Written by Jonathan Rubin, Partner and Co-Founder of MoginRubin LLP |
Private antitrust plaintiffs are increasingly bringing cases alleging that the use of a common, commercially available pricing algorithm by multiple competitors constitutes price fixing in violation of Section 1 of the Sherman Act. The Antitrust Division of the Department of Justice has filed a Statement of Interest in three such cases, supporting the plaintiffs’ claims.[i] After the third one, I wrote that algorithmic price fixing was emerging as a new DOJ enforcement priority. This prognosis is borne out by the Division’s recent price fixing lawsuit against RealPage (which it also claims has monopolized the market for residential rental revenue management software (“RMS”)), joined by eight state Attorneys General.[ii]The DOJ’s first Statement of Interest in April 2023 supported the plaintiffs against RealPage in what is now multidistrict litigation (“MDL”) pending in the Middle District of Tennessee. The bulk of their Memorandum in support of its Statement addressed the defendants’ “agreement,” a central element of any Section 1 case. The agreement issue in the so-called “algorithmic price fixing” cases more than any other has captured the attention of antitrust scholars and commentators.
The key element of a Section 1 violation is some form of agreement involving the violators that exerts an unreasonable anticompetitive effect on the market.[iii] Unlawful agreements encountered in antitrust fall along a continuum. At one end of the spectrum lie price-fixing conspiracies entered into by the members of a cartel. Cartel conduct is regarded by the Supreme Court as “the supreme evil of antitrust.”[iv] Consequently, Section 1 treats price fixing harshly by subjecting it to a “per se” standard, an irrebuttable presumption that such arrangements violate Section 1. Antitrust law allows no defense when competitors enter into price fixing agreements, not even where the fixed prices are “reasonable.” Other per se offenses include agreements to allocate markets or allocate customers and schemes to rig competitive bidding.
At the other end of the spectrum lie agreements that first must be proven to harm market competition before they warrant condemnation under Section 1. At this end of the spectrum lie agreements whose purposes or effects are ambiguous or can be justified by a legitimate business purpose, such as a joint development agreement or a limited exclusive distribution agreement. Agreements that are not subject to per se condemnation are evaluated by the courts under the “rule-of-reason,” the requirement the that harmful effects on competition alleged to be the product of the agreement be demonstrated before the Section 1 violation can be proven.
Not infrequently, rather than focusing on the purpose and effect of the alleged agreement, the dispute in a Section 1 case focuses on whether an agreement was ever reached at all. For example, it is not unknown in antitrust for a plaintiff to allege price fixing based on the parallel movement of competitors’ market prices yet not be able to prove that the correlation of prices arose as the consequence of any agreement. There is a difference between disputing the nature of an agreement and disputing whether an agreement even exists. Given that an irrebuttable presumption of illegality attaches to price fixing agreements, it is unsurprising that the existence issue arises so frequently in Section 1 litigation. Although there is no defense in the sense that an agreement to fix prices is always a Section 1 violation, there is no violation if no agreement ever existed in the first place.
In the RealPage litigation, the company and its landlord customers claim precisely this: there is no Section 1 price fixing violation because its users never agreed to fix prices.
The plaintiffs in the RealPage MDL have taken a well-worn page from antitrust jurisprudence to infer the existence of an agreement when the circumstances and evidence make clear that the violators knowingly acted together to fix prices. In 1939, the Supreme Court held that an agreement for the purposes of Section 1 can be inferred from an invitation proposing collusion followed by a course of conduct showing acceptance of that invitation.[v] Subsequent case law has inferred price fixing agreements in a variety of circumstances in which no direct information exchange or other communication between the conspirators can be proven, but where mediation by a third party could not have occurred without their knowing assent.[vi]
Such an approach to the agreement element conforms to our economic understanding of why Section 1 irrebuttably condemns price fixing: competition depends on individual profit maximization, each competitor setting prices with the goal of maximizing its individual profit. When firms instead coordinate their pricing decisions with the goal of maximizing the overall profit of the group, competition and consumers suffer. Jointly profit maximizing prices for the group are not the same as the competitive prices set by individual profit maximizing firms. Under joint profit maximization prices tend to be higher and output tends to be lower. In the extreme case in which all the firms in a market jointly profit maximize, prices rise to the monopoly price and output falls to the monopoly quantity. Economically, the relevant agreement in a price fixing case is the agreement to set prices jointly rather than individually.
The Supreme Court has characterized the agreement element in a Section 1 case as “a conscious commitment to a common scheme designed to achieve an unlawful objective.”[vii] The significance of the case law referred to above is that it empowers courts to condemn arrangements where the circumstances show a knowing commitment by competitors to jointly setting prices. The key agreement alleged by the private plaintiffs in the RealPage MDL is just such a commitment to just such a purpose.
