At the time of starting the jam I was unaware of the private medical photos being used for AI, and as someone who had medical photos taken I would never want them to be used by strangers on the internet.
I don't see how canceling the jam and restarting it would be any less fair then letting it continue with the updated rules. People who used AI would be in the same position they are now, and people who have previously submitted would have to seek out the new jam to resubmit.