New technologies circumvent old laws: algorithms are used to circumvent antitrust rules, price fixing, etc.

Technology company RealPage is once again at the center of legal trouble in Texas - accused of using algorithmic software to allow residential property owners across the country to collude and inflate rental prices.

The precedent-setting cases soon to be heard by the court could determine whether algorithms (and eventually artificial intelligence) can be used to circumvent antitrust laws and evade other regulations.

Washington, D.C. Attorney General Brian Schwalb was recently the first to sue RealPage (along with 14 of D.C.'s largest landlords) for using the same algorithmic program to set rental prices. More than 90 percent of large apartments in the D.C. metro area use RealPage software, the D.C. attorney's office said. Plaintiffs accuse them of illegally conspiring to set rental prices above competitive levels.

On Nov. 15, the U.S. Department of Justice entered a separate sweeping antitrust violation case, backing tenants suing RealPage and major rental housing companies across the country. RealPage is accused of acting as an information exchange facilitator for large real estate tenants. According to the lawsuits, the property managers agreed to set prices through RealPage's software, which also allowed the companies to share data on vacancy rates and prices in the housing market in some of the most expensive areas of the U.S.

The lawsuits against RealPage and the housing management companies say that RealPage's software covers at least 16 million properties nationwide, and private investor-owned property management companies are the most active users of RealPage's technology. RealPage itself is also owned by private investors. Many rental markets dominated by large landlords have seen astronomical rent price increases in recent years (pre-pandemic), as well as increased evictions and homelessness.

Lawsuits against RealPage and management companies

The court cases against RealPage and the management companies are consolidated in federal court in Nashville, Tennessee, and are attracting particular attention because the court's decision has far-reaching implications for virtually every industry where pricing algorithms are distributed. RealPage and the landlords are now seeking to have the claims dismissed based on two arguments.

The parties' arguments

The Department of Justice responded as follows on November 15:

"Complaints allege that RealPage exerts pressure to enforce its recommendations and landlords have turned over pricing decisions to RealPage. Moreover, even the exchange of information is unlawful: in each of these cases, the challenged price exchange scheme violated the competitive process. To impose liability, it is not required that the scheme result in higher prices.... So long as the evidence shows an understanding between competing landlords to use RealPage prices as a starting point, the scheme is per se illegal. "

The second argument from RealPage and major landlords:

"The DOJ's response: a defendant cannot 'escape the consequences' of organizing a price-fixing cartel simply because it organizes the cartel by distributing software. Judicial experience is only relevant for determining whether a 'new immutable rule' will be adopted, not for determining whether an already existing immutable rule applies.

The DOJ's argument is that the pricing law applies even when an algorithm (or AI) tells it to do so. If the court upholds this thesis, it will have a huge impact on the entire country.

"Algorithms are the new frontier," the Justice Department said in a statement. "And given the amount of information an algorithm can access and assimilate, this new frontier poses an even greater threat to anticompetitive behavior than the previous one. "

Other areas where algorithms are used

New revelations suggest that almost all areas of the economy use algorithms to set prices - or even something like it.

UnitedHealth now faces lawsuits over its scheme to use algorithms to cut off health care for the elderly and disabled.

This practice, unfortunately, is not new. It was previously noted that: Internal documents show that a UnitedHealth subsidiary called NaviHealth has set a goal for 2023 to keep the length of patient rehabilitation in private Medicare plans within 1 percent of the number of days predicted by the algorithm.

RealPage had a similar system for people who dared to contradict its computer models. As reported by ProPublica:

"The software update tracked not only the percentage of customer consent, but also the identity of employees of landlords who requested deviations from the prices set by RealPage, the lawsuit says. It also suggests that remuneration for some management company employees was tied to compliance with company guidelines. "

In another area of algorithmic pricing, the Justice Department filed an antitrust lawsuit in September against Agri Stats Inc. for organizing an anticompetitive exchange of information between chicken, pork and turkey producers. Agri Stats is said to collect, integrate and distribute price, cost and volume information between competing meat producers, allowing them to coordinate volumes and prices to maximize profits.

And, of course, there's Amazon:

"The FTC alleged that Amazon temporarily suspended the algorithm during Prime Day and the holiday shopping season, when there was more public and customer attention. "

So algorithmic collusion is relatively new - or at least its understanding and detection is relatively new. It remains an open question how much the universal implementation of algorithmic intermediaries could contribute to higher prices for everything, but as the Kansas Federal Reserve Bank points out in January, "markup" could account for more than half of 2021 inflation.

A 2021 Yale University study found that prices can rise above competitive levels when two or more competitors in an industry use algorithmic pricing. Now we face the challenge of establishing its illegality (and enforcing compliance), which, according to SMU's Science and Technology Lawfulness Review, shouldn't be that hard.

Researchers there wrote earlier this year that while the use of algorithmic intermediaries may be a new phenomenon, antitrust laws governing such behavior have been in place for more than 140 years. And while algorithms can increase the speed of setting prices based on actual data, they're nothing new in and of themselves: Let's just change the conditions of the hypothetical situation a bit to see why. Wherever the word "algorithm" appears, please replace it with the words "a man named Bob". Could a man named Bob collect confidential pricing strategy information from all market participants and then tell everyone how they should set prices? If this is not normal behavior for a person named Bob, it is probably not normal behavior for the algorithm either.