DOJ "Triples Down" on View that Use of Pricing Algorithms Can Support Price-Fixing Claims

The Antitrust Division of the U.S. Department of Justice (DOJ) on March 28, 2024, weighed in for the third time in recent months in support of plaintiffs in class action lawsuits challenging the defendants' use of software to assist in pricing decisions. The DOJ submitted its latest statement of interest in Cornish-Adebiyi, et al. v. Caesars Entertainment, Inc., et al., a case pending in the U.S. District Court for the District of New Jersey alleging a conspiracy among Atlantic City casino hotels to inflate prices of hotel rooms through adoption of a common software platform that incorporates a pricing algorithm that suggests room rates.¹ The DOJ had previously submitted similar statements of interest in cases challenging use by owners of multifamily apartment buildings of RealPage and Yardi software to set rental rates for apartments in their buildings. In response to arguments by the defendants in each case that none of them ever discussed its choice of pricing software with its competitors, much less agreed with competitors to adopt a common pricing platform, the DOJ (with the support of the Federal Trade Commission (FTC) in this case and the Yardi case) argued that the plaintiffs properly alleged concerted price fixing by the hotel or apartment owners when they said in their complaints that each defendant delegated its pricing discretion to a common pricing algorithm.

From the DOJ's perspective, if the plaintiffs allege that the software company invited multiple competitors to use its pricing algorithm and companies adopt the software with knowledge that other competitors are as well, it does not matter that the competitors never communicated with each other at all. That conduct alone opens companies up to price-fixing claims that deserve to survive motions to dismiss.

If the DOJ's views are adopted by courts,² pricing algorithms used in online shopping and other industries (as the The Wall Street Journal observed on April 15, 2024) might also become targets of private plaintiffs or the antitrust agencies. Businesses that use or are considering using algorithmic pricing tools should be aware of this developing legal landscape and understand the associated risks.

The Case Against Atlantic City Casino Hotels

In Caesars, the proposed class consists of individuals who booked hotel rooms in Atlantic City, New Jersey, from June 2018 to the present.³ Believing that they received "artificially high" hotel room rates, plaintiffs filed a one-count complaint against eight Atlantic City casino-hotel operators, as well as the Cendyn Group LLC, a revenue management company that provided the algorithmic software platform, called "Rainmaker," purportedly used by the defendant casino-hotel operators.⁴

The Allegations

The plaintiffs describe the Rainmaker software used by the defendants as gathering real-time pricing and occupancy data from hotels that use the software and allowing for "a clear and complete picture of market supply and demand and competitive dynamics at any given time."⁵ Using such pricing and occupancy data, the software's algorithm generates "optimal" room rates for each participating casino hotel, which the software then recommends to each casino hotel.⁶

The plaintiffs brought suit under Section 1 of the Sherman Antitrust Act (15 U.S.C. § 1), which requires that they show that defendants entered into an agreement or conspiracy relating to use of the software.⁷ By engaging with this third-party pricing system, the plaintiffs contend, the defendant casino-hotel operators acted in concert to use shared pricing recommendations and, thus, entered into a per se⁸ illegal price-fixing scheme or conspiracy, in violation of Section 1.

Defendants Move to Dismiss

In their motion to dismiss, filed on Feb. 20, 2024, the defendants focused principally on the lack of an agreement or conspiracy to increase prices. Specifically, they argued that the plaintiffs failed to allege direct evidence – such as meetings, conversations or some form of communication – that would plausibly suggest an agreement among them.⁹ Likewise, the defendants argued that the plaintiffs did not allege circumstantial evidence related to any meaningfully similar conduct that would allow the court to infer the existence of an illegal agreement.¹⁰ Among other things, the defendants emphasized there is no dispute that they began using Rainmaker at vastly different times across a 14-year period, that they could, and often did, decline the recommendations provided by a particular software pricing algorithm, and that some of them raised their rates while others lowered them.¹¹ In light of such allegations, the defendants argued that there can be no agreement or conspiracy, even if they were aware that they were sharing information with and receiving pricing recommendations from Rainmaker.

