Is Price Discrimination in the Software Industry legal in the US? (Sneakers resale software case)

Question

There is a software manufacturer that advertises their product for $599 on their website. Conveniently, the software is always out of stock, while the manufacturer “backdoors” some licenses to a selective group of users, at a price of $6,500. Then, they raffle a few licenses at the advertised price among thousands of users. I feel like this is a clear and blatant violation to fair competition but I am by no means an expert. What strikes me immediately, though, is that the Robinson-Patman Act deems illegal the “price differences in the sell of identical goods that cannot be justified on the basis of cost savings or meeting a competitor’s price.” As software licenses are identical, I believe the act is violated. I have two questions:

1. what other regulations this practice might be violating?
2. is this something I can report to the FTC or other authority?
3. do I need a lawyer to do it?

Edit: It seems the post has been popular and there are additional questions as for why manufacturers do this. There is a whole secondary market for this type of software. Users buy and sell licenses at way-above-retail prices. For the software in turn, Nyte Software, retail is $599 and resell price has reached $7K at some point, in secondary markets. Manufacturers sell the copies at resale value to a select group of users, under strict rules imposed to the users on the prices they can resell the software at, all while the software is labeled as "out of stock" in their webpage (why keep the advertising of $599 in their webpage, right?). In this way, manufacturers control the market prices, while they cash through increasing the supply.

Additional competition questions that arise are about price manipulation through social media (manufacturers often intensively advertise the success of the software in social media to drive prices up, before selling), unfair product sale (cherry-pick buyers) and price control (strict resale rules). In this blog post, there is an example that shows the different things these software manufacturers do, relating to their software distribution and market practices. In fact, even when they sell de-facto at a price of $6500, they might send different invoices with the same description. This part also seems against fair competition.

Answer 1

There are a couple of unusual things going on here.

Users buy and sell licenses at way-below-retail prices.

This is very odd in the software world. Software licenses are almost never assignable and are tied to the purchaser. When software gets re-sold, it's in cases like console games or software from the pre-internet era, where you need the physical disc in order to use it. Otherwise, there's nothing preventing you from reselling the same license to multiple buyers. On its face there's nothing wrong with users selling unneeded licenses, but it's unusual enough that it stands out as a red flag.

Companies, to cash on their success, sell the copies

Does "Companies" refer to the manufacturer of the software? Or are you saying there are companies whose business model is buying and re-selling these licenses and profiting from the arbitrage?

The latter case seems legit, as it exists for many other types of products. If the software manufacturer is buying back and reselling copies of its own software then you might have a problem. Since a "used" copy of software is identical to a "new" copy, they might encounter a problem if they try to sell a "used" copy for higher than their advertised price.

sell the copies at market value to a select group of users, under strict rules of the prices they can resell the software at

On it's face, an agreement not to sell something at a price less than X sounds a lot like price fixing, which is absolutely illegal. A license or other legal document cannot require a party to do something illegal, so any license terms limiting the resale price would seem to be unenforceable. The manufacturer is free to stop doing business with someone who sold cheaply, but an end user selling a license they don't need any more wouldn't care about that. I'm not aware of an instance where this specific sort of arrangement was tested by a US court, however. A lot of the antitrust law here deals with manufacturers putting limits on what a retailer/distributor can charge, though. The relationship between manufacturer and end user is rather different, however, so different rules may apply.

In the EU, however, these rules would almost certainly be void and unenforceable. European courts have ruled that software has the same rights of resale as physical goods, and that the publisher cannot restrict the buyer's ability to resell the software. Specifically, the ruling says "even if the licence agreement prohibits a further transfer, the rightholder can no longer oppose the resale of that copy". While this ruling doesn't directly apply to the US, it gives a European seller the ability to effectively undercut any seller in the US and drive the market price below any artificial restrictions and render them useless.

In this way, they control the market prices, while they cash through increasing the supply.

Do they really profit from doing all of this, though? Every copy that gets re-sold is a sale that the original publisher does not get. If demand outstrips supply by as much as you say, the publisher should make more money by using standard non-transferrable software licenses on a subscription model and selling enough copies to match the demand. There's a reason that literally every other software company does it that way. Heck, they could probably make more money by not selling the software at all and just using it to buy and scalp the same items that their customers are using it for.

Additional competition questions that arise are about price manipulation through social media (companies often intensively advertise the success of the software in social media to drive prices up, before selling), unfair product sale (cherry-pick buyers) and price control (strict resale rules).

There's nothing wrong about publicizing your successes, provided that you're making truthful, accurate statements. Sellers generally have the ability to choose who they want to sell to, provided that they're not trying to get/maintain a monopoly, are not conspiring with competitors, and are not discriminating based on some legally-protected characteristic (race, age, etc.). As described above, price controls may not be legal depending on the details.

is this something I can report to the FTC or other authority? do I need a lawyer to do it?

