges.
“At this point, the scope remains unchanged,” he said. “I believe this undermines privacy, rather than protecting it.”
Alastair Mactaggart, CPPAMactaggart asserted the scope is so broad it would incorporate any company using software, hurting businesses and overwhelming the agency with paperwork while diminishing its enforcement ability.
“There's no chance we'll be able to review tens and tens of thousands of multipage risk assessments at this stage with our current resources,” he said. “This has almost nothing to do with some predictive algorithm that tells your boss to fire you because you might get pregnant. That's creepy and that's bad.”
He estimated the sectors potentially impacted by the regulation account for 75% of the state’s economy.
“At some meaningful level, this will break the internet,” he said.
Board chair Jennifer Urban, a law professor at the University of California, Berkeley, stressed to Mactaggart that initiating the rulemaking process allows the board to begin revising the proposal to address those concerns, though she was hesitant to endorse any significant changes.
“We are legally mandated to have rules on opt outs for automated decision making, including profiling, on risk assessments and on cybersecurity audits,” said Urban. “We have, in fact, been sued on a theory that we have been too late in promulgating these regulations.”
Several labor advocates, on the other hand, pressed the board to further expand the restrictions and eliminate any compliance flexibility that could lead to loopholes.
“We would encourage you especially to be looking at the strong civil rights protections that are needed for immigrants, people seeking reproductive services, transgender people, protesters and others,” said Becca Cramer-Mowder, a legislative advocate at ACLU California action.
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