Can the FTC Help Lower Rents?
Brian Hill
INTRODUCTION
In recent years, with every credit card tap or “buy now click,” rising prices have beleaguered consumers’ bank accounts during a time of high inflation[1] and low consumer satisfaction[2]. In the past year alone, high rents,[3] expensive airfare,[4] and costly trips to the grocery store[5] have all headlined the news. In their recent article “It’s Getting Too Expensive to Have Fun,” Robbie Whelan and Anne Steele of the Wall Street Journal lamented that even “[t]he rising cost of fun is becoming a drag” and found that prices for entertainment such as concert tickets and amusement-park entry fees have “ballooned.”[6] A potential dark age for consumers looms on the horizon as these increasing costs are coming at a time when firms are implementing algorithms, powered by artificial intelligence, to price their goods and services.[7]
Historically, pricing decisions made by humans took weeks and months to implement.[8] Now, pricing algorithms can adjust prices within milliseconds.[9] In hub and spoke algorithms, the developer of a single algorithm acts as the “hub” to determine the market price charged by its users, individual firms who act as the “spokes.”[10] For the algorithm to work, each individual firm sends its cost data to the third-party developer of the algorithm.[11] Then, the algorithm compiles the data and returns a suggested price to the individual firms based on the provided data.[12]
Large property management firms across the country, in particular, have been accused of colluding to raise rents through their shared use of third-party rent-setting software developed by RealPage.[13] Multiple class actions have been filed in federal court and have been consolidated into the Federal District Court for the Middle District of Tennessee,[14] renters have accused RealPage and several of the country’s largest property management firms of “engag[ing] in a nationwide conspiracy to fix and inflate the price of multifamily rental housing across the country.”[15] [WM1] The DOJ has signaled an interest in the lawsuit and, on October 17, 2023, the court granted its Notice of Potential Participation.[16][WM2]
BASIC RULES OF ANTITRUST LAW
In 1890, Congress enacted the Sherman Antitrust Act (“Sherman Act”) to prohibit anticompetitive agreements and monopolies.[17] The main objective of antitrust law main is “to protect the process of competition for the benefit of consumers, make sure there are strong incentives for businesses to operate efficiently, keep prices down, and keep quality up.” [18]
One of antitrust law’s main concerns is price fixing. Price fixing is a violation of Section 1 of the Sherman Act (“Section 1”) that is accomplished when competitors form a cartel agree to an optimal price that will maximize their profits. It is a per se illegal offense, meaning that there is no defense or justification for a violation.[19] Proving a price-fixing cartel’s existence under Section 1 requires the plaintiff to demonstrate the existence of “an agreement or concerted action toward ‘a common goal’” that unreasonably restrains trade affecting interstate commerce.[20] When there is no direct evidence of an agreement, it is difficult to prove that firms intended to collude and it is unlikely courts will categorize the defendant’s behavior as per se illegal. They will instead apply the more lenient rule of reason, which generally favors the defendant in an antitrust lawsuit.[21] Demonstrating the existence of a price-fixing agreement is difficult because the Supreme Court “has never held that proof of parallel business behavior conclusively establishes agreement.”[22] It is hard to distinguish between ordinary procompetitive parallel conduct and collusion between firms based simply on an observation of a group of firms acting the same way.