Yes you can, and no you don't. You can submit a complaint directly to the FTC for antitrust or fraud issues. Their complaint forms are designed for mortal citizens, not lawyers. You may also be able to file a complaint with your state's attorney general. Often times, a state AG's office will be more responsive to complaints, especially since some states have antitrust laws that go farther than federal laws.

Note about this software:

It's worth noting that the software in question is not your typical computer program. This is a program designed to automate the process of buying products from online storefronts. It's marketed to the trolls that scoop up and hoard scarce goods like graphics cards or designer shoes and then scalp them at absolutely stupid prices. The company selling the software is essentially engaging in the exact same practices itself, artificially limiting supply and then manipulating prices to their advantage. That leaves its customers with little moral basis to complain about the practice.

The following was taken from their website:

Here, they clearly state their price as $599 + $49 subscription. Their current pricing practices as shown in your screenshots appear to be a plain violation of the basic laws preventing deceptive advertising. For example, Florida Title XXXIII§531.44 states:

No person shall misrepresent the price of any commodity or service sold or offered, exposed, or advertised for sale by weight, measure, or count, nor represent the price in any manner calculated or tending to mislead or in any way deceive a person.

This situation certainly seems to fall afoul of the "tending to mislead" portion. Most states have similar laws in effect. The software company's obvious defense is that the software is being sold at the advertised price and the extra $5,900 charge is a separate "right to purchase" fee. I'd be really skeptical that they could get a court to believe that and not to see this as anything other than an attempt to deceive the customer. If this were kosher, other industries like automobiles or mobile phones wouldn't need the asterisks and "fine print" on their ads disclosing all the conditions and extra fees associated with that price. Advertised prices are generally required to include all non-optional fees and charges.

The particular nature of the software may put it at odds with other laws as well. Most retailers' websites prohibit the use of bots with their sites, and software that literally advertises itself as designed to circumvent retail websites' protection technology may run afoul of the DMCA or similar technology laws. Using it is a clear violation of the site's terms and conditions, and a product whose primary purpose is to violate the terms of a contract is itself on shaky legal ground (compare to the notion of "contributory infringement" in the copyright realm). Even if the software isn't strictly illegal, these online retailers may have grounds to sue the manufacturer into oblivion.

Answer 2

The US federal Robinson-Patman Act applies only to a sale of tangible goods to different retailers at different prices in interstate commerce. See "Robinson-Patman Act" at investopedia.

What is described in the question is not a sale of tangible goods, nor is it a sale to different retailers at different prices.

Bait-and-switch selling schemes are prohibited by laws in most US states, and by US FTC regulations. But the fact pattern described in the question does not seem to exactly fit the usual definition of a bait-and-switch selling scheme.

Knowingly advertising a product with no intention of selling it at the advertised price might well constitute false advertising, at least in some jurisdictions.

It is not clear, at least to me, from the question why the company acts as it does. What benefit does it hope to gain from advertising the lower price? Intention is often important in bait-and-switch and false advertising cases.

Answer 3

Jurisdiction: england-and-wales

If you are purchasing as a consumer (which is implied from your tag) then this could amount to bait advertising under the Consumer Protection from Unfair Trading Regulations 2008:

3(1) - Unfair commercial practices are prohibited.

3(4) - A commercial practice is unfair if [...] (d) it is listed in Schedule 1.

12 - A trader is guilty of an offence if he engages in a commercial practice set out in any of paragraphs 1 to 10, 12 to 27 and 29 to 31 of Schedule 1.

Schedule 1, para 5 - Making an invitation to purchase products at a specified price without disclosing the existence of any reasonable grounds the trader may have for believing that he will not be able to offer for supply, or to procure another trader to supply, those products or equivalent products at that price for a period that is, and in quantities that are, reasonable having regard to the product, the scale of advertising of the product and the price offered (bait advertising).

Answer 4

The practice might violate some state deceptive practices acts, which sometimes prohibit advertising something for sale at a price when the seller knows that it is not likely that many people will be able to purchase it at this price. The nature of the software might be important to determine if these acts apply, however, because often they are limited to retail sales to consumers buying for household purposes, and not to business purchases.

Determining when an advertisement made generally on the Internet is subject to state consumer protection laws, however, is a non-trivial matter and does not have a clean black and white rule that provides an answer.

The Robinson-Patman Act does not apply since software is not a "good." Likewise, firms that create software are generally considered to be part of the service sector and not manufacturers.

There is no federal law that globally prohibits price discrimination. Indeed, price discrimination is pervasive in almost every industry (except publicly regulated utilities, and sometimes even then), and if you see business practices that facially don't seem to make sense, price discrimination is the single most common explanation for them.

