What's The Story On Algorithmic Pricing?

New York State become one of the first states in the country to address a consumer protection warning if the company they are buying from is using personalized (or “surveillance” pricing) for their goods or services and it is also one of the first states to ban the use of algorithms by landlords (residential) to coordinate rental rates.

This is a topic that has garnered the attention of many states and will certainly impact not only self storage operators in New York, but likely will carry across the country as well. So what does this mean for operators using data to establish their rental rates? 

First, operators need to understand the difference between two types of data:

• Public data used to inform pricing, similar to what many vendors in the self storage industry are offering

• Private personalized data that establishes rates or prices solely based on the location, browsing history and purchase history of an individual customer or tenant.

The concept of surveillance pricing is where companies use this private information to effectively charge each customer the maximum amount they might be willing to pay based on the personal information gathered on that particular customer. As a result, businesses are charging different prices for different customers for the same items. The contention is that their individualized pricing leads to discriminatory pricing and certainly data manipulation.

The New York law now requires companies that use any such personalized data to disclose this along with the presentation of their rates or prices. The notice must state “THIS PRICE WAS SET BY AN ALGORITHM USING YOUR PERSONAL DATA.” So far, all legal challenges to this disclosure requirement have failed and the Attorney General for New York has the right to impose penalties against companies who fail to provide this disclosure with a fine up to $1,000 per violation. 

As for rate setting between landlords, the new law bans the use of software that collects and analyzes private rental data from multiple landlords for the purpose of creating any antitrust or collusion in establishing market rental rates. The new law effectively prohibiting tools that recommend rent, lease renewals, or occupancy levels that use shared data in order to prevent anti-competitive behavior and price-fixing.

The statute deems it an unlawful agreement in violation of New York’s Donnelly Act “for a residential rental property owner or manager to knowingly or with reckless disregard set or adjust rental prices, lease renewal terms, occupancy levels, or other lease terms and conditions” based on recommendations from algorithmic pricing software.

This new rent-setting ban has evolved from investigations and a pending Department of Justice lawsuit against multi-family landlords and their software vendors who allegedly were using the internal private rental data from their tenants to establish inflated rentals rates via collusion in the particular rental markets.

The settlements that have emerged from these lawsuits (namely the RealPage litigation) included agreements not to use any nonpublic, competitively sensitive information to determine rental prices; Cease using active lease data for purposes of training the models underlying the software (limiting model training to historic or backward-looking nonpublic data that has been aged for at least 12 months); Not use models that determine geographic effects narrower than at a state level; Remove or redesign features that limited price decreases or align pricing between users of the software; and Cease conducting market surveys to collect competitively sensitive information. The intent of these settlement agreements is to clarify how data can be properly used to set pricing. 

Certainly, all of this information on the proper use of algorithmic pricing in relatively new to the self storage industry, and as a result, operators in the industry must be careful to comply not only with the individual state laws that may apply but must also be aware of how its data is collected and how it is used to prevent any potential discriminatory pricing decisions. Companies using algorithmic pricing models must understand how their data influences their pricing and how others have access to such data. The goal is to avoid any appearance of collusion of anti-competitive practices when it comes to rental rates. 

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About Us

Scott Zucker is a partner in the law firm of Weissmann Zucker Euster + Katz P.C. in Atlanta, GA. Scott specializes in business litigation with an emphasis on real estate, landlord-tenant and construction law. For more visit www.wzlegal.com. 

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This newsletter is for the purpose of providing general legal insight into the self-storage industry. It should not be substituted for the legal advice of your own attorney.