Chen believed that she was doing all the right things. Her little marketing firm had been using AI for months to automate customer reporting, create ad copy, and analyze client data. Then she received the email of her lawyer.
We should speak about compliance.
She wasn’t alone. On the first day of January 2026, business owners across the country faced a new reality. AI policies that appeared to be far-off policy talk turned into hard reality legal mandates.
When the Rules of AI Changed Overnight
On January 1, 2026, several state laws concerning AI became effective. Colorado was the first state to institute full AI regulations, where companies must evaluate their systems for the risk of discrimination. California was not too far behind in its own regulations.
The confusion? In each state, the rules were different.
Colorado requires high-risk AI systems to be subjected to algorithmic impact assessments. California is concerned with the transparency of automated decision-making. Illinois already had laws on biometric privacy that now intersect with AI facial recognition technology. New York City needs hiring algorithm bias audits.
When you conduct business between states, you are managing two or more rulebooks.
The Trump Executive Order That Changed Everything
In early 2025, President Trump signed an executive order aimed at what he alleges to be conflicting state AI laws that are detrimental to American innovation. The order instructed the agencies of the federal government to develop a common framework and also question any state laws which contradict with the federal standards.
This generated a grey zone in the law. Do you follow state rules? Federal guidance? Both?
The answer isn’t clear yet. Some states have already gone to court to dispute the order. Businesses are in limbo until the judges make decisions.
The Real Cost of Getting It Wrong
The penalties aren’t small. In Colorado, the law permits consumers to initiate legal actions against the companies on the basis of AI-related damages. The maximum fines are 20000 dollars each offence. The implementation of California enforcement may imply both a monetary penalty and a mandate to alter your whole AI infrastructure.
But money isn’t the only risk.
Consider the example of RealPage, a prospective company that offers rental pricing software. Prosecutors allege their algorithm was used to organize rent hikes by landlords, which is against antitrust law. The case is still in court, yet it demonstrates how AI technologies may cause unforeseen liability.
Like cases are springing up all over. Hiring algorithms discriminate against. Artificial intelligence credit scoring systems are being considered. Even basic chatbots have elicited litigation on data privacy.
What Europe Did First
America was debating, but Europe was taking action. The EU AI Act was enacted in 2024 and began to roll out requirements during 2025.
The European approach is less complex in principle: classify AI according to risk exposure. Stereotypes of high-risk systems (such as medical machines or recruitment aids) are subject to rigorous criterion. Less risky AI (such as spam filters) receives less massive rules.
The catch? When you have European customers, you abide by European regulations. Even though your company will never leave Texas.
A lot of American companies are currently adapting to EU standards due to the fact that it is less hassle than having two different systems. This implies that the development of AI in America is being informally influenced by European regulations.
The Frontier Model Problem
Highly developed AI systems, so-called frontier models, produced a new area of concern. These are the robust systems capable of producing essays, coming up with pictures, writing code, and also performing sophisticated duties.
Who should oversee them? How do we prevent misuse? What is considered dangerous capability?
In 2023, the Biden administration announced a framework that mandated safety testing of the most powerful models. The Trump administration retained certain requirements but loosened others, leaving developers uncertain with what they need to do.
In the meantime, California attempted to enact SB 1047, which would have enforced sweeping safety measures on large AI models. It did not work, yet other states are introducing similar bills.
What This Means for Your Business
The compliance burden isn’t equal. Large tech companies have legal teams and budgets for this. Small businesses and startups don’t.
Here’s what you need to consider now:
Know what AI you’re using. Many businesses use AI without realizing it. Your CRM might use predictive analytics. Your website might use AI chatbots. Your applicant tracking system probably uses algorithmic screening. Make a list.
Understand your risk level. Are you using AI to make decisions about people? Hiring, firing, promotions, credit, housing, insurance, these are high-risk uses that attract regulatory attention.
Check your data practices. Most AI regulations connect to data privacy. Where does your AI’s training data come from? Do you have rights to use it? Can you explain how decisions are made? With proper cybersecurity measures in place, you can better protect sensitive AI training data and prevent breaches that could expose your compliance gaps.
Document everything. If you face an investigation or lawsuit, you’ll need to show what you did to comply. Keep records of your AI systems, their purposes, testing results, and any bias audits you conducted.
Watch multiple jurisdictions. If you operate in or serve customers in Colorado, California, Illinois, or New York, you’re already subject to state AI laws. If you serve European customers, the EU AI Act applies too.
The Litigation Wave Just Started
In addition to the enforcement of regulations, there is an increased number of private lawsuits. The artists filed a lawsuit against AI image generators because of copyright violations. Authors were suing AI businesses to use their books without their consent. Employees used discriminatory algorithms to sue employers.
These cases will take years to resolve, but they’re creating new legal theories about AI liability. Even if you’re not breaking any regulation, you could face a lawsuit claiming your AI caused harm. Social media plays a growing role in these legal cases, as evidence of AI misuse or harm often surfaces on public platforms first.
