A Blanket “No AI” Clause Can Effectively Become a “No Software” Clause

My client was about to sign a $1M+ services contract with a much larger company. One clause effectively barred the software it uses every day.

My client's work often gives it access to sensitive, not-yet-public information about its customers' plans. So the customer's caution about AI made complete sense. Information put into the wrong AI tool can be stored on someone else's servers or used to train models others use.

The trouble was that the customer's fix, as drafted, meant my client would be in breach just by doing its job.

The customer's paperwork took the simplest route, banning any use of generative AI in connection with its confidential information without prior written approval from its legal department. Since the contract also treated my client's work product as confidential, that covered essentially everything.

My client's leadership saw the problem right away. Every file this customer sends us is confidential, and Copilot is built into our Microsoft 365. Aren't we in breach from day one?

My client was right. People think of AI risk as ChatGPT or Claude, and forget that AI is now built into everyday tools like Gmail, often on by default. Turning it off can take several settings, and sometimes only IT can do it.

So we stopped arguing over whether my client could use AI and focused on which AI, and on what terms.

My AI-law teammate and I checked what my client's licenses said about training on customer data, and I made our case to the customer's in-house counsel, who came back with a compromise built on two ideas:

→ "Closed AI Systems": tools whose terms bar using your data to train models offered to others, or sharing it beyond what's needed to run the tool.

→ A separate carve-out for AI embedded in standard enterprise software (email, word processing).

We tightened it to fit how my client works. Then, three days before signing — naturally — the customer added a condition barring my client from putting its information or documents into those embedded AI features to summarize, draft or analyze. So the AI could stay on, as long as nobody actually used it on this customer's work.

We pushed back, again, and the condition came out. The result works for both sides. Embedded AI is allowed if the tool qualifies as a closed system and its use stays within the contract's existing confidentiality rules.

That one small section took hours of analysis and negotiation.

Takeaways for service businesses with large customers:

→ A blanket "no AI" clause is now close to a "no software" clause. Read it against the software your team uses every day.

→ The real negotiation is over definitions, like what counts as "inputting" information and which tools qualify as closed.

→ Know what your software licenses say about training on your data before a customer asks.

→ Reread the AI clause in every redline. Agreed concepts can get narrowed in the next draft.

Attorney Advertising. Details are anonymized and simplified. None of this is legal advice.

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