The FBI feeds data into Troy Hunt's database and FBI Director Christopher Wray gave Troy Hunt a medal for his work [1].

The Open Web Application Security Project's Application Security Verification Standard recommends that you do a hashed password check [2].

For bigger companies, sure, go talk to legal, but for young startups, my feeling is it's not worth the $200 or whatever your counsel will charge to say it's ok. I personally did not ask anyone (am cto), I just added the check.

1. https://twitter.com/troyhunt/status/1674132801837477888

2. See OWASP ASVS 4.0 2.1.7 https://github.com/OWASP/ASVS/blob/master/4.0/en/0x11-V2-Aut...