The insurance companies are retaliating by developing AI liability policies. Others are not considering AI-related claims as standard coverage. Review your current policies.
Developers Face Special Risks
When you are constructing AI systems, rather than simply using them, there are other difficulties.
The issue of liability is sticky. Who will bear the responsibility in case your AI tool makes a discriminative decision? You as the developer? The company that deployed it? Both?
Recent legal action may indicate that all chain members are liable. This is a matter that courts are still deciding on, and developers should never feel safe simply because another person is using their tool.
Open-source AI raises more questions. Should you release a model out in the open and someone uses it to injure people? Is that your responsibility? What about refining it first? And suppose they use it in a manner not intended by you?
Nobody knows yet. The law hasn’t caught up.
What Coming Soon
Several federal AI bills are moving through Congress. None have passed yet, but they signal where regulation might go:
The Algorithmic Accountability Act would require impact assessments for automated decision systems. The AI Leadership Training Act would fund AI education for federal workers. The National AI Commission Act would create a body to study AI risks and recommend policies.
More state laws are coming too. At least 15 states are considering AI legislation in 2026. The patchwork will get more complicated before it gets simpler.
Internationally, other countries are following Europe’s lead. Canada, Japan, and South Korea are all developing AI frameworks. China already has extensive AI regulations that apply to companies operating there.
How to Stay Ahead
This landscape changes weekly. What can you do?
Join industry associations that track AI policy. Many provide regular updates and compliance guidance. The information is worth the membership cost.
Build relationships with lawyers who understand AI. This is a specialized area. Your general business lawyer might not know the latest AI regulations. Legal professionals themselves are learning to navigate this field, successful lawyers use AI as an assistant, not a replacement for their judgment when handling complex compliance questions.
Participate in public comment periods when regulators propose new rules. Your input matters, especially for small businesses that will bear compliance costs.
Consider getting certified. Several organizations now offer AI governance and ethics certifications. They signal to customers and regulators that you take compliance seriously.
The Human Element Still Matters
Nobody can tell what all the legal complexity really is; however, there will always be one rule: harming people with your AI will lead to consequences.
Laws are attempting to keep pace with that fact. They are posing simple questions. Is your AI fair with people? How does it come up with decisions? When do you know it makes mistakes?
These are not merely legal questions. They’re ethical ones.
Only those businesses that saw AI as a means of serving people in a better fashion, rather than a device to replace human judgment, will survive this regulatory wave. They will be the ones that were tested to have bias before regulators demanded it. Who interpreted decisions even where the law was ambiguous. Who installed guardrails because it was the right thing to do.
Smart Contracts and Automated Systems
One area that deserves special attention is automated contract execution. Smart contracts powered by AI are becoming common in real estate, finance, and supply chain management. But smart contracts carry unique risks in 2026 that combine both AI compliance requirements and blockchain legal questions.
Assuming you are or intend to use smart contracts in your business, you must learn the implications of new AI regulations on automated contract terms. A vulnerability in the code of your smart contract may lead to a breach of multiple state laws at the same time.
Legal Research and AI Tools
For lawyers and legal departments trying to keep up with this changing landscape, AI-powered research tools have become essential. Choosing the best AI legal research platform in 2025 means finding one that stays current with regulatory changes across all jurisdictions.
The same tools that help lawyers research case law can help businesses understand their compliance obligations. Generative AI for lawyers enables document automation and research that would take humans weeks to complete manually.
But here’s the catch: using AI to understand AI regulations means you’re subject to those very regulations. Your legal research tool might need its own compliance review. AI drafting and research tools unlock legal efficiency, but only when used within proper compliance frameworks.
What Happens Next
AI regulation is in the ugly middle phase. Rules are overlapping, contradicting, and gaping. The new questions of law are being sorted out by the courts. Regulators are educating themselves.
This insecurity will not prevail. At some point, more definite standards will be created. Cases will be decided. The laws of the federal and state governments will either be in line or one will prevail.
At this point, companies have to deal with conflicting demands in their attempt to innovate. It’s not easy. It’s not cheap. But it’s necessary.
The companies that are concerned about compliance at this time will be advantaged in the future. They will have systems, documentation prepared, and practices laid down. They will be prepared when the enforcement increases, and it will.
The ones that neglect those changes are making a very costly gamble. It can only get stricter on the side of the regulatory environment.
Chen had to know this the hard way. Following that discussion with her lawyer, she took three months to audit all AI tools utilized by her agency. She employed a compliance consultant. She abandoned certain practices and disregarded tools that were not able to comply with new requirements.
It was time-consuming and costly. However, once the enforcement in Colorado started, she was not concerned. She had done the work.It is up to you to choose: either act now or act later. You are free to do what you want; however, time is running out.
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