N.Y. Federal Court Upholds “Algorithmic Pricing Disclosure Act”

[T]he Algorithmic Pricing Disclosure Act … provides that any entity domiciled or doing business in New York that

sets the price of a specific good or service using personalized algorithmic pricing, and that directly or indirectly, advertises, promotes, labels or publishes a statement, display, image, offer or announcement of personalized algorithmic pricing to a consumer in New York, using personal data specific to such consumer, shall include with such statement, display, image, offer or announcement, a clear and conspicuous disclosure that states: “THIS PRICE WAS SET BY AN ALGORITHM USING YOUR PERSONAL DATA.”

The Act defines “personalized algorithmic pricing” as “dynamic pricing set by an algorithm that uses personal data,” which the Act further defines as “any data that identifies or could reasonably be linked, directly or indirectly, with a specific consumer or device.” The Act excludes from this definition location data used by a “for-hire” or “transportation network company” vehicle to calculate a passenger’s fare based on mileage and travel time. The Act also excludes from its coverage entities that are regulated under state insurance law and certain regulated financial institutions, as well as discounted prices offered to consumers under “existing subscription-based agreement[s].” …

Just as the First Amendment limits the government’s power to restrict expression, it also curtails its power to compel speech. To determine whether a particular law runs afoul of these limits, courts employ different levels of judicial scrutiny, depending on the type of expression and the nature of the restriction at issue.

On the whole, laws regulating commercial speech are subject to a less-exacting standard of review than are laws regulating other forms of speech. Under this umbrella, restrictions on speech are also treated differently from compelled disclosures.

A law that prohibits or restricts commercial speech must survive so-called “intermediate” scrutiny in order to pass constitutional muster. This means that the regulation must “directly advance[ ] a substantial governmental interest” and must not be “overly restrictive.” By contrast, a law that requires the disclosure of “‘purely factual and uncontroversial information’ about the goods or services the speaker may offer” is governed by the more permissive Zauderer standard of review. Under Zauderer, a commercial disclosure law does not offend the Constitution so long as it is “‘reasonably related to the state’s interest in preventing deception of consumers,’ and [is] not ‘unjustified or unduly burdensome.'”

Under Zauderer, the fact that First Amendment scrutiny applicable to commercial disclosure requirements is relatively “relaxed” follows from the fact that the First Amendment protection afforded commercial speech “is justified principally by the value to consumers of the information such speech provides.” Accordingly, a seller’s First Amendment “interest in not providing any particular factual information in his advertising is minimal.” Moreover, unlike a “flat prohibition[ ] on [commercial] speech,” disclosure requirements “trench much more narrowly” on sellers’ First Amendment interests because they do not prevent sellers from conveying any message of their own but merely require them “to provide somewhat more information than they might otherwise be inclined to present.” …

“[I]nformational disclosure law[s] … [are] subject to review under Zauderer” so long as the required disclosure is of “‘purely factual and uncontroversial information’ about the goods or services the speaker may offer.” Plaintiff has not plausibly alleged that the disclosure mandated by the Act fails to satisfy these requirements.

First, the statement requirement by the Act—”THIS PRICE WAS SET BY AN ALGORITHM USING YOUR PERSONAL DATA”—is plainly factual. Plaintiff concedes as much, acknowledging that pricing algorithms “analyze data and publish prices” based on “consumer inputs,” and that its members use algorithmic pricing to set prices and offer promotions. The Act “by its terms applies only [when a price was set using personalized algorithmic pricing]” and therefore “the disclosure[ ] [is] necessarily accurate.” In other words, only when a merchant has literally satisfied the disclosure must the merchant “identify” as much. Accordingly, the required disclosure “accurate[ly]” describes plaintiff’s members’ practices.

To avoid this conclusion, plaintiff points to caselaw from the Ninth Circuit, arguing that the required disclosure is not “purely factual” even if “literally true” because it is “misleading and, in that sense, untrue.” Even accepting, in the absence of any similar Second Circuit precedent, the proposition that certain “literally true” statements are excluded from Zauderer‘s reach, plaintiff has not plausibly alleged that the disclosure required here is “misleading.” In Wheat Growers, the Ninth Circuit explained that the statement that a certain chemical is “known … to cause cancer” was not a “purely factual” statement because “the use of the word ‘known’ [was] misleading” in context. That was so because “an ordinary consumer would not understand the nuance between ‘known’ as defined in the statute and ‘known’ as commonly interpreted without the knowledge of the scientific debate on that subject.”

Plaintiff does not identify any similarly misleading aspect of the disclosure here. Instead, it merely speculates that the overall statement “gives the misleading, imaginary and ‘unsubstantiated’ impression that price-setting algorithms are ‘dangerous,'” that they involve “non-consensual invasive surveillance,” and that they set prices in ways that are harmful to the consumer. The Court notes that plaintiff’s assertions about how consumers will react to the disclosure are entirely speculative.

