United States: FTC Issues Warning On The Use Of Algorithms To Recommend Or Set Prices

The U.S. Federal Trade Commission (FTC) recently published a blog post warning that the use of algorithms to assist in determining prices may violate federal antitrust laws, regardless of the business or industry. The FTC blog references a Statement of Interest that it and the U.S. Department of Justice (DOJ) (together, the Agencies) filed earlier that same day in Duffy v. Yardi Systems, Inc. in the Western District of Washington. In Yardi, a putative class of plaintiffs alleges that certain landlords violated Section 1 of the Sherman Act by agreeing to use Yardi's rent pricing algorithms to allegedly inflate rental prices in multifamily housing. The Agencies stated they submitted the Statement of Interest to notify the Yardi Court of DOJ's earlier Statement of Interest filed in a case with similar allegations — In re RealPage, Inc. — and to explain why the defendant landlords' motion to dismiss in Yardi allegedly runs afoul of the principles the government articulated in RealPage.

Two Key Principles

The FTC blog only uses the Yardi Statement of Interest as a starting point and does not limit its interest to the facts at issue in that case. Instead, the FTC emphasizes that no matter what your business, if it uses an algorithm to set prices, the algorithm may not do anything that would be illegal for a real person to do. The FTC blog argues there are two key principles for businesses in any industry: (1) a business cannot use an algorithm to evade allegations of price fixing, and (2) an agreement to use shared pricing recommendations, lists, calculations, or algorithms can still be unlawful even if businesses retain some pricing discretion to deviate from the algorithm.

As to the FTC's first principle, the FTC claims that agreeing to use an algorithm can constitute the requisite "contract, combination ... or conspiracy" that may violate Section 1. The relevant agreement, according to the FTC, is the competitors' agreement to use the algorithm knowing that other competitors are doing the same. According to the FTC, "[w]hen you replace once-independent pricing decisions with a shared algorithm, expect trouble."

For the FTC's second principle, the FTC rejects any argument that price deviations undermine a conspiracy. For example, setting the initial price, even if competitors deviate from the initial recommendation, may suffice and be illegal under the FTC's position. Or, if an algorithm recommends a price but does not necessarily determine the price, the FTC may still consider that price recommendation illegal price fixing. The FTC similarly rejects claims that competitor "cheating" undermines an alleged conspiracy, claiming "[b]eing bad at breaking the law isn't a defense."

Statement of Interest

The Agencies' Yardi Statement of Interest largely focused on this second issue, emphasizing that the Agencies submitted the Statement to notify the Yardi Court of DOJ's earlier Statement of Interest filed in a case with similar allegations — In re RealPage, Inc. — and correct what the Agencies contend is an "incorrect legal position" in the landlord-defendants' motion to dismiss in Yardi. The landlord-defendants had argued that a price-fixing claim cannot survive when the landlords retain pricing discretion. The Agencies, however, maintain that it is per se illegal for competitors to jointly delegate key aspects of their pricing to a common algorithm, even if the competitors retain some authority to deviate from the algorithm's recommendations.

The Agencies argue any combination — such as through the joint use of algorithmic pricing — interferes with the free play of market forces. As an example, the Agencies believe that joint delegation of pricing recommendations to a common algorithm, which allegedly alters the starting point of prices, is analogous to an agreement to fix list prices.

Impact

The FTC's blog post specifically highlights the role of private equity in alleged algorithmic price fixing. In the rental housing industry in particular, the blog post states that efforts to fight collusion are even more important given the private equity involvement among landlords and property management companies, claiming potential algorithmic pricing collusion exacerbates the "leverage" these companies supposedly have over renters. The FTC blog also calls out other industries currently subject to government or private litigations concerning the use of algorithms, including online resales, meat processing, hotels, and casinos.

The FTC blog — and the Agencies' joint Statement of Interest — demonstrate the heightened attention and scrutiny government enforcers are giving to the use of pricing-related algorithms. These actions show the Agencies may be casting a wide net and looking for new industries and practices to investigate.

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