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United States: Antitrust authorities confirm their view that algorithmic price fixing is a per se antitrust violation

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In brief

Both the Antitrust Division of the US Department of Justice (DOJ) and the Federal Trade Commission (FTC) (collectively, “Agencies“) have submitted a joint Statement of Interest in a third-party dispute currently active in the Federal District of New Jersey. The Statement clarifies the Agencies’ positions on price fixing through the use of algorithms.

The third-party dispute involves a class action against casino hotels in the Atlantic City, New Jersey area. The plaintiffs allege that the defendants knowingly used one of the defendant’s pricing algorithm platforms to inflate prices for hotel guest rooms in violation of Section 1 of the Sherman Act. The Statement of Interest highlights the Agencies’ perspectives regarding what facts need to be alleged to support a Section 1 claim where the competitors use the same algorithm provider and offers insights for businesses contemplating use of such software.

Contents

  1. Key takeaways
  2. In depth
  3. Conclusion

Key takeaways

  • The Agencies make clear that competitors coordinating through the use of a uniform pricing formula engage in per se unlawful price fixing. This follows remarks made by Deputy Attorney General Lisa Monaco at the 39th National Institute on White Collar Crime, hosted by the American Bar Association’s Criminal Justice Section on March 7, 2024, regarding the DOJ’s enforcement priority of disruptive technology risks.1 Companies should be on notice that regulators are heavily scrutinizing pricing algorithms.
  • According to the Agencies:
  1. Plaintiffs do not need to show direct communications between competitors in an algorithmic price-fixing case in order to establish a violation.
  2. Even if the algorithm just provides a starting point for pricing, competitor coordination on that still represents a per se unlawful Section 1 violation regardless of whether the ultimate price deviates from that starting point.
  • Recent litigation and enforcement actions emphasize how antitrust risk surrounding algorithms and data tools can be mitigated through compliance by identifying the risk associated with AI and pricing algorithms, continuously evaluating how information is exchanged through these tools, conducting regular audits, and creating safeguards to protect commercially sensitive data. 

In depth

In two parallel consolidated class actions against major casino hotel operators in both Las Vegas, Nevada, and Atlantic City, New Jersey, plaintiffs allege that the hotel operators engaged in a price-fixing conspiracy through the use of a pricing algorithm platform offered by one defendant. In both cases, the plaintiffs allege that the algorithm is installed into the defendant-hotels’ booking systems and continuously analyzes pricing and occupancy data for each of its subscribers to provide recommendations on guest room pricing, which are updated multiple times per day. Both cases include allegations that defendants utilizing this platform possessed a market share of over 70% in the respective cities. Plaintiffs further allege that the goal of the algorithm was to achieve supra-competitive prices that resulted in overcharges for guests, and, at times, also vacant rooms for the hotels.

Late last year, the US District Court of Nevada dismissed the Las Vegas action without prejudice for three reasons:

  1. Plaintiffs failed to sufficiently plead an agreement amongst the defendants to actually use the same pricing algorithm.
  2. Plaintiffs’ allegation that the defendant-hotels used a defendant’s software pricing recommendation 90% of the time was inadequate because the final prices could not be fully derived from the platform recommendations and a 10% rejection rate suggests there was not a complete agreement.
  3. Merely identifying the “hotel operators” as participants in the conspiracy meant that the complaint did not sufficiently identify the individual participants involved or the time when the conspiracy began. 

Earlier this year, the defendants in the New Jersey action filed a motion to dismiss, citing heavily to the Las Vegas victory. The defendants argued that the complaint failed to plausibly allege circumstantial evidence of a conspiracy because there are no facts to show that the defendant-hotels engaged in parallel pricing and plaintiffs failed to allege sufficient plus-factors to infer an agreement. Defendants then argued that there was ample evidence to the contrary (i.e., evidence showing defendant-hotels rejected the algorithm’s pricing recommendations and participants subscribed to the platform months apart from each other, etc.).