In any event, Wheat Growers provides no support for plaintiff’s argument, which focuses on the disclosure’s “overall message,” and not on any specific aspect of the disclosure that plaintiff contends is misleading. By contrast, in Wheat Growers, the Ninth Circuit’s conclusion was based on the presence of specific language in the challenged warning that it reasoned was susceptible to misinterpretation and that, if so interpreted, would make the statement demonstrably false. See Wheat Growers (reasoning that “a ‘known’ carcinogen carries a complex legal meaning that consumers would not glean” and which is distinct from the lay meaning of the term). To the extent that the court in Wheat Growers referenced the “totality of the warning,” it did so only to explain why other parts of the statement could not adequately correct the misimpression communicated by the use of the word “known,” and not to invite an assessment of a consumer’s overall reaction to the message.

Plaintiff does point to the terms “personal data” and “algorithm” in this disclosure, speculating that because they are “undefined” they will “falsely imply that the price to which that disclosure is attached is exploitative and based on sensitive personal information, even when it is not.” But, unlike in Wheat Growers, plaintiff stops short of alleging that the meaning of those individual terms, as used in the disclosure, is demonstrably odds with their ordinary meaning and, in that sense, misleading. Plaintiff’s argument thus “amounts to little more than a preference” for other terms, not an argument that the terms adopted are inherently misleading.

Likewise, plaintiff’s attempt to analogize to R.J. Reynolds Tobacco Co. v. FDA (D.D.C. 2012), is unpersuasive. There, the court considered an FDA rule requiring certain textual warnings and “graphic images” to be printed on cigarette packages. Assessing only the “graphic-image requirements,” the court concluded that the images were not being used to convey “factual information.” The court relied on the government’s acknowledgment that the primary purpose of the images was to “elicit negative emotional reactions” and that the images did not depict “common consequence[s]” of smoking but were merely meant to “symbolize[ ]” its harms. Thus, the images in that case were not even “literally true.” By contrast, plaintiff has not pointed to any part of the disclosure here that communicates anything but “literally true” information about its members’ practices.

Second, plaintiff also fails to plausibly allege that the required disclosure is “controversial.” The Second Circuit has been clear that a compelled commercial disclosure is not rendered “controversial” merely because the regulated entity does not wish to make that disclosure or because they would prefer to make a different statement on that same topic.

In NYSRA, for example, the Second Circuit applied Zauderer to a law requiring calorie counts to be printed on certain restaurant menus, notwithstanding plaintiff’s assertion that “its member restaurants do not want to communicate to their customers that calorie amount should be prioritized among other nutrient amounts.” The court reasoned that, so long as the government’s focus on the required disclosure is “rational,” the First Amendment does not bar the government from mandating “‘under-inclusive’ factual disclosures.” Accordingly, the fact that plaintiff’s members would, in the absence of the Act, choose to make a different statement (or none at all) regarding their use of algorithmic pricing does not remove the law from Zauderer‘s reach.

Nor, as plaintiff contends, is the disclosure here rendered “controversial” because it requires the speaker to “take sides in a public debate.” Although the Second Circuit has not spoken directly to this consideration, the Supreme Court in NIFLA suggested that certain disclosures that bear on controversial “topic[s],” such as abortion, may not qualify for Zauderer review. Plaintiff, however, makes no more than a conclusory assertion that the topics of “machine learning, algorithms, and artificial intelligence” in general, or algorithmic pricing in particular, are “controversial” in any meaningful way. And those topics are hardly more controversial than abortion, which was directly at issue in a disclosure law that the Second Circuit recently upheld under Zauderer.

Furthermore, even if we were to assume, arguendo, that the regulation of these technologies is the subject of “robust public debate” and is therefore “controversial,” that does not mean that “the fact that [plaintiff’s pricing mechanisms] are what they are” is itself controversial.

Plaintiff’s members are free to utilize algorithmic pricing or not and are free to communicate their own views about the use of such technologies. Plaintiff’s members are not required by the disclosure to “t[ake] sides” in any controversy, no less a “heated political” one. The disclosure “does not require any statement regarding the merits [of algorithmic pricing]” and plaintiff’s members “remain free to share with their [customers]” their own views on that matter, including their professed view that algorithmic pricing is “socially beneficial.” The law does not require any statement “at war” with that belief….

Finally, plaintiff argues that the challenged disclosure requirement falls outside of Zauderer‘s reach because it does not meet the threshold requirement that the statement “seek to correct misleading or deceptive commercial speech.” However, Zauderer is not limited, as plaintiff would have it, to disclosures narrowly designed to “correct” specific instances of “deceptive commercial speech.” Zauderer is “broad enough to encompass nonmisleading disclosure requirements,” and has consistently been applied to evaluate commercial disclosure laws aimed at “the non-disclosure of information material to the consumer.” …

Indeed, the disclosure required here serves to ameliorate “consumer confusion or deception” by ensuring that consumers are better informed about how a merchant has set the displayed price, including the fact that the price may be different for different consumers. This, then, is not a case where “the disclosure requirement is supported by no interest other than the gratification of ‘consumer curiosity.'” …