McDonald's (MCD.US) sued over AI pricing tool, accused of facilitating algorithmic collusion among U.S. franchisees

According to Jinse Finance, McDonald's (MCD.US) is facing a federal lawsuit. The complaint accuses its AI-enhanced pricing tool of violating antitrust laws by sharing non-public data with franchisees who might otherwise compete against each other in the same market.

The lawsuit was filed last Friday in Illinois. The complaint alleges that McDonald's pricing tool uses artificial intelligence to collect data that competing franchisees typically would not share, such as store-level sales information. The Chicago-based burger giant said it provides the tool to its U.S. franchisees to help them set prices for their individual restaurants.

The lawsuit also blames rising prices at U.S. McDonald's locations on this pricing system.

"McDonald's has established and for years employed its own proprietary information-sharing pricing platform, using millions of daily transaction data points to set menu prices for thousands of restaurants nationwide," the complaint states. "The result is an algorithmic pricing monopoly imposed on already cash-strapped customers."

On Tuesday, McDonald's said the lawsuit is "riddled with inaccuracies" and that the company will vigorously defend itself.

"AI does not set menu prices for McDonald's restaurants—the franchisees set pricing," the company said in a statement. "Franchisees may use optional tools to help them make the best decisions for their business and customers, but these tools in no way automate, coordinate, or fix prices."

The lawsuit was filed on behalf of Michael Thomas, a consumer in DeKalb, Illinois. According to the complaint, Thomas is a frequent customer of McDonald's, ordering a Quarter Pounder with Cheese, fries, and a Coke. The complaint says Thomas noticed price differences between McDonald's locations near his home.

McDonald's said it has used its AI-enhanced pricing tool for more than a decade. The program determines the optimal price for menu items based on store sales, location, and other factors (including competitor prices). McDonald's stated that even before adopting AI-powered tools, the company was collecting data and recommending prices to franchisees. Franchisees own and operate 95% of McDonald's 14,000 U.S. restaurants.

"All we do is provide background information," a McDonald's spokesperson said. "We have no way to influence restaurant menu pricing."

But the complaint claims McDonald's has "significant influence" over its franchisees and can pressure them to follow its pricing recommendations.

For years, McDonald's has tried various value strategies in the U.S. and other markets, aiming to win back lower-income customers who are visiting fast-food chains less frequently. However, franchisees don't always follow its guidance. In an August investor call, McDonald's Chairman and CEO Chris Kempczinski said that only 60% of U.S. restaurants offered the company's suggested ten menu items under $3.

"As you know, within our system, this isn't just something we can switch on," Kempczinski said. "This requires communication with franchisees."

The lawsuit requests the judge to certify the case as a class action and demands McDonald's pay damages to the class members. The suit also seeks to prohibit McDonald's from enforcing any agreements that restrict competition.