Answer 5

"Fair" is not even a factor here.

To understand why, we need to step back and look at what this so-called "software" even is. To start with, it's not functionally software: it's a service. And it is one whose value is greatly diluted by over-circulation.

What this software is

Shoe companies (as in basketball shoes/sneakers) make limited editions of their shoes, for their fans. The shoe companies hold the prices to a reasonable and fan-friendly numbers such as $150 or $250. There is great demand, and getting a pair largely involves being online at the right time and "getting lucky". People who buy tickets for extremely popular events like Burning Man or Blizzcon go through this too: being home on the PC at the exact minute of release, dashing through the purchase forms, etc.

These shoes are collector's items, as you can imagine. There is quite an aftermarket on various trading sites. Prices run much higher, even into the thousands of dollars.

So there are third party traders/brokers/arbitragers who attempt to buy the shoes at the $250 price and flip the shoes into the aftermarket for thousands.

These traders do not want to "get lucky". They want to automate their purchase efforts, simply so they can be faster than all the fans trying to do it by hand. So they use automated software to interact with the manufacturer's sales websites: this software loads the web pages, interacts with the forms, and submits the purchase, all in milliseconds. This type of software is called a "bot".

Programming a "bot" is actually pretty hard. Most shoe brokers don't want to reverse engineer the websites and write scripts to interact appropriately. (I've done this sort of thing, it's a PitA). They want to buy someone else's work in this area, and given the money they can make, they are willing to pay for it.

The tragedy of the commons

The manufacturer does not like bots.

They don't make these limited editions for brokers to profiteer off of. They make them for fans. The manufacturer is keen on as many of these shoes landing in the hands of fans as possible. However, fans do not run bots.

If the bots were completely uncontrolled, every limited release would sell out in the first 4 seconds, all to bots. Every fan would experience only a "Sold Out" notice. This creates a bad experience for fans, and word would get around quickly among fans that trying to buy limited editions was a total waste of time.

Well, if shoemakers wanted every sale to go to brokers, they would simply hold an auction and let brokers bid up the prices. But that is not their point in doing these sales.

To deter this and give fans a chance, they certainly have told their IT/InfoSec departments to take technical countermeasures against the "bots" so that the bulk of sales actually do make it to fans. And so, we have an arms race. The bot will break, and bot makers will rush to defeat those countermeasures. And InfoSec will shoot back and break the bot again, and bot makers must rush to defeat that too. While the bot maker works, all its customers are down.

The company doesn't want to spend infinite resources on this, so they have probably pegged a target "metric" — say, "85% of sales make it to fans".

What this means in practicality is, if bots operate at too large a scale, the shoemaker can bury the bot with an ever increasing number of countermeasures. In an arms race, the bot maker loses.

So there is an uneasy detente between shoemaker and bot maker: the bot maker makes sure bots don't dominate sales, and the shoemaker doesn't break the bots every week and put all the brokers offline until the bot can be updated.

This tells us a couple of things.

• This is not ordinary software like Microsoft Word. The bot must be constantly updated to beat the latest countermeasures. As such, though it may look like software, it is actually a service - the service of keeping the bot up to date.
• The bot maker has tremendous, legitimate interest in limiting the number of copies in circulation. To avoid antagonizing the shoe makers.

And, re: "fair", you need to read the EULA/TOS of each of the retail websites you would use the bot on. Each will have a clause requiring you to agree not to use bots. So the entire point of this botting software is for you to violate legal contracts! But that aside...

Does the bot maker have a right to limit copies sold?

Yes, of course they do. It's their software, and control of usage is the heart of what "copy rights" mean.

Further, in this situation they have a very good and defendable reason for wanting to limit coinage of licenses.

This also explains their willingness to allow licenses to be resold (something software makers usually try to avoid). They want a user who is finished with the software to surrender their license, so they can "keep a lid on" the number of licenses out there.

It's ironic: the whole reason you want this software is to buy sneakers at list price (e.g. $150) and resell it at market rates. Yet when brokers of this software do exactly the same thing with the software itself, you don't like it and want to report it to the FTC.

Do they have a right to charge any price they please?

Yes, they certainly do.

Do they really have a right to set opportunistic pricing?

Put it this way. Suppose the only way they sold copies of the software was via eBay auctions, with prices being driven up into thousands of dollars by buyers. Would that be legal? Of course!

Is there a problem with their odd way of pricing?

There might be, but it's a semantic issue, since they are in the whole allowed to charge what they please. The best you could hope for is force them to change how they state their prices: a pyrrhic victory. Like the "Don Quixote" who beat Big Oil, proving in court it was illegal to have a 5 cent surcharge for credit. The very next day, prices went up 5 cents... and the signs changed to "5 cent discount for cash". Golfclap.