Overview
Recently enacted state laws are beginning to regulate the use of algorithmic pricing in various ways.
Any company doing business in New York State that sets prices that may fluctuate depending on an individual's personal data is now required by statute to state clearly and conspicuously in any offer or announcement of its price that "THIS PRICE WAS SET BY AN ALGORITHM USING YOUR PERSONAL DATA." With certain exceptions, the statute applies when the seller uses any data that identifies or could reasonably be linked to a specific consumer or device, including the customer's location or his or her past shopping activity.
Banks and other financial institutions, and insurance companies are exempted from the law, as are personalized location data used by car services to calculate fares based on mileage and trip duration, and prices offered to consumers with existing subscription-based contracts for goods or services, where the offered price is lower than that set forth in the existing contract.
A consumer alert issued by New York Attorney General Letitia James warns that this type of algorithmic or surveillance pricing is most commonly used on businesses' apps or as part of loyalty programs, and cites as examples customers being charged more for hotel rooms when booking from a high-income ZIP code and Target shoppers seeing prices increase when they browse online inside a Target retail location. The alert encourages consumers to file complaints with the Office of the Attorney General. Upon receipt of consumer complaints, the attorney general will send a cease and desist letter to the business; continued violations may be enjoined by a court and penalized by civil penalties of up to $1,000 per violation.
Federal district court Judge Jed Rakoff dismissed with prejudice a First Amendment challenge to the statute, because it was "reasonably related to the state's interest in preventing deception of consumers" and was not "unjustified or unduly burdensome" under the standard of Zauderer v. Off. of Disciplinary Counsel, 471 U.S. 626 (1985).
Meanwhile, in California, a statute that took effect on January 1 of this year prohibits the use of a "common pricing algorithm" by agreement where a computer, software or other technology uses "competitor data to recommend, align, stabilize, set or otherwise influence a price or commercial term." It also prohibits the distribution of a common pricing algorithm if a business "coerces" another to set or adopt a recommended price or commercial term recommended by the common pricing algorithm.
At the federal level, Senator Amy Kobuchar and co-sponsors twice introduced "The Preventing Algorithmic Collusion Act" that would prevent the use or distribution of any pricing algorithm that uses, incorporates, or was trained with of nonpublic competitive data. Neither introduction resulted in enactment.
The New York and California statutes are examples of state legislatures stepping in where the U.S. Congress has chosen not to act. What may be unique about the New York statute is that it prohibits single-firm conduct; in contrast, both California statute and Senator Klobuchar's proposal require an agreement (consensual or coerced) or at least the cooperation of competitors in sharing nonpublic competitive data. As additional statutory efforts are under consideration in more states, companies employing algorithmic pricing will need to monitor both the case law on which we have previously written and reported, as well as these statutory developments.
