I stopped playing with the outlaw sectors turned on against AI for two balance reasons.

1) If the AI are too weak, they expand super slowly, or die altogether.

2) If the AI are strong enough, the outlaw sectors feed their capital ships and titans a ton of experience, making them super hard to kill in the mid-late game. The difference between a level 1 and level 6 titan is huge.

That said, the outlaw sectors are a very fun addition if you're playing with friends. They slow down the early game, make it basically impossible to rush, and make sure that everyone has leveled cap ships by the time you meet.

Good times

I'm not surprised. I've experimented with the AI and have figured out a few of its "death spirals" that doom it. On low difficulties they can easily get into an upkeep rut. Due to the fact that they don't budget for newly acquired planets the low-difficulty AI's can suffer a fairly notable drop in income for a prolonged period of time after acquiring new planets. Unable to develop their planets, they actually reduce rather than enhance the AI's income and its economy can take a long time to recover. Quick start and faster income speeds both alleviate this problem by increasing the AI's income and decreasing the amount of time they spent bleeding in this rut. Higher difficulty AI's seldom have this problem and as a result get moving relatively smoothly. Lower difficulty AI's can often bum around for 30-60 minutes without any real fleet as a result of this.

Of course, higher difficulty AI's can death spiral too. They're fine for income (vicious usually ends up in a "money is no object" scenario) but they poorly manage their logistics space and planetary upgrades. In particular it will often build too few factories, and will put civilian specialization on the planets with those factories. New unit production orders will be balanced between its existing factories, but since the ones on civilian specialized planets build so slowly their queues just keep growing. Eventually this reaches a critical point at which so much of the AI's fleet command is clogged up in unit production queues that it can no longer fight effectively. Eventually new units are just getting fragged as soon as they come out of the factory, and at that point the AI's real fleet (rather than the imaginary in-production one) quickly collapses to nothing but capital ships. This particular death spiral is virtually guaranteed to happen on higher difficulties after you eliminate the AI's homeworld, as the homeworld is guaranteed to two have at least two factories and industry specialization, which gives a certain minimum guarantee on its unit production capabilities. Take that away and the death spiral isn't far off.