The Agencies’ Statement of Interest disagrees with the Las Vegas dismissal, and highlights aspects that the Agencies believe were wrongly decided. The Agencies identified “two legal errors that defendants appear to make in their motion to dismiss”.2 First, the Agencies argued that plaintiffs do not need to demonstrate direct communications between competitors to plausibly allege an agreement under Section 1 of the Sherman Act.3 The Agencies noted that the Defendant-hotels could have acted in concert by using the same algorithm provider as the “middle man” and “a tacit agreement can be inferred from an invitation proposing collective action followed by a course of conduct showing acceptance”.4 Second, the Agencies argued that a Section 1 violation can still be established where the Defendants have fixed the starting point of prices, even if the algorithm’s pricing recommendations are not binding on the defendants’ final rental rates.5 The Agencies stated that “both types of agreements [competitors agreeing to fix the final prices and competitors agreeing to fix the starting point for pricing] corrupt the decentralized price-setting mechanism in the market, whether or not they ultimately succeed in raising or stabilizing prices”.6

In addition to these Statements of Interest, the Agencies have used other forums to comment on AI and algorithmic pricing. For example:

  • In June 2017, the FTC, together with the DOJ, submitted a paper to the Organisation for Economic Co-operation and Development (OECD) titled “Algorithms and Collusion”.7 The paper addressed how to apply and limit US antitrust analysis to business conduct involving technologically advanced tools such as pricing algorithms.
  • In June 2022, the FTC issued a report to Congress detailing its concerns with AI tools and signaled that its work in the technological space “will likely deepen as AI’s presence continues to rise in commerce”.8
  • In February 2023, the DOJ Principal Deputy Assistant Attorney General, Doha Mekki, called for further scrutiny of pricing algorithms, acknowledging that “[i]n some industries, high-speed, complex algorithms can ingest massive quantities of ‘stale,’ ‘aggregated’ data from buyers and sellers to glean insights about the strategies of a competitor” and concluded that “[i]ndeed, we are experiencing an inflection point in the use of algorithms, data at scale, and cloud computing”.9
  • During the American Bar Association 2023 Antitrust Spring Meeting, Leslie Wulff, Chief of DOJ Antitrust Division’s San Francisco office noted that algorithms are not “some sort of, like, set it and forget it, and come back in 50 years and see what the robots have done,” adding that “companies have a responsibility to check in on their algorithms, see what they’re learning, see how they’re adjusting to current market realities”.10
  • More recently, on March 7, 2024, Deputy Attorney General Lisa Monaco announced at the 39th National Institute on White Collar Crime hosted by the American Bar Association’s Criminal Justice Section that the DOJ’s Criminal Division will now “incorporate assessment of disruptive technology risks — including risks associated with AI — into its guidance on Evaluation of Corporate Compliance Programs.” She explained that, moving forward, prosecutors will be directed to consider how a company’s compliance program assesses and mitigates the risk of misuse of AI.11

Conclusion

As technology continues to transform the business landscape, and as pricing algorithms are becoming ubiquitous across industries, serving as a universal tool for businesses to optimize pricing strategies, the use of pricing algorithms raises important questions about competition and antitrust compliance. Businesses can better navigate this regulatory environment with proactive measures such as a robust compliance program, conducting regular audits to mitigate the risk of collusion allegations, training employees on the responsible use of AI tools, and creating safeguards to protect commercially sensitive data. 

1 Jessica Nall, Cyrus Vance, Maria Piontkovska, Compliance Steps After ABA White Collar Crime Conference (Mar. 19, 2024).
2 Statement of Interest of the United States at 2.
3 Id. at 2-3.
4 Id. at 5, 10. 
5 Id. at 3, 12.
6 Id. at 7. 
7 OECD, Algorithms and Collusion – Note by the United States (June 2017).
8 FTC, Report to Congress, Combatting Online Harms Through Innovation (June 16, 2022).
9 Principal Deputy Assistant Attorney General Doha Mekki Delivers Remarks at GCR Live: Law Leaders Global 2023 (Feb. 2, 2023).
10 Mike Swift, Companies using pricing algorithms can’t just ‘set it and forget it,’ US DOJ antitrust official says, MLex Insight (Mar. 30, 2023).
11 Id.

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Author

Creighton Macy is the Chair of Baker McKenzie's North America Antitrust & Competition Practice Group. Creighton is recognized as a leading global antitrust practitioner.

Creighton has extensive experience representing clients in a wide variety of antitrust matters, including mergers and acquisitions, investigations by the United States Department of Justice and the Federal Trade Commission, private litigation, and counselling on issues such as antitrust compliance. Before joining the Firm, Creighton served as Chief of Staff and Senior Counsel in the DOJ Antitrust Division, working as a senior advisor to the Assistant Attorney General on civil and criminal antitrust enforcement and policy matters, as well as budget and personnel issues. During Creighton's time at the DOJ, the Antitrust Division undertook an unprecedented volume of high-profile civil and criminal matters.