The defendants' arguments closely track the analysis and conclusions reached by the U.S. District Court for the District of Nevada in Gibson, et al., v. MGM Resorts Int'l, et al., a Section 1 case involving similar allegations against casino-hotel operators on the Las Vegas Strip that also allegedly used Rainmaker.¹² There, the court granted the defendants' motion to dismiss and, in doing so, identified a "non-exhaustive" list of "fatal" deficiencies in the complaint, including that plaintiffs failed to allege that: 1) all the casino-hotel operators used the same pricing algorithm, 2) all casino-hotel operators "began using particular pricing software at or around the same time," 3) the casino-hotel operators "exchang[ed] nonpublic information with each other through their use of the same software" and (4) all casino-hotel operators "[were] required to accept the prices that the pricing software recommends to them."¹³

The Statement of Interest

The DOJ's statement of interest, submitted on March 28, 2024, argues that the defendants need not have accepted every recommendation provided by the algorithm at issue to have colluded. Rather, the DOJ contends that even where the defendants did not wholly delegate pricing authority to the algorithm, use of this technology is a departure from the once-independent pricing decisions occurring prior to engagement of the algorithm and constitutes the requisite agreement among competitors to violate Section 1 of the Sherman Act.¹⁴ The DOJ further argues the fact that defendants may have deviated from the algorithm's recommended pricing does not immunize them from antitrust liability because "just as competitors cannot agree to fix their final prices, competitors cannot agree to fix the starting point for pricing."¹⁵

The DOJ also argues that the absence of direct communications between the defendants is not fatal to the plaintiffs' claim, emphasizing that Section 1 reaches "tacit" agreements, which can occur when entities "engage" as a group to achieve a "common goal" and also "prohibits competitors from delegating key aspects of pricing decision-making to a common entity, even if the competitors never communicate with each other directly."¹⁶ The DOJ further contends that, contrary to the defendants' framing of the issue, the court need not apply the traditional "parallel conduct and plus factors" analysis. The court can infer a tacit agreement "from an invitation proposing collective action followed by a course of conduct showing acceptance" of that invitation.¹⁷

At present, the motion to dismiss briefing in Caesars is complete and awaiting the court's decision.

Increasing Trend and Prioritization

Interest of the antitrust agencies in the use of pricing algorithms is not new. In addition to public statements highlighting their views of the antitrust risks posed by use by competitors of common pricing platforms,¹⁸ the DOJ has filed similar statements of interest in related cases.

On Nov. 15, 2023, the DOJ submitted a statement of interest in In re RealPage, Inc., Rental Software Antitrust Litig., a consolidated series of antitrust cases currently underway in the U.S. District Court for the Middle District of Tennessee, where apartment and student housing lessees have alleged that property managers, owners, operators and lessors conspired with a property management software company to artificially inflate lease prices above competitive levels.¹⁹ And more recently, on March 1, 2024, the DOJ (with the support of the FTC) filed a statement in Duffy v. Yardi Systems Inc., et al., where a putative class of renters filed suit in U.S. District Court for the Western District of Washington, contending that 11 property management companies engaged in a price-fixing ring through the use of a pricing algorithm, developed and powered by a property management software company.²⁰ In both cases, the DOJ took the same fundamental position as in Caesars, namely that Section 1 of the Sherman Act "prohibits competitors from fixing prices by knowingly sharing their competitive information with, and then relying on pricing decisions from, [a common software algorithm, which] competitors know analyzes information from multiple competitors."²¹

The prevalence of algorithmic pricing software is not merely a federal concern. State and local authorities are also increasing their own enforcement of antitrust and consumer protection laws related to the use of pricing algorithms, as seen in recent lawsuits and investigations initiated by the attorneys general of Arizona, North Carolina, and Washington, D.C.²²

Possible Legislative Action

Algorithmic pricing software has garnered the attention of not just antitrust regulators, but federal and state lawmakers as well.

