California’s Algorithmic Pricing Antitrust Amendments to the Cartwright Act Take Effect

AB 325, which amends California’s state antitrust law, the Cartwright Act, went into effect on January 1, 2026. The amendments are significant because they create a new basis for liability for parties that “coerce” the adoption of prices recommended by common pricing algorithms used by multiple persons.

The amendments also lower the pleading requirement for all Cartwright Act conspiracy claims. While this amendment will certainly make it easier for plaintiffs under the Cartwright Act to survive motions to dismiss, there is an open question as to whether the more relaxed pleading standard will apply in federal court, or if there will be an influx of California state antitrust cases.

What is certain is that companies that make and use algorithmic pricing tools should be aware of new compliance risks.

KEY TAKEAWAYS

“Coercive” uses of algorithmic pricing software are now outlawed: 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.

Cartwright Act pleading standard: Under the Cartwright Act, a plaintiff is no longer required to allege facts excluding the possibility of independent action when asserting 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. Whether this lowered pleading standard is applied by federal courts exercising diversity jurisdiction remains to be seen.

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 nonpublic 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 nonpublic data, creating some additional uncertainty.

WILL THE LOWERED PLEADING REQUIREMENT APPLY IN FEDERAL COURT?

Section 16756.1 broadly adopts a new pleading standard for antitrust conspiracies under the Cartwright Act. Section 16756.1 eliminates any requirement for a complaint under the Cartwright Act to allege facts that “tend[] to exclude the possibility of independent action.” A significant unresolved question is whether this pleading standard will apply in federal courts sitting in diversity or only in California state courts.

It is hornbook law that federal courts sitting in diversity “apply state substantive law and federal procedural law.” Hanna v. Plumer, 380 US 460, 465 (1965). Federal courts, however, have long grappled with the questions of whether a state law is in fact substantive or procedural, and whether a state procedural law may nevertheless apply in federal courts.

The US Supreme Court’s 2010 decision in Shady Grove Orthopedic Associates v. Allstate Ins. Co., 559 US 393 (2010), addressed these issues in the context of a class action bar in New York’s state antitrust law, the Donnelly Act. The question before the Court was whether New York’s antitrust class action bar conflicted with Rule 23 of the Federal Rules of Civil Procedure, and if so, which rule must be applied in federal courts.

The Court split 4-1-4, with Justice Scalia writing for a plurality, Justice Stevens concurring in judgment, and Justice Ginsburg writing for four justices in dissent. Justice Scalia was of the view that Rule 23 controls the availability of the class action mechanism in federal court, and therefore New York’s state law class action bar should not apply in federal court. Justice Stevens agreed that the class action bar should not apply in federal court, but was less categorical: Stevens agreed with the four justices in dissent “that there are some state procedural rules that federal courts must apply in diversity cases because they function as a part of the State's definition of substantive rights and remedies.”[1] Since then, lower courts have divided on the application of Shady Grove to various state law rules.[2]

As applied to Section 16756.1, the amendment does not alter the underlying elements to prove a violation of the Cartwright Act on the merits. Rather, the amendment tackles what should be deemed “plausible” to state a claim: this is the same question addressed by Rule 8 of the Federal Rules of Civil Procedure, as construed by Bell Atlantic Corp. v. Twombly, 550 US 544 (2007) and its progeny. Following Twombly, various federal courts have held that to state an antitrust conspiracy claim under Rule 8, a plaintiff must allege facts that tend to exclude the possibility of independent action.[3] Because Rule 8, as construed, and Section 16756.1 appear to answer the same question in terms of what facts are sufficient to state an antitrust conspiracy claim, there is considerable doubt whether Section 16756.1 will apply in federal court—particularly depending on whether Justice Scalia’s or Justice Stevens’ framework in Shady Grove is followed. This uncertainty may well lead to an influx of plaintiffs bringing claims in California state court where Section 16756.1’s lower pleading standard will apply without question.

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.