The California AI Transparency Act (SB 942) introduces new rules for businesses that create or use generative artificial intelligence (GenAI). The law, signed on September 1, 2024, aims to ensure transparency in AI-generated content. It takes effect on January 1, 2026, and applies to companies with more than one million users in California.
This law requires businesses to embed disclosures in AI-generated images, videos, and audio. It also mandates the availability of AI detection tools. Companies must update their contracts to ensure compliance. Violations may result in fines of $5,000 per day, making it essential for businesses to understand the new obligations.
Scope of the California AI Transparency Act
The law applies to companies developing AI systems that generate synthetic content such as images, videos, and audio. Only providers with over one million monthly users in California are subject to these regulations.
The law does not apply to non-user-generated media, including video games, television, and streaming services. AI-generated text is also not covered under the current version of the law. However, future legislation may expand these requirements to text-based AI content.
Businesses that license AI technology to third parties must also comply. If a licensee alters AI models to bypass disclosure requirements, the AI provider must revoke the license within 96 hours.
AI Detection Tool Requirements
A major requirement of the Act is that AI providers must offer a publicly accessible AI detection tool. This tool must be free for users and allow them to check if content was generated or altered by AI.
The tool must be capable of processing multiple types of content, including images, videos, and audio. It should provide system provenance data, such as details about the AI model used to create the content. However, it cannot store or process personal user data.
To ensure accessibility, the tool must support an application programming interface (API). This allows businesses and researchers to integrate AI detection capabilities into their own systems.
Manifest and Latent Disclosure Requirements
The Act introduces two types of disclosures that must be embedded in AI-generated content. These disclosures ensure that consumers and regulators can identify AI-created media.
Manifest Disclosures (Visible Labels)
AI-generated content must include clear and conspicuous labels to inform users that the content was created by AI. These labels must be simple to read and difficult to remove.
The placement of these disclosures depends on the type of content. For images, a watermark or overlay may be required. For videos and audio, text or spoken disclaimers may be necessary. The goal is to ensure that users are fully aware when they encounter AI-generated content.
Latent Disclosures (Embedded Metadata)
In addition to visible labels, AI-generated content must contain hidden metadata. This metadata includes:
- The AI provider’s name
- The AI model version number
- The creation time and date
- A unique identifier for tracking
Latent disclosures must be permanent and detectable by AI verification tools. The law ensures that metadata remains intact, even if the content is edited or modified.
Contractual Obligations for AI Licensees
Companies that license AI models must ensure their contracts comply with the Act. The law mandates that third-party licensees cannot modify AI models in a way that removes disclosure features.
If an AI provider discovers that a licensee has altered an AI system to bypass disclosure rules, they must revoke the license within 96 hours. If the licensee does not comply, legal action can be taken.
These rules prevent misuse of AI technology and ensure that all AI-generated content remains traceable. AI providers must update their contracts to include explicit terms that reflect these requirements.
Enforcement and penalties
The law includes strict penalties for non-compliance. Companies that violate the Act may face
- • Fines of $5,000 per violation, per day.
- Lawsuits filed by the Attorney General or local authorities
- Legal action against third-party licensees that fail to comply within the 96-hour period
Each day of non-compliance is considered a separate violation. This means that companies could face millions in penalties if they do not implement the required disclosures and detection tools.
Contracting Strategies for Compliance
To avoid legal risks, businesses should update their contracts to align with the Act. The table below outlines key contract updates that companies should consider:
| Contract Element | Compliance Strategy |
| AI Disclosure Obligations | Contracts must require manifest and latent disclosures in all AI-generated content. |
| License Revocation Terms | Agreements must specify a 96-hour license revocation period for non-compliance. |
| Indemnification Clauses | Providers should include terms that shift liability risks to licensees who fail to comply. |
| Audit and Monitoring Rights | Contracts should allow verification of AI disclosure compliance. |
| Content Modification Limits | License agreements must prohibit alterations that remove AI disclosure labels. |
Updating contracts ensures that AI providers and licensees understand their obligations under the law. It also helps businesses mitigate legal risks by clearly defining responsibilities and penalties.
Future Implications of the AI Transparency Act
The California AI Transparency Act could serve as a model for other states. Similar laws may be introduced across the U.S., requiring companies to comply with broader AI transparency rules.
One possible expansion of the law is the inclusion of text-based AI content. Currently, the Act only applies to images, videos, and audio. However, lawmakers may introduce additional regulations to cover AI-generated text and chatbots.
Companies should also watch for enforcement guidelines from the California Attorney General. These guidelines may provide clarity on how the law will be applied and what additional compliance measures businesses must take.
Conclusion
The California AI Transparency Act imposes strict requirements on businesses using AI-generated content, including mandatory disclosures, AI detection tools, and updated license agreements. Non-compliance can lead to significant financial penalties, making legal guidance essential.
Stevens Law Group specializes in technology and AI law, offering contract reviews, risk mitigation strategies, and proactive regulatory guidance to keep your business compliant.
Don’t risk penalties—contact Stevens Law Group today to ensure your AI technology and contracts meet California’s legal standards before the law takes effect on January 1, 2026.
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