Five Tips for Navigating Antitrust Risk from Algorithmic Pricing Software

In recent years, both private plaintiffs and the government have increasingly scrutinized businesses’ use of “algorithmic pricing” software, leading to a wave of antitrust lawsuits and enforcement actions. These softwares, used in a wide array of industries, employ algorithms to analyze market conditions, to generate pricing recommendations. While these tools can help businesses optimize their pricing strategies, they also can raise antitrust concerns, particularly when they involve confidential competitor data or appear to facilitate price coordination among competitors.

One of the first antitrust challenges to algorithmic pricing came in 2015, when the U.S. Department of Justice charged an executive at an e-commerce site with conspiring with various competitors to adopt the same algorithm to set their respective prices. The trend gained momentum in 2022, when several lawsuits accused a software company and various property managers of using software to coordinate rental rates in multifamily housing, allegedly in violation of Section 1 of the Sherman Antitrust Act. Since then, new lawsuits have continued to emerge, and antitrust enforcers are showing an increased focus on algorithmic pricing. DOJ recently weighed in on an “algorithmic collusion” case, arguing that using a common pricing algorithm can qualify as concerted action under the Sherman Act.

Algorithmic collusion claims are still relatively new, and courts have not yet settled on clear legal standards to govern these claims, but recent cases offer insight on potential risks. Below, we outline five key considerations for companies using or thinking about adopting pricing algorithms.

1. Consult with counsel before using software that may incorporate competitors’ confidential price information. When pricing software relies on competitors’ confidential data to make pricing recommendations, it potentially can raise legal concerns. Some courts have allowed lawsuits to proceed when a software’s algorithm ran on confidential pricing data shared by competitors, with one court likening such algorithms to a “melting pot of confidential competitor information.” By contrast, several algorithmic collusion claims have been dismissed when they involved software that relied only on publicly available data. Reviewing a competitor’s publicly listed prices is generally legal under antitrust laws, whereas using private competitor data has sometimes been construed to suggest illegal collusion. Therefore, before using software that may incorporate competitors’ confidential pricing data, it is advisable to consult with counsel to consider how the software works and assess the potential risks.

2. Do not automatically follow the software’s pricing recommendations. Some of the antitrust lawsuits involving algorithmic pricing have alleged that businesses have given up control over their pricing decisions by blindly following a software’s pricing recommendations. A former FTC commissioner once explained the plaintiffs’ theory this way: “If it isn’t ok for a guy named Bob to do it [tell competitors how to set their prices], then it probably isn’t ok for an algorithm to do it either.” It is therefore significant that, in at least one case, defendants successfully obtained dismissal of the complaint in part by pointing to allegations that they sometimes overrode the software’s recommendations rather than blindly following them. Therefore, to reduce legal risk, businesses should consider maintaining the discretion to make their own independent pricing decisions rather than automatically accepting a software’s recommendation. This might mean implementing policies or trainings that empower employees to deviate from the software’s recommendations at times. At a minimum, it means keeping a “human in the loop” to monitor the software and ensure it does not work in unintended ways. The key is to retain some degree of human control over pricing instead of fully outsourcing pricing decisions to an algorithm — especially if you have reason to believe competitors may be doing the same.

3. Do not discuss algorithmic pricing software with competitors. Many lawsuits alleging algorithmic collusion rely on the concept of a “hub-and-spoke” conspiracy, where the software provider supposedly acts as the central “hub” of the alleged conspiracy and its customers (competing businesses) are the “spokes.” Importantly, to prove a “hub-and-spoke” conspiracy, a plaintiff must show not only that there were agreements between the hub and the spokes but also that the competing spokes all reached an agreement with one another — what courts call the “rim” of the wheel. In past cases, plaintiffs have cited discussions between competitors at industry conferences, webinars, and meetings hosted by the software provider as circumstantial evidence of an agreement. To lessen these sorts of risks, avoid discussing your use of algorithmic pricing software — or your competitors’ use of it — at such events or in any other contexts your competitors may learn about.

4. Avoid talking about algorithmic pricing in terms of “profit maximization” and, instead, emphasize its procompetitive benefits. Some lawsuits have cited statements from software providers and users claiming algorithmic pricing helps raise prices and increase profits. Some courts have viewed such statements as an “invitation” to collude, where the users allegedly agreed to join the asserted conspiracy by adopting the software. To reduce these kinds of risks, avoid making statements — whether in marketing materials, board presentations, or investor reports — that suggest any pricing software is being used to push prices above competitive levels. Instead, emphasize the software’s procompetitive benefits such as helping businesses offer lower prices than their rivals or helping to match supply with demand. Documenting these benefits ahead of time can help strengthen your defense if a legal challenge arises.

5. Consult an antitrust lawyer before using algorithmic pricing software. Antitrust laws surrounding algorithmic pricing are still evolving, and what seems like low-risk behavior today could become actionable conduct in the future. With ongoing court cases and appeals, as well as various legislative efforts at the city, state, and federal levels, the legal landscape is changing quickly. To stay ahead of potential risks, businesses using or considering algorithmic pricing software should seek advice from an antitrust lawyer. Foley’s Antitrust & Competition team has experience advising businesses on these issues and defending against claims of algorithmic collusion. If you have any questions about antitrust risks associated with algorithmic pricing, reach out to the authors or your Foley & Lardner attorney.