Room Rate Roulette: The Third and Ninth Circuit Wrestle with Antitrust Liability for Pricing Algorithms

Two federal appellate courts have now looked at analogous allegations of price fixing using AI-driven pricing software and reached opposite conclusions—creating an arguable circuit split and providing additional guidance to companies using algorithmic pricing tools.

In Cornish-Adebiyi v. Caesars Entertainment, Inc., the Third Circuit recently reversed dismissal of antitrust claims against Atlantic City casino-hotels and their algorithmic pricing software provider, holding that plaintiffs plausibly alleged a price-fixing conspiracy under Section 1 of the Sherman Act. Last August, however, in Gibson v. Cendyn Group, LLC, the Ninth Circuit reached the opposite conclusion on similar allegations, holding that competing hotels’ independent decisions to license the same pricing software, followed by higher prices, was insufficient to state a Sherman Act claim.

The Same Software. Two Opposite Outcomes.

Both cases involved the same AI-powered pricing software used by competing hotels and casinos. In both cases, hotel guests sued, claiming the software was used to illegally fix room prices and restrict the number of available rooms, and in both, the district courts dismissed the claims. The circuit courts reviewing those dismissals, however, reached opposite results.

In Cornish-Adebiyi, the Third Circuit credited the Plaintiffs’ allegations that the algorithm continuously processed and analyzed each casino-hotel’s non-public, real-time pricing and occupancy data along with the same type of non-public, real-time data submitted by their competitors. The Third Circuit declined to require plaintiffs to plead with more specificity how the algorithm facilitated that exchange of information, holding that to do so would be tantamount to expecting plaintiffs to explain how the software in question worked without the benefit of discovery.

This holding contrasts with Gibson, where the Ninth Circuit noted that while plaintiffs alleged each user provided the software with non-public pricing and occupancy data, they did not sufficiently allege that the software pooled, shared, or used the confidential information provided by a given hotel in the pricing recommendations it generated for any other hotel—adding in a footnote that this analysis might change if plaintiffs had alleged that the software shared the confidential information of each competing hotel among the licensees.

Additional Considerations from the Third Circuit

The Third Circuit also identified several additional allegations in the complaint that supported its conclusion:

1. The “Override” Constraint: The challenged software was allegedly integrated into the casino-hotels’ reservation systems and constrained their ability to deviate from recommendations by requiring a special override used only in times of “need and extreme circumstances.” The software scored each casino-hotel on how often it used the override.
2. The 90% Acceptance Rate: The defendant casino-hotels allegedly accepted the algorithm’s recommendations 90% of the time, replacing what was described as a “historically independent room pricing system” with an “interdependent, collusive one.”
3. Economically Irrational Pricing: Between 2017 and 2019, defendants’ collective room occupancy allegedly dropped 8%, while room revenue rose approximately 22%. As the court put it, the alleged conspiracy would only work if casino-hotels could maintain higher prices knowing competitors would not undercut them: “This certainly supports an inference of collusion; indeed, we can think of no other explanation.”

Practical Implications

The Third Circuit invoked the framework articulated by former FTC Acting Chair Maureen Ohlhausen: “Is it ok for a guy named Bob to collect confidential price strategy information from all the participants in a market, and then tell everybody how they should price? If it isn’t ok for a guy named Bob to do it, then it probably isn’t ok for an algorithm to do it either.”

The law on algorithmic pricing continues to develop. The Third Circuit’s decision recognizes that there is nothing “inherently wrong or anticompetitive with using algorithms,” but as contrasted with the Ninth Circuit’s treatment of similar allegations, it is clear that courts are continuing to grapple with how to treat common algorithmic pricing tools.