A hub and spoke agreement is one form of an illegal price-fixing agreement. In antitrust law, the key for a plaintiff to prove a hub and spoke agreement is for the plaintiff to establish the existence of agreements between the spokes or the “rim holding everything together.”[23] For a hub and spoke agreement to be per se illegal, there must be proof of vertical agreement between the hub and spokes and horizontal agreement along the “rim” between the spokes, or individual competitors.[24] Prosecuting companies using a hub and spoke algorithm usually requires both a showing of horizontal agreement among the rim of the agreement, and proof that the algorithm was designed to facilitate collusion among its users.[25] Additionally, “a successful hub and spoke theory of Sherman Act liability based on the use of algorithmic pricing depends in part on the exchange of nonpublic information between competitors through the algorithm.”[26]
APPLICATION TO IN RE: REAL PAGE, INC., RENTAL SOFTWARE ANTITRUST LITIGATION
As discussed above, a class of consumers has sued RealPage and its users and alleged that they agreed to set rents in metropolitan areas across the country. The Complaint alleges that RealPage and its users engaged in “an agreement . . . to fix, raise, stabilize, or maintain at artificially high levels the rents they charge in Metro Areas nationwide.”[27] It states that the agreement included each defendant sharing “competitively sensitive information” with each other that caused anticompetitive effects in the market.[28] The Complaint alleges that the property management companies:
[K]new that their competitors had accepted RealPage’s invitation to participate in the agreement to fix the price of multifamily rental units, regulate supply, and interfere with the free market across the United States through their receipt of marketing materials, participation in RealPage information sharing events, and knowledge of competitors using RealPage’s RMS—and with this information, Defendants accepted RealPage’s invitation to participate in the scheme.[29]
It will be difficult for the plaintiffs to prove an agreement because of the Supreme Court’s holdings that conscious parallelism is not enough to constitute a Section 1 violation. The defendants argue that the renters have not alleged a plausible price-fixing conspiracy because they illustrate, at best, “that [the property management firms] each agreed individually with RealPage to use a software tool that they believed was in their unilateral interest, with the knowledge that other Lessor Defendants were also using the same tool, and then used it to varying degrees.”[30] According to the defendants, even if agreements for the purposes of the Sherman Act existed between RealPage and each individual property management firm, there is not a per se price fixing violation because the renters cannot demonstrate proof of a horizontal agreement among the competitor property management firms to establish the “rim.”[31] Therefore, whether the complaint will survive a motion to dismiss depends on if the judge finds that the renters established enough plausible facts to demonstrate the existence of an agreement between the defendants. If the complaint survives the motion to dismiss, a significant portion of the trial will likely be spent trying to prove the existence of an agreement between each individual property management company.[32]
CAN THE FTC STEP IN? IS THERE A SOLUTION?
In 2017, Terrell McSweeny, a then commissioner of the Federal Trade Commission (“FTC”), recognized the difficulty of limiting algorithmic collusion under Section 1 of the Sherman Act.[33] While acknowledging that the use of a pricing algorithm on its own does not raise antitrust issues, she explained that the algorithm’s potential to increase tacit collusion is what puts it beyond Section 1’s reach.[34] If the allegations against the defendants in the RealPage case are not strong enough to constitute an agreement under Section 1 of the Sherman Act, the FTC’s powers under the FTC Act as a consumer protection agency could be a line of defense against the potential dangers of algorithmic collusion.
In 1914, Congress passed the FTC Act to respond to the Sherman Act’s shortfalls.[35] The FTC Act prohibits some conduct that falls below the scope of the Sherman Act.[36] Specifically, Section 5 of the FTC Act outlaws “[u]nfair methods of competition . . . and unfair or deceptive acts or practices in or affecting commerce” in addition to “conduct that contravene[s] the spirit of the antitrust laws and those that, if allowed to mature or complete, could violate the Sherman . . . Act.”[37]
While the FTC Act provides options for antitrust enforcement beyond the Sherman Act, the FTC’s ability to prevent algorithmic hub-and-spoke price fixing agreements may be limited by past court decisions. As to the issue of finding agreement in a price-fixing cartel, decisions from the Ninth and Second Circuits appear to evaporate any hopes for the FTC Act becoming a stronger defense for consumers from the dangers of hub and spoke algorithms. For example, in Boise Cascade v. Federal Trade Commission, the “the Ninth Circuit found that to prove a section 5 violation in the absence of an actual effect on competition, the FTC needed to show evidence of an agreement.”[38][WM3] Additionally, in E.I. Du Pont de Nemours & Co. (Ethyl) v. Federal Trade Commission, the Second Circuit stated that “[s]ection 5 is aimed at conduct, not at the result of such conduct, even though the latter is usually a relevant factor in determining whether the challenged conduct is ‘unfair.’”[39] However, those cases might be distinguishable from this case.
In 2022, the FTC explained in its Policy Statement Regarding Section 5 Enforcement that Ethyl, Boise, and Official Airline Guides, Inc. v. FTC fell outside of Section 5’s scope because “the particular facts at issue lacked evidence of unfairness, either ‘some indicia of oppressiveness’ or some evidence that the conduct tended to negatively affect the market.”[40] The FTC defines unfair conduct as conduct that “may be coercive, exploitative, collusive, abusive, deceptive, predatory, or involve the use of economic power of a similar nature” and “tend[s] to negatively affect competitive conditions.”[41] According to the FTC, negative consequences include “raising prices, reducing output, limiting choice, lowering quality, reducing innovation, impairing other market participants, or reducing the likelihood of potential or nascent competition.
