US District Court Denies Motion to Dismiss Algorithmic Pricing Antitrust Claims

The US District Court for the Western District of Washington issued a significant ruling on December 4, 2024 in an ongoing case raising alleged claims of algorithmic price collusion in the apartment rental industry. The court denied the defendants’ motion to dismiss in Duffy v. Yardi, [1] paving the way for the case to move forward to discovery. The court held that the plaintiffs’ allegations were sufficient to allege a per se unlawful antitrust conspiracy, creating an apparent split in the lower courts over how to assess antitrust claims involving algorithmic pricing tools. This ruling suggests that algorithmic pricing tool users may be subject to increased antitrust scrutiny and litigation risks under Section 1 of the Sherman Act.

In Duffy v. Yardi, the plaintiff/tenants allege that ten lessors of multifamily residential units (lessors) agreed to share non-public pricing, inventory, and market data with Yardi Systems Inc. (Yardi) “to establish supracompetitive rental rates in the multifamily housing market in violation of Section 1 of the Sherman Act.” According to the plaintiffs, the lessors provided sensitive, non-public information to Yardi, which, in turn, entered that information into RENTmaximizer, Yardi’s revenue management software. RENTmaximizer’s algorithm then provided rental pricing recommendations to each of the lessors, which the plaintiffs allege the lessors had used to establish the “supracompetitive rental rates.”

The defendant lessors, with Yardi (Defendants), filed a motion to dismiss, arguing, among other things, that neither the lessors themselves nor the lessors and Yardi were alleged to have agreed “to implement or adhere to RENTmaximizer’s suggestions and thereby abdicate their independent decision-making over rental rates.” Consequently, the Defendants argued that without alleged evidence of such an agreement between the lessors themselves or between the lessors and Yardi, the plaintiffs failed to state a claim for a Section 1 violation.

THE DECISION

Judge Robert Lasnik of the US District Court for the Western District of Washington denied the Defendants’ motion to dismiss, finding that the plaintiffs plausibly alleged a horizontal agreement between the lessors under Section 1 of the Sherman Act based on their decisions to use RENTmaximizer.

The plaintiffs alleged that RENTmaximizer invited lessors to “trade their commercially sensitive information for the ability to charge increased rental rates without fear of being undercut by competitors.” According to the court, the complaint adequately alleged that the defendant lessors accepted this invitation to restrain trade in violation of the Sherman Act when they signed up to use RENTmaximizer. Furthermore, the court believed the plaintiffs adequately alleged that the defendant lessors understood that providing data to Yardi and using RENTmaximizer was only beneficial if competitors did the same. Accordingly, the court denied the Defendants’ motion to dismiss.

PER SE VS. RULE OF REASON

Judge Lasnik’s order asserted that the type of computerized algorithmic pricing conduct alleged by plaintiffs should be treated as per se illegal under Section 1. In 2023, a federal district court in Tennessee overseeing the RealPage class action, confronted with alleged facts similar to Yardi, suggested that the novelty of this type of alleged agreement involving computerized algorithmic pricing rendered per se treatment inappropriate.

“[R]espectfully disagree[ing]” with the Middle District of Tennessee, the court in Yardi found that there is not “any legal authority supporting the conclusion that an adequately alleged horizontal price fixing agreement could be a reasonable restraint on trade” simply because the technology used to achieve that agreement is new. Therefore, the court held that the conduct alleged amounted to a price-fixing agreement accomplished by algorithm and should be subject to per se treatment under Section 1 of the Sherman Act.

The court’s ruling appears aligned with the US Department of Justice and Federal Trade Commission’s Statement of Interest in the case supporting the plaintiffs, including its reliance on the 1939 case Interstate Circuit v. United States. [2] Both the antitrust agencies and the court cited Interstate Circuit for the proposition that “competitors’ acceptance, through conduct, of an invitation to act together suffices to establish concerted action” in violation of Section 1 of the Sherman Act.

However, the court did not delve deeply into the facts of Interstate Circuit and how they may differ from the facts in Yardi. In Interstate Circuit, eight movie distributors received identical letters from movie theaters that (1) asked them to impose identical restrictions on screenings of certain films and (2) mentioned that each distributor received the same letter. After receiving the letters, the distributors uniformly imposed the requested restrictions.

In contrast, Yardi was alleged to have publicly marketed its service to many lessors nationwide and provided unique pricing recommendations to each lessor. Moreover, the defendant lessors here did not necessarily know which lessors used RENTmaximizer or what pricing recommendations were provided to other lessors, including to what extent the recommendations may have been to lower rent prices (or to raise them by a smaller increase than the lessor may otherwise have proposed). Finally, plaintiffs did not allege that the defendant lessors uniformly implemented RENTmaximizer’s pricing recommendations.

ROLE OF THIRD-PARTY INTERMEDIARIES

Judge Lasnik held that the lessors’ use of an intermediary to set prices, rather than meeting and setting them on their own, did not “preclude the existence of an agreement or change its unlawful nature.” Instead, the court held that the lessors’ use of an algorithmic pricing software like RENTmaximizer to make pricing decisions could constitute a Section 1 violation.

According to the court, a “group of competitors subcontracting their pricing decisions to a common, outside agent that provides algorithmic pricing services amounts to a hub-and-spoke conspiracy. This is so because the same outside vendor now has confidential price strategy information from multiple competitors, [and] it can program its algorithm to maximize industry-wide pricing even if the firms themselves don’t directly share their pricing strategies with each other.”

This observation may raise questions about where the boundary lies between potentially legitimate and justifiable information-sharing activities and per se unlawful price fixing in the age of algorithms. For example, could future plaintiffs invoke the court’s broad language here to try to assert per se claims against participants in trade groups who merely report their pricing or rates to an intermediary who then reports back aggregated and anonymized information about prevailing prices or rates to trade group members? Such an outcome would be contrary to current antitrust law regarding information exchanges among competitors, which is that the rule of reason—not per se treatment—applies to evaluating such exchanges. [3]

While the court denied the Defendants’ motion to dismiss, it noted the Defendants may still prevail by demonstrating 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.” Furthermore, the Defendants may show they “lacked a common motive to conspire” based on their geographic remoteness from each other and their lack of control over enough housing units to impact rental prices.

CONCLUSION

The court’s order denying the Defendants’ motion to dismiss is arguably the most favorable motion ruling to date for plaintiffs in antitrust algorithmic pricing cases. As a result, the decision could spur additional litigation based on similar theories of harm. Businesses across all sectors and industries should carefully consider the potential antitrust risks when using algorithmic pricing tools—or other price-reporting or suggestion mechanisms—prior to their implementation.