Beware – Price Fixing by Algorithms

Regina M. Joseph

Regina M. Joseph

So, you’ve designed a great looking poster.  Posters are sold all over Twitter and other social media sites, and now you’ve been lucky enough to land a space in Amazon Marketplace. You’re not the only one selling posters, of course.  Some even resemble yours.  Great minds think alike, after all.  So, how do you know what price to advertise?  Prices are constantly changing and being discounted on Amazon. Overpricing on a sensitive item like posters can make you dead in the water.  Yet, you need to cover your costs and make a living.

Well, you know that Amazon is famous for using algorithms.  In fact, algorithms are all the rage for everything nowadays.  Sellers of all likes live and die according to the ever-changing Amazon algorithms.  Google wouldn’t even exist without them.  Uber infamously thrives on them, imposing its “surge” pricing.  And, you know this guy or gal who writes code and who can craft an algorithm just for you (and maybe a couple of the other poster sellers), so that as prices change, so do yours.  You’re a little guy, small potatoes, and the posters are cheap, so who’s going to care?

Brilliant solution?  Maybe.  Criminal?  Yes, according to the United States Department of Justice (“DOJ”).

In what the DOJ billed as its “first online marketplace prosecution,” on April 6, 2015, the DOJ charged David Topkins, a former executive of an e-commerce seller of posters, prints and framed art, with conspiracy to fix the prices of posters sold online.  Mr. Topkins was reported in a New Yorker article on this topic to be the founder of Poster Revolution, which was sold in 2012 to Art.com.  As questioned in the New Yorker article, one wonders why the first e-commerce prosecution focused on a small-time seller of posters, unless DOJ’s true focus is the usage of algorithms.  The New Yorker articles cite as-yet-unpublished scholarly articles that explore the legal implications of bots.

According to the DOJ, Mr. Topkins and his co-conspirators agreed to fix the prices of certain posters, and they implemented their agreement by using computer code that instructed algorithm-based software to set prices in conformity with the Agreement.  In this way, they allegedly coordinated changes to their respective prices.

Through a Plea Agreement filed with the United States District Court for the Northern District of California, San Francisco Division (Case No. CR 15-00201 WHO), on April 30, 2015, Mr. Topkins pled guilty to the criminal charge of conspiracy to fix prices of certain posters from September 2013 through January 2014 in violation of the Sherman Antitrust Act, 15 U.S.C. § 1.

The Plea Agreement recites the possible maximum sentence for a violation of Section One of the Sherman Antitrust Act.  This includes a prison term of 10 years, and a fine equal to the greatest of (1) $1 million, (2) twice the gross pecuniary gain the conspirators derived from the crime, or (3) twice the gross pecuniary loss caused to the victims.  The court could also order him to pay restitution to his victims.

For cooperation, DOJ agreed to recommend for the sentencing hearing that the court impose a penalty of imprisonment of 6 to 12 months and a fine of $20,000 (Plea Agreement, § 10).

So beware:  price fixing is price fixing, no matter how it’s done.

Although DOJ’s April announcement was headlined “First Online Marketplace Prosecution,” and its text noted that it targeted “e-commerce,” the case raises far greater implications for the increasingly ubiquitous usage of algorithms.  It is curious that no other co-conspirators were named, even though the release and the Plea Agreement refer to an agreement–a conspiracy, after all, is a fundamental element of a claim under Section One of the Sherman Act.  The documents have few details into this essential element; Mr. Topkins caved in the Plea Agreement to admitting this essential fact.  It’s noteworthy that the DOJ also said in its release, “We will not tolerate anticompetitive conduct, whether it occurs in a smoke-filled room or over the Internet using complex pricing algorithms.”  DOJ is not the only agency delving into the dark recesses of high technology. In March 2015, the Federal Trade Commission (“FTC”) announced a new initiative for this purpose by creating within its Bureau of Consumer Protection the Office of Technology Research and Investigation.

Given the speed of Internet communications and the increasing prevalence of algorithms, many actors might communicate anonymously and instantaneously through no conscious touch other than that of the “bots” that race through the Internet pathways and react to one another according to the programming instructions.  May this activity constitute price fixing?  Past antitrust law has required proof of actions that produce at least an inference of an illegal understanding among competitors.

In conclusion, the Topkins prosecution (at least to date) was against one individual, not a group of conspirators.  So, it leaves the question:  Is usage of a pricing algorithm sufficient to constitute prosecution under the Sherman Act?  As noted in the New Yorker article, an unresolved legal question of increasing relevance in the Internet age is:  What constitutes collusion?