The alleged conduct between RealPage and the property management companies is arguably collusive and using a hub and spoke algorithm to allow property management companies to raise rents without improving their product can be seen as a practice that negatively impacts competition. If the use of algorithmic hub and spoke agreements to set rents is able to evade the grasp of the Sherman Act, the alleged facts in the RealPage case would be the perfect opportunity for the FTC to protect renters and put their definitions of Section 5’s scope to the test by bring its own enforcement against the RealPage defendants under Section 5 of the FTC Act. However, even if the FTC were to succeed in arguing that the use of this type of hub and spoke algorithm was an unfair use of competition under Section 5, this victory might only be a short-term win for renters. As artificial intelligence technology progresses, there might not be a need for hub and spoke agreements because property management companies might be able to use separate artificial intelligence-powered algorithms that will reach the same conclusion on price without ever communicating with each other.[42]
Brian Hill is an Associate Editor with MJEAL. Brian can be reached at bchill@umich.edu.
[1] See Consumer Price Index Data from 1913 to 2023, US Inflation Calculator, https://www.usinflationcalculator.com/inflation/consumer-price-index-and-annual-percent-changes-from-1913-to-2008/ (last visited Nov. 20, 2023).
[2] Rebecca Hinds & Sarang Gupta, Customer Experience Is Everyone’s Responsibility, Harvard Business Review (Apr. 6, 2023), https://hbr.org/2023/04/customer-experience-is-everyones-responsibility#:~:text=In%20the%20U.S.%2C%20customer%20satisfaction,Customer%20Satisfaction%20Index%20(ACSI).
[3] See Jon Leckie, The Rent Report, Rent.Research, https://www.rent.com/research/average-rent-price-report/ (graph showing national rent price trends since April 2019) (last visited Nov. 20, 2023); Robert Frank, Manhattan rents hit an all-time high in January, CNBC (Feb. 9, 2023 8:35 AM), https://www.cnbc.com/2023/02/09/manhattan-rents-record-high-january.html.
[4] Brett Holzhauer, Airline ticket prices are up 25%, outpacing inflation – here are the ways you can still save, CNBC (May 25, 2023), https://www.cnbc.com/select/airline-ticket-prices-are-up-25-percent-why-and-how-to-save/.
[5] Sticker Shock at the Grocery Store? Inflation Wasn’t the Only Reason Food Prices Increased, GAO (Apr. 11, 2023), https://www.gao.gov/blog/sticker-shock-grocery-store-inflation-wasnt-only-reason-food-prices-increased
[6] Robbie Whelan & Anne Steele, It’s Getting Too Expensive to Have Fun, Wall Street Journal (Oct. 17, 2023 10:38 PM), https://www.wsj.com/economy/consumers/its-getting-too-expensive-to-have-fun-a59e9df8.
[7] Emilio Calvano et al., Artificial Intelligence, Algorithmic Pricing, and Collusion, 110 The American Economic Review 3267, 3267 (2020).
[8] Ariel Ezrachi & Maurice E. Stuke, Artificial Intelligence & Collusion: When Computers Inhibit Competition, 2017 U. Ill L. Rev. 1775, 1780 (2017).
[9] Id.
[10] Id. at 1782.
[11] Id. at 1788.
[12]Id.
[13] Heather Vogell, Rent Going Up? One Company’s Algorithm Could be Why., ProPublica (Oct. 15, 2022), https://www.propublica.org/article/yieldstar-rent-increase-realpage-rent.
[14] Federal judge advances seismic RealPage lawsuit, The Real Deal (Aug. 9, 2023 3:31 PM), https://therealdeal.com/national/2023/08/09/seismic-realpage-lawsuit-moving-forward/.
[15] Second Amended Complaint at ¶ 1, In RE: Realpage, Inc., Rental Software Antitrust Litigation, No. 3:23-MD-3071 (M.D. Tenn. Sept. 7, 2023) [hereinafter “Complaint”].
