California Clarifies Antitrust Pleading Standard, Creates Uncertainty on ‘Coercive’ Uses of Algorithmic Software

California Governor Gavin Newsom recently signed into law AB 325, which amends California’s state antitrust law, the Cartwright Act. Effective January 1, 2026, the amendments create a new basis for liability for parties that “coerce” the adoption of prices recommended by common pricing algorithms used by multiple persons and clarify that the pleading requirements for Cartwright Act claims are distinct and more permissive than those under federal antitrust law. This new law creates legal uncertainty, and companies that distribute and use algorithmic pricing tools should be aware of new compliance risks.

KEY TAKEAWAYS

• Targeted legislation: Lawmakers narrowed the bill from earlier drafts, signaling some caution in crafting legislation that could impact emerging technologies.
• Focus on “coercive” uses of algorithmic pricing software: While the term “coerce” is not defined, the law appears designed to prevent sweeping liability for unwitting users or licensees of a common pricing algorithm and instead targets those coercing users to accept prices recommended by algorithms.
• Lowers Cartwright Act pleading standard: The bill clarifies that, at the pleading stage, a plaintiff is not required to allege facts excluding the possibility of independent action when alleging a violation of the Cartwright Act. This relaxed pleading requirement applies to all claims of agreement or conspiracy under the Cartwright Act, making it easier for a plaintiff to plead conspiracy claims under California antitrust law based on parallel conduct by competitors. In order to establish an antitrust conspiracy claim in federal court, it is generally necessary to plead facts that exclude the possibility of independent action.

   

AB 325’S EVOLUTION FROM EARLIER DRAFTS

AB 325’s initial aim to prohibit the use of pricing algorithms that rely on nonpublic competitor data ended up on the cutting room floor, signaling that lawmakers were wary of overly broad legislation that could, among other things, chill innovation. The more targeted amendments to the Cartwright Act that ultimately passed include the following provisions:

California Business and Professions Code Section 16729(a): “It shall be unlawful for a person to use or distribute a common pricing algorithm as part of a contract, combination in the form of a trust, or conspiracy to restrain trade or commerce in violation of this chapter.”

California Business and Professions Code Section 16729(b): “It shall be unlawful for a person to use or distribute a common pricing algorithm if the person coerces another person to set or adopt a recommended price or commercial term for the same or similar products or services in the jurisdiction of this state.”

California Business and Professions Code Section 16756.1: “Notwithstanding any other law, in a complaint for any violation of this chapter, it is sufficient to contain factual allegations demonstrating that the existence of a contract, combination in the form of a trust, or conspiracy to restrain trade or commerce is plausible, and the complaint shall not be required to allege facts tending to exclude the possibility of independent action.”

Section 16729(a) essentially states that traditionally proscribed conduct remains unlawful even when effectuated through an algorithm. Sections 16729(b) and 16756.1, on the other hand, are significant changes to California’s antitrust law that are likely to have impact on claims arising from pricing algorithms and alleged antitrust conspiracies more broadly.

Pricing Algorithm Coercion

Section 16729(b) creates liability for parties that coerce others to adopt pricing or other commercial terms recommended by common pricing algorithms. A “common pricing algorithm” is defined as “any methodology, including a computer, software, or other technology, used by two or more persons, that uses competitor data to recommend, align, stabilize, set, or otherwise influence a price or commercial term.”

The term "coerce” is undefined, and time will tell how California courts will interpret and apply the term. It remains unclear what evidence will be required to show coercion and what type of conduct would be considered coercion. By requiring “coercion” to violate the act in the absence of some underlying agreement that would otherwise violate the Cartwright Act, the law is less likely to target users or licensees of a pricing algorithm.

Notably, other proposed state legislation has focused on prohibiting the use of algorithms that use non-public data inputs. In contrast, California’s new law focuses on "common pricing algorithms” that use “competitor data” and does not consider whether the algorithm is trained on public or non-public data, creating some additional uncertainty.

New Pleading Requirement

Section 16756.1 broadly adopts a new pleading standard for antitrust conspiracies under the Cartwright Act, which no longer requires antitrust plaintiffs to plead allegations that exclude the possibility of independent conduct. In Bell Atlantic Corp. v. Twombly, 550 US 544 (2007), the US Supreme Court explained that a complaint alleging an antitrust conspiracy in federal court must allege sufficient facts to state a claim for relief that is “plausible on its face,” and the Court stated that this standard was not met by alleging “merely parallel conduct that could just as well be independent action.” Id. at 570.

While AB 325 also invokes the requirement that a complaint’s factual allegations of an antitrust violation must be “plausible,” AB 325 further states that “the complaint shall not be required to allege facts tending to exclude the possibility of independent action,” arguably adopting a more expansive definition of plausibility that differs from how that term was interpreted in Twombly and other subsequent cases.

However, it is uncertain how California courts will interpret the new standard. For example, without necessarily requiring a plaintiff to plead facts tending to exclude independent action, might California courts still require a plaintiff to plead something more than parallel conduct alone to establish a “plausible,” and not merely possible, claim of conspiracy?

While the new standard appears to be a reaction to the outcome in certain alleged algorithmic collusion cases—e.g., Gibson v. Cendyn and Cornish-Adebiyi v. Caesars, which were dismissed based on allegations of parallel conduct—the relaxed pleading requirement by its terms applies to all claims of agreement or conspiracy under the Cartwright Act. The law is likely to result in more collusion claims being filed in California—and more claims (including algorithmic pricing cases) proceeding to discovery.

Next Steps

With the potential for increased liability for certain conduct involving pricing algorithms under California’s new laws, companies using or considering adopting algorithmic pricing tools should monitor ongoing developments in this space and weigh the benefits of designing and implementing an antitrust compliance program that is attentive to these evolving laws.

Morgan Lewis is actively assessing the impacts of AB 325 and monitoring developments.