Latest Collusion-by-Algorithm Ruling Offers More of Same, but a Significant New Twist
Starting in October 2022, companies that use software to assist in setting prices for their products have faced an avalanche of litigation claiming that the common use by competitors of the same pricing software inflates prices and amounts to "collusion by algorithm" in violation of Section 1 of the Sherman Act. Class action plaintiffs have targeted owners and developers of multifamily apartments, along with luxury, extended-stay and casino hotels and health insurers, among others, in antitrust lawsuits in courts around the country. The plaintiffs' theory – that the adoption and use of the same pricing platform is the product of collusion among users of the software – has been tested on motions to dismiss in several cases, with what appears to be an emerging consensus among courts that allegations that users of the software knowingly contribute competitively sensitive information to the algorithm for use in setting prices for all users can state a claim and survive motions to dismiss.
On Dec. 4, 2024, Judge Robert S. Lasnik of the U.S. District Court for the Western District of Washington found that the plaintiffs in Duffy, et al. v. Yardi Systems, Inc., et al., No. 2:23-cv-1391 (W.D. Wash.), had succeeded in stating a claim that multifamily apartment owners and operators that used pricing software offered by Yardi violated the antitrust laws. But in a departure from all prior algorithmic collusion decisions, Judge Lasnik characterized the plaintiffs' allegations as per se price fixing – easing the burden on the Duffy plaintiffs to ultimately prove their claims.
Alleged Sharing of Competitively Sensitive Information Differentiates Successful Collusion-by-Algorithm Claims from Claims That Have Been Dismissed
The principal distinguishing feature between cases in which courts have granted motions to dismiss and those in which courts have denied motions to dismiss and allowed plaintiffs to proceed to discovery has been whether plaintiffs have alleged that users of the software contribute competitively sensitive information that is pooled for use by the pricing algorithm in recommending prices for all users. In two cases alleging collusion between casino hotels in Las Vegas and Atlantic City, New Jersey, courts dismissed complaints after finding that the plaintiffs failed to allege that the algorithm generated pricing recommendations based on nonpublic, competitively sensitive information contributed by users of the software. See Gibson v. Cendyn Group, LLC, 2024 WL 2060260, at *5 (D. Nev. May 8, 2024), and Cornish-Adebiyi v. Caesars Entertainment, Inc., 2024 WL 4356188, at *4 (D.N.J. Sept. 30, 2024). In a case against multifamily apartment owners and RealPage Inc., a competitor to Yardi in providing pricing software for use by apartment owners, the court denied motions to dismiss after finding that the plaintiffs alleged "unequivocally" that "RealPage's revenue management software inputs a melting pot of confidential competitor information through its algorithm and spits out price recommendations based on that private competitor data." In re RealPage, Inc. Rental Software Antitrust Litig. (No. II), 709 F. Supp. 3d 478, 512 (M.D. Tenn. 2023).
Judge Laznik found that the Duffy plaintiffs' allegations fell on the RealPage side of the line, noting that Yardi "advertised its revenue management software to lessors as a means of increasing rates" and that its software would work "as advertised … only if each lessor client divulges its confidential and commercially sensitive pricing, inventory, and market data" for use by Yardi in making pricing recommendations. Order Denying Def's' Joint Mot. to Dismiss ("Laznik Order") at 7, Duffy, et al. v. Yardi Systems, Inc., et al., No. 2:23-cv-1391 (W.D. Wash. Dec. 4, 2024) (ECF No. 187). The court rejected the defendants' arguments that adoption of Yardi's software reflected only each apartment owner's independent business decision, finding that Yardi had invited apartment owners to use its software based on the promise of higher prices and that users "accepted [that] invitation to trade their commercially sensitive information for the ability to charge increased rental rates without fear of being undercut by their competitors." Id. at 7-8 (citing Interstate Circuit v. United States, 306 U.S. 208, 226-27 (1939)). The court also found that the apartment owners would only have adopted a strategy of raising prices and ignoring occupancy rates if they knew their competitors had committed to the same strategy: "It is only in the presence of a prior understanding that competitors would likewise raise rates that such conduct appears rational." Laznik Order at 9. And Judge Laznik rejected the defendants' arguments that because users of Yardi's software retain complete discretion to reject the algorithm's pricing recommendations, mere adoption of the software cannot support the existence of a conspiracy – finding it implausible that "having turned over their commercially-sensitive data and paid for the services Yardi offered," the defendants "did not intend to use the information generated as a result." Id. at 10.
Judge Laznik's Ruling That the Alleged Conduct Amounts to Per Se Illegal Price Fixing
Importantly, unlike in the RealPage case, where the court found the alleged conduct did not fall into a category that courts have condemned as per se illegal – such as price fixing, bid rigging, or market or customer allocation – Judge Laznik found that the plaintiffs' "allegations that defendants colluded to fix prices at above-market rates and impose those prices on customers is per se anticompetitive conduct." Id. at 13. He did not believe that the alleged use of "novel" means of colluding called for treating the plaintiffs' allegations differently from other, more traditional means of fixing prices or that any "further testing or study" would be needed before applying the per se standard to the alleged conduct. Id. at 13. This ruling will not absolve the plaintiffs of the need to prove the existence of a conspiracy among Yardi and its customers, but if they establish the existence of the requisite conscious commitment to a common scheme, it will mean they will not need to show actual harm to competition under the "rule of reason."
Allegations Are Not Evidence But Carry the Day on a Motion to Dismiss
Judge Laznik observed that defendants vigorously contest the factual allegations on which he based his determination that the plaintiffs had alleged a plausible conspiracy among users of Yardi's prices to inflate rents but noted that he is bound by the plaintiffs' factual allegations on motions to dismiss. See, e.g., id. at 6 n.1. But he provided a roadmap for the defendants going forward to defeat the conclusions he reached based only on the pleadings, observing expressly that the defendants "may ultimately be able to show that Yardi's services were advertised differently than as alleged, that they provided no commercially sensitive, non-public information, and or that they ignored Yardi's pricing recommendations to such an extent as to make the allegations of concerted action unlikely." Id. at 10.
Conclusion
Judge Laznik's decision adds to the growing body of caselaw concerning what allegations in "collusion-by-algorithm" cases will suffice to plead a claim that can survive a motion to dismiss – with allegations of the collection and use of competitively sensitive information appearing to be the decisive variable in decisions to this point. Motions to dismiss are pending in other cases, which will build on this existing case law and bring further clarity to litigating parties. Judge Laznik's characterization of common use of pricing software as per se illegal price fixing will also be tested in upcoming cases – and also could be revisited later in Duffy if plaintiffs' characterization of the conduct of the users of Yardi's software does not hold up when confronted with actual evidence.
Holland & Knight's Antitrust Team will continue to share news of new developments in algorithmic collusion cases.