On Jan. 20, 2024, Sen. Amy Klobuchar (D-Minn.), joined by five co-sponsors, introduced S. 3686 (Preventing Algorithmic Collusion Act of 2024), which would "prohibit the use of algorithmic systems to artificially inflate the price or reduce the supply of leased or rented residential dwelling units in the United States."²³ Klobuchar's proposed legislation would close what she perceives to be current loopholes in antitrust law by creating a presumption of the existence of a price-fixing "agreement" where competitors share competitively sensitive information through a pricing algorithm. The proposed legislation would also demand greater transparency by requiring that businesses disclose information concerning the use of pricing algorithms and allow regulators to audit the use of a company's pricing algorithm, ban companies from using "nonpublic competitor data" to inform or train a pricing algorithm, and order the FTC to study the impact of pricing algorithms on competition. Id. Sen. Ron Wyden (D-Ore.), joined by five co-sponsors, has also introduced S. 3692 (Preventing the Algorithmic Facilitation of Rental Housing Cartels Act of 2024), which pursues the same fundamental goals as S. 3686, but using a slightly different tack.²⁴ Among other things, Wyden's bill would make it unlawful for housing providers to contract for revenue management services by designating such arrangements a per se violation of federal antitrust laws, prohibit the coordination of price, supply and other rental housing information among competing rental property owners, and invalidate arbitration agreements that keep antitrust claims out of court or prohibit class actions.²⁵

Likewise, state legislatures are also considering bills that would regulate use of algorithmic pricing devices.²⁶

Takeaways and Practical Implications

Increased attention by the government and private plaintiffs to the use of pricing algorithms should serve a warning to all businesses – in any industry – of the antitrust risks of using software to set prices or gather or provide pricing, output, or other current and competitively sensitive information. Companies using or contemplating use of software to assist them in pricing decisions should closely evaluate whether and how the software incorporates information supplied by competitors in any pricing recommendations. And they should consult antitrust counsel concerning the potential risks in the current environment of adopting and delegating competitive decision-making to any software. As artificial intelligence (AI) tools continue to become more advanced, businesses might find it difficult to pass on the anticipated productively enhancements and other benefits they can offer. But they will need to add antitrust to the list of issues to consider before proceeding.

Notes

¹ See Cornish-Adebiyi, et al. v. Caesars Entertainment, Inc., et al., No. 1:23-cv-02536-KMW-EAP (D.N.J.), ECF No. 96 (Statement of Interest).

² It remains unclear what impact, if any, the DOJ’s views will have on courts evaluating claims of collusion by algorithm. In a related case challenging an alleged conspiracy by hotel operators in Las Vegas to inflate hotel room prices, the court declined to consider the DOJ’s statement of interest in Caesars, noting that the court need not afford the DOJ’s views "special deference." Gibson, et al., v. MGM Resorts Int'l, et al., No. 23-cv-00140 (MMD) (D. Nev.), ECF No. 179 (citing Republic of Austria v. Altmann, 541 U.S. 677, 701 (2004)). But the court in the Realpage case denied motions to dismiss and allowed plaintiffs’ claims to proceed to discovery. See In re Realpage, Inc., Rental Software Antitrust Litig. (No. II), No. 3:23-md-03071, 2023 WL 9004773 (M.D. Tenn. Dec. 28, 2023). The Realpage decision did not mention the DOJ’s statement of interest.

³ Cornish, supra n. 1, ECF No. 80 at ¶¶ 1, 4, 9-11.

⁴ Id. at ¶¶ 1-25.

⁵ Id. at ¶ 6.

⁶ Id.

⁷ Id. at ¶¶ 66, 397-407 (the Amended Class Action Complaint contains a single count: "Conspiracy in Restraint of Trade - Violation of Section 1 of the Sherman Act[.]").

⁸ See Texaco Inc. v. Dagher, 547 U.S. 1, 5 (2006) ("Per se liability is reserved for only those agreements that are so plainly anticompetitive that no elaborate study of the industry is needed to establish their illegality.") (citations and quotations omitted).

⁹ Cornish, supra n. 1, ECF No. 89-1 at 1.