Creighton began his career as a Trial Attorney in the Litigation III and Transportation, Energy, and Agriculture sections of the Antitrust Division, working on a number of notable merger and civil non-merger investigations and cases. Before rejoining the Antitrust Division as its Chief of Staff, he was a member of another global law firm's antitrust practice, where he advised clients on a wide range of US and international antitrust issues.

Creighton is consistently recognized globally for his market-leading antitrust practice with respect to high-stakes transactions, investigations, and compliance and counseling work. For example, clients have noted that Creighton “shines above the rest’ due to his first-rate cartel and merger control-related practice.’” He also regularly speaks and publishes articles relating to a variety of antitrust issues, and has been recognized many times for his contributions and thought-leadership on these issues.

Creighton is currently Co-Chair of the American Bar Association Antitrust Law Section’s Young Lawyers Task Force. In previous roles, he served as Reporter of the Presidential Transition Task Force, as well as Chair of the Trade, Sports, and Professional Associations Committee. He is highly involved in mentoring programs, including with the Antitrust Law Section, as well as Marquette University Law School, where he previously served as the DC Representative of the Alumni Board.

Creighton graduated from Marquette University, where he was an NCAA Division I Academic All-American tennis player. During his time at Marquette, he was awarded the Athletic Department’s Cura Personalis award by his peers, as well as several leadership awards. More recently, Creighton was named the Athletic Department’s Young Alumnus of the Year Award.

Author

Jeff Martino brings an in-depth understanding of a wide variety of white collar and fraud related matters to his antitrust litigation and investigations practice. Jeff is co-lead of the Firm's Global Cartel Task Force and represents multinational corporations and their boards and executives in high-stakes criminal and civil investigations by the US Department of Justice (DOJ) and other federal and state agencies. Jeff draws upon his extensive criminal investigations, litigation, and enforcement experience to advise clients through sensitive matters pertaining to international cartel actions and white collar investigations. Prior to joining Baker McKenzie, Jeff spent nearly two decades at the DOJ and his last five years as Chief of DOJ Antitrust Division's New York Office. He has extensive experience as "first chair" on trials and investigations in the most complex areas of criminal antitrust and market manipulation. Jeff's work at the DOJ included providing technical assistance to competition agencies in Asia, Africa, the Americas and Europe and overseeing matters that included international corruption and antitrust cartel offenses that entangled the largest global banks and their key executives.

Author

Mark Weiss is a partner in the Firm's North America Antitrust & Competition Practice Group. He is an experienced litigator and counselor with proficiency in antitrust litigation, class-action defense, federal multi-district litigation, and no-poach defense. Mark has vigorously and tirelessly represented clients in a variety of industries including manufacturing, mining, high-tech industries, banking, defense contracting, aerospace, and energy.
As an experienced antitrust counsel, Mark has also conducted cartel investigations and internal compliance reviews, and regularly provides antitrust advice on a broad range of non-litigation matters, including sales and distribution advice, antitrust compliance, competitive merger analysis, and merger clearance strategy.
Prior to joining Baker McKenzie, Mark worked at another global law firm with a focus on class-action antitrust litigation, including defending a global electronics manufacturer from price-fixing and collusion claims, defending a major global financial institution from antitrust collusion and boycott claims, and defending a large government defense contractor from claims alleging illegal no-poach agreements.

Author

Ashley Eickhof is a senior associate in the Firm's North America Antitrust & Competition Practice Group. Ashley is an experienced litigator and has tried criminal cases in federal court.
Prior to joining Baker McKenzie, Ashley worked at another large international law firm in the Antitrust and Competition Practice Group. Before that, Ashley began her career as a federal prosecutor for the Antitrust Division of the US Department of Justice.

Author

Andrea Rivers is a member of the Firm's North America Antitrust & Competition Practice Group, based in Washington, DC. Andrea previously worked as a Legal Intern for the Federal Trade Commission, Bureau of Competition, Anticompetitive Practices Division as well as a Legal Intern to the Antitrust, Commercial & Administrative Law Subcommittee of the U.S. House Committee on the Judiciary and the Montgomery County State's Attorney's Office. Prior to joining Baker McKenzie, Andrea was an associate at a specialist antitrust law firm.

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