[16] U.S. Notice of Potential Participation at 1, IN RE: Realpage, Inc., Rental Software Antitrust Litigation, No. 3:23-MD-3071 (M.D. Tenn. Oct. 17, 2023).
[17] Eleanor M. Fox & Daniel A. Crane, Cases and Materials on U.S. Antitrust in Global Context 8 (4th ed. 2020).
[18] The Antitrust Laws, Federal Trade Commission, https://www.ftc.gov/advice-guidance/competition-guidance/guide-antitrust-laws/antitrust-laws (last visited Nov. 11, 2023).
[19] See United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 218 (1940) (“Thus for over forty years this Court has consistently and without deviation adhered to the principle that price-fixing agreements are unlawful per se under the Sherman Act and that no showing of so-called competitive abuses or evils which those agreements were designed to eliminate or alleviate may be interposed as a defense.”).
[20] T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass’n, 809 F.2d 626, 632 (9th Cir. 1987).
[21] Aneesa Mazumdar, Algorithmic Collusion: Revising Section 5 of the FTC Act, 122 Colum. L. Rev. 449, 459 (2022).
[22] Theatre Enter., Inc. v. Paramount Film Distrib. Corp, 346 U.S. 537, 541 (1954).
[23] Total Benefits Planning Agency, Inc. v. Anthem Blue Cross & Blue Shield, 552 F.3d 430, 435-36 (6thCir. 2008).
[24] See Id.
[25] Ezrachi & Stuke, supra note 8, at 1788-89.
[26] Gibson v. MGM Resorts Int’l, No. 2:23-cv-00140-MMD-DJA, 23 U.S. Dist. LEXIS 190432 at *14 (D. Nev. Oct. 24, 2023)
[27] Complaint, supra note 15, at ¶ 702, 703.
[28] Id. at ¶ 703.
[29] Id. at ¶ 8.
[30] Defendant’s Memorandum of Law in Support of Motion to Dismiss at 3, In RE: Realpage, Inc., Rental Software Antitrust Litigation, No. 3:23-MD-3071 (M.D. Tenn. Aug. 7, 2023).
[31] Id. at 9.
[32] During the editing process of this blog, Judge Waverly D. Crenshaw of the Middle District of Tennessee denied the defendants’ motion to dismiss. Omnibus Order, In RE: Realpage, Inc., Rental Software Antitrust Litigation, No. 3:23-MD-3071 (M.D. Tenn. Dec. 28, 2023). In its memorandum opinion, the court explained that the plaintiffs have successfully alleged a hub and spoke agreement because their allegation depended on the exchange of nonpublic information between competitors through the algorithm. Memorandum Opinion at 34, In RE: Realpage, Inc., Rental Software Antitrust Litigation, No. 3:23-MD-3071 (M.D. Tenn. Dec. 28, 2023). While this is a victory for the plaintiffs, they will still have to prove the existence of an agreement at trial and, if they succeed at that, possibly on appeal.
[33] Mazumdar, supra note 21, at 463.
[34] Id.
[35] Id. at 460.
[36] Id. at 465.
[37] Id. at 461 (quoting Fed. Trade Comm’n, Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act (Aug. 13, 2015), https://www.ftc.gov/system/files/documents/public_statements/735201/150813section5enforcement.pdf).
[38] Mazumdar, supra note 21, at 462; See Boise Cascade v. Fed. Trade Comm’n, 637 F.2d 573, 582 (9th Cir. 1980).
[39] Mazumdar, supra note 21, at 462;E.I. Du Pont de Nemours & Co. v. Fed. Trade Comm’n (Ethyl), 729 F. 2d 128, 142 (2d Cir. 1984).
[40] Fed. Trade Comm’n, Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act 7 (2022), https://www.ftc.gov/system/files/ftc_gov/pdf/P221202Section5PolicyStatement.pdf.
[41] Id.
[42] See Ezrachi & Stuke, supra note 8, at 1789 (“Under certain market conditions, the industry-wide use of algorithms transforms the market dynamic to effectively enable conscious parallelism and higher prices.”); Calvano et al., supra note 7, at 3268 (“The results indicate that relatively simple pricing algorithms systematically learn to play collusive strategies.”).