¹⁰ Id. at 1-3 (applying the "parallel conduct" and "plus factors" legal framework as discussed in In re Ins. Brokerage Antitrust Litig., 618 F.3d 300, 322-23 (3d Cir. 2010)).

¹¹ Id. at 17-23.

¹² Gibson, supra n. 2, 2023 WL 7025996, *1 (noting that plaintiffs "allege that [the] defendant [casino-hotel operators] on the Las Vegas Strip unlawfully restrained trade in violation of Section 1 of the [Sherman Act] by artificially inflating the price of hotel rooms after agreeing to all use pricing software marketed by the same company, [Cendyn]"). Despite its similarities with Caesars, the DOJ did not file a statement of interest in Gibson.

¹³ Id. at *2-6. (cleaned up). Following the dismissal, the plaintiffs in Gibson filed an amended complaint, adding both new allegations in an attempt to cure the prior deficiencies, as well as an additional cause of action challenging the casino-hotel operators' "vertical agreements" with Cendyn. Gibson, supra n. 2, ECF No. 144 at 6-7. The defendants have moved to dismiss for a second time, contending that the amended complaint did not cure the numerous pleading deficiencies identified by the court and, therefore, fails to plead the existence of an agreement under Section 1. Id., ECF No. 160 at 1. And as to the newly added cause of action, the defendants seek its dismissal on the grounds that there are no allegations showing that such a software licensing agreement "restrains trade" or leads to anti-competitive effects. Id. at 2. The briefing on defendants’ second motion to dismiss is complete and awaiting the court's decision. A hearing on the matter was scheduled for April 24, 2024. Id., ECF No. 170.

¹⁴ Cornish, supra n. 1, ECF No. 96.

¹⁵ Id. at 7.

¹⁶ Id. at 3.

¹⁷ Id. at 5 (citing Interstate Circuit v. United States, 306 U.S. 208, 226-27 (1939)).

¹⁸ As just one example, during the First Annual International Competition Network Conference in May 2022, U.S. Assistant Attorney General Jonathan Kanter discussed the emergence of antitrust concerns brought about by the continued evolution of AI. Significantly, Kanter stated that "whether you use a smoke-filled room in a basement or you're using AI and an [application programming interface], it's still the same thing. It's still collusion." Kanter further noted that companies should proactively design algorithms and AI programs not to collude and that the DOJ would be increasing its ability to pursue investigations and enforcement actions in this area. See v|lex: "Antitrust Agency Insights: Developments At The US Antitrust Enforcement Agencies'Second Quarter 2022." See also DOJ Antitrust Division Principal Deputy Assistant Attorney General Doha Mekki in a Feb. 2, 2023, speech: "Where competitors adopt the same pricing algorithms, our concern is only heightened. Several studies have shown that these algorithms can lead to tacit or express collusion in the marketplace, potentially resulting in higher prices, or at a minimum, a softening of competition.").

¹⁹ See In re RealPage, Inc., Rental Software Antitrust Litig. (No. II), No. 3:23-cv-00326 (M.D. Tenn. Dec. 28, 2023).

²⁰ See Duffy v. Yardi Systems Inc, et al., No. 2:23-cv-01391 (W.D. Wash. Sept. 8, 2023).

²¹ In re RealPage, supra n. 19, ECF No. 96-2 at 2; see also Duffy, supra n. 20, ECF No. 149 at 2.

²² See press releases from the Arizona, North Carolina, and Washington, D.C. attorneys general.

²³ See S. 3686.

²⁴ See S. 3692.

²⁵ Id.

²⁶ Colorado HB 24-1057 would make the use of algorithmic devices in rent setting for residential tenants punishable under the Colorado Consumer Protection Act. It has passed the house and pending before a senate committee. New Hampshire HB 1368 would prohibit termination of a tenancy based on a tenant's failure to pay rent that was increased by certain price fixing programs. It is pending before a judiciary committee. New York A9473 would prohibit the use of an algorithmic device by a landlord for the purpose of determining the amount of rent to charge a residential tenant and would declare that such use is an unfair or deceptive trade practice. It is currently pending in the assembly's housing committee.

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