This conception of the agreement element was supported by the DOJ, which argued in its Statement in that case that “Section 1 applies to collaborations that eliminate independent decisionmaking—however they have been brought about.” And quoting Interstate Circuit and other cases, the Department said it was “elementary that an unlawful conspiracy may be and often is formed without simultaneous action or agreement on the part of the conspirators.”[viii] Moreover, they argue, an agreement need not be entered into by all the parties at the same time and may be reached by successive actions evidencing their joining of a conspiracy.
In RealPage those actions include the submission of non-public information to RealPage, the broad adherence to RealPage’s pricing recommendations, the observed elevation of market prices, the nature of the available communications, and other circumstances. The inference of agreement is a common-sense conclusion from facts that show that RealPage and its customers knew they were engaged in setting prices that maximize joint, rather than individual, profits.
In U.S. v. RealPage, the Antitrust Division has taken a subtle turn in its framing of its allegations of agreement against RealPage. The government stops short of inferring an agreement among competitors—RealPage’s users—to fix prices based on the reasoning of Interstate Circuit. Instead, the complaint frames the agreements between RealPage and its users as the key elements of its Section 1 counts, despite clearly recognizing that RealPage’s landlords “enjoy the benefits of coordinated pricing among competitors” and the short, clear allegations that “RealPage replaces competition with coordination. It substitutes unity for rivalry.”
Nonetheless, the unlawful agreement alleged in the complaint is not a horizontal agreement inferred from the circumstances among the landlord users to fix prices, but the vertical agreements between RealPage and its customers that enable them to do so. The government alleges that landlords agreed to share nonpublic, competitively sensitive transactional data with RealPage to generate price recommendations, that the landlords agreed to use RealPage RMS to align pricing and that they agreed to allow RealPage to share their information to generate price recommendations.
These alleged vertical agreements, although necessary for the landlord’s joint price setting enterprise, are nonetheless second order to the ultimate “agreement” that renders the defendants’ conduct unlawful, i.e., their conscious commitment to the common scheme to fix, stabilize, or align prices. The inferred (horizontal) price fixing agreement among the landlords is the more fundamental and organic basis for Section 1 liability in the case. The purpose and effect of that agreement is unambiguously harmful to competition and deserves per se condemnation. The same cannot be said for the (vertical) agreements alleged by the government, any single one of which can only be found to violate Section 1 after it is considered in light of all the other circumstances, including the existence and cumulative effect of all the other, similar agreements.
The choice to litigate the RealPage matter not as a horizontal price fixing case but as a vertical rule-of-reason case could reflect the DOJ’s concern over the judiciary’s growing unwillingness to apply per se condemnation to agreements proven through too heavy a reliance on inferential reasoning. Nonetheless, given the uniqueness of the arrangement, by casting a wide net the government could still end up proving a case of horizontal price fixing.
Still, it is regrettable that the government’s RealPage complaint refers only obliquely to an agreement to fix prices and without alleging it as the agreement element in a Section 1 count, particularly given that the enterprise engaged in by the competing landlords and intermediated by RealPage can only achieve the results it does by exploiting the gains from setting prices jointly rather than individually, precisely the conduct Section 1 was enacted to prevent.
Notably, the court overseeing the RealPage MDL in Tennessee has ruled that the plaintiffs did not adequately plead a per se violation, so the agreement alleged there will have to be evaluated under some variation of the rule-of-reason. But neither the framing of the government’s Section 1 claims as a series of vertical agreements nor the arguably premature ruling by the Tennessee district court regarding per se treatment will ultimately determine how best to characterize the common use of RMS software through which competing users share competitively sensitive, non-public information.
As I have written before, in my view such conduct—at least under the circumstances alleged in the RealPage cases—amounts to horizontal price fixing worthy of per se condemnation under Section 1. The DOJ should have fashioned a Section 1 claim based on that straightforward proposition.
Notes
[i] In re RealPage, Inc., Rental Software Antitrust Litig., No. 3:23-MD-3071 (M.D. Tenn. Nov. 15, 2023), Duffy v. Yardi, No. 2:23-cv-01391 (W.D. Wa. March 1, 2024), and Cornish-Adebiyi v. Caesars Entertainment, D. N.J., No. 1:23-cv-02536-KMW-EAP.
[ii] United States, et al. v. RealPage, Inc., Case No. 1:24-cv-00710 (M.D.N.C., filed Aug. 23, 2024). The states are: California, Colorado, Connecticut, Minnesota, North Carolina, Oregon, Tennessee, and Washington.
[iii] The Sherman Act, Section 1, declares: “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal.”
[iv] Verizon Communications v. Law Offices of Curtis V. Trinko, 540 U.S. 398, 408 (2004).
[v] Interstate Circuit v. United States, 306 U.S. 208 (1939),
[vi] See, MR Blog, April 4, 2024.
[vii] Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 768 (1984).
[viii] 306 U.S. at 227.