McDonald's (MCD.US) was sued over AI pricing tools, accused of encouraging US franchisee algorithm collusion

The Zhitong Finance App learned that McDonald's (MCD.US) is facing a federal lawsuit. The lawsuit alleges that its AI-enhanced pricing tool violates antitrust laws because it shares non-public data with franchisees that may compete with each other in the same market.

The lawsuit was filed in Illinois last Friday. According to the lawsuit, McDonald's pricing tool uses artificial intelligence to collect data that competing franchisees would not normally share, such as store-level sales data. The Chicago-based burger giant said it is providing the tool to US franchisees to help the latter set prices for their respective restaurants.

The lawsuit also blamed the pricing system for the rise in McDonald's prices in the US.

“McDonald's has established and deployed its own information-sharing pricing platform over the years, using millions of daily transaction data to set menu prices for thousands of restaurants across the US.” The lawsuit reads, “The result was an algorithmic pricing monopoly on customers whose wallets were already tight.”

McDonald's said on Tuesday that the lawsuit is “full of inaccuracies” and the company will actively defend it.

“AI doesn't set menu prices at McDonald's restaurants — the pricing is set by McDonald's franchisees.” The company said in a statement, “Franchisees can use optional tools to help them make the best decisions for their business and customers, but these tools don't automate, coordinate, or fix prices in any way.”

The lawsuit was filed on behalf of DeKalb, Illinois consumer Michael Thomas. According to the complaint, Thomas often visits McDonald's to order a full three or two cheeseburger, fries, and cola. According to the lawsuit, Thomas noticed a price difference between McDonald's stores near his home.

McDonald's said it has been using AI-enhanced pricing tools for over a decade. The program determines the best prices for menu items based on store sales, location, and other factors, including competitor prices. McDonald's said that long before adopting AI-enhanced tools, the company was already collecting data and recommending prices to franchisees. The franchisee owns and operates 95% of McDonald's 14,000 stores in the US.

“All we did was provide context.” A McDonald's spokesperson said, “We have no way of influencing restaurant menu pricing.”

However, the lawsuit alleges that McDonald's has “significant influence” on its franchisees and can pressure the latter to follow its pricing recommendations.

Over the years, McDonald's has been experimenting with various value-added strategies in the US and other markets to win back low-income consumers who are declining in the number of fast food chain customers. But franchisees don't always follow its guidance. In an August conference call with investors, McDonald's Chairman and CEO Chris Kempchinski said that only 60% of American restaurants serve the 10-item menu proposed by McDonald's under $3.

“As you know, in our system, this isn't something we can do at the push of a switch.” Kempchinski said, “This requires communication with the franchisee.”

The lawsuit asked the judge to certify the case as a class action and required McDonald's to pay damages to the class members. The lawsuit also sought to prohibit McDonald's from enforcing agreements restricting competition.