McDonald's (MCD.US) faces class-action lawsuit in the US! Accused of illegally manipulating menu prices with AI pricing system

According to Zhitong Finance APP, McDonald's (MCD.US) has faced a class-action lawsuit in a federal court in Chicago, accusing the fast-food giant of illegally manipulating menu prices between its franchised and company-owned restaurants through the use of an artificial intelligence (AI)-driven pricing system.

The lawsuit, which was filed last Friday, alleges that McDonald's conspired with independent franchisees to use algorithms trained on non-public data to manipulate prices in violation of U.S. antitrust laws. The suit cited relevant media reports and pointed out that other fast-food companies have also started to use AI to assist in pricing and other business operations. The lawsuit states, "Independently operated businesses must independently set their own prices."

On Monday, McDonald's said in a statement that the allegations are "baseless and lack adequate factual support." The company added, "AI does not set the price of the Big Mac or any other menu item." McDonald's said that franchisees make their own pricing decisions, and the use of pricing suggestion tools and analytical instruments is very common across industries.

McDonald's Implements AI Pricing

Reports cited in the lawsuit indicate that McDonald's is increasingly using AI to set menu prices for both U.S. and select overseas markets. After reviewing screenshots from McDonald's pricing backend this August and interviewing nine informed insiders, media stated that McDonald's pricing engine, powered by machine learning algorithms, continues to analyze millions of transactions each day from nearly 14,000 outlets. It then generates what the company calls "optimal prices" for every menu item at every restaurant—from the Big Mac to discount coffee for seniors.

Three franchisees reported that this pricing engine has further widened the price gap for identical products across different locations—even within the same area, prices at restaurants only a few blocks apart can differ. In September, media verified these price differences via the McDonald’s mobile app. For example, at one company-owned restaurant in Fresno, California, a Big Mac was priced at $5.69, while just two miles away at another company-owned location, the same burger cost $6.89—a 21% difference. However, it remains unclear whether this gap resulted from the pricing engine’s recommendation or other factors.

Reports also said that although McDonald's publicly claims franchisees can independently set their store prices, five operators said the headquarters pressured them to use this AI pricing tool. An internal notification sent to franchisees required, as of January this year, that franchisees "actively cooperate with official McDonald's certified pricing consultants and tools" per the new operating standards.

McDonald's, for its part, said each restaurant faces different operational costs, and even a few miles apart, business environments may vary. At an investor meeting at the end of September, McDonald's called its “industry-leading” pricing engine a key part of the company's overall value strategy. Franchisees have also realized the need to keep low-priced menu items to attract low-income customers. The company further claimed the pricing backend was "just a tool, not a mandate. It provides recommendations for individual stores to help franchisees balance customer interests and make more prudent business decisions."

McDonald's also criticized media coverage of the issue as "subjective conjecture lacking factual basis, attempting to portray a standard business operation as a controversial event."

Reportedly, McDonald's has used some version of a pricing tool as far back as 2019. Some franchisees said that during the pandemic and subsequent inflationary periods, the engine recommended significant price increases. But in recent months, the engine has taken a more conservative pricing stance, even suggesting price cuts for certain items, which has heightened tensions between corporate headquarters and franchisees.

In the current environment, where growth is slowing, lowering prices to attract more customers and boost overall revenue ultimately benefits McDonald’s headquarters. This is because the bulk of corporate income comes from taking a percentage of franchisees’ revenues—franchise-level profitability does not directly impact headquarters' earnings. Conversely, franchisees have greater motivation to raise prices to cover rising wages, rent, and other operating expenses. The National Restaurant Association of the U.S. estimates that operating costs for restaurants have increased by a cumulative 36% since 2019.

However, in reality, McDonald's franchisees today have little autonomy left over pricing. Headquarters controls crucial aspects such as franchise renewal eligibility and new-store approvals. During an investor call in August, McDonald's CEO Kempczinski mentioned that due to recent updates in franchisee evaluation mechanisms, “in some circumstances, failure to comply with pricing guidance may be considered during performance reviews.”

Reputational and Regulatory Risks

It’s worth noting that other consumer companies previously faced fierce public backlash after algorithm-based differential pricing schemes were exposed. In 2024, Wendy’s (WEN.US) CEO announced plans to test “dynamic pricing” but quickly faced criticism due to concerns about unfair price swings. Wendy's later clarified that the public misinterpreted their statements and confirmed that the system was never launched.

The U.S. grocery delivery platform Instacart also tested AI tools on a limited basis to show different produce prices to different customers. After research exposing this program came to light, both consumers and lawmakers expressed their criticism. In December last year, Instacart discontinued the AI pricing tool and promised never to use personal information to determine product prices.

At the same time, McDonald's pricing backend service terms, as reviewed by the media, also warn operators about potential legal risks associated with the system. The terms of service state that restaurant operators “may be competitors with each other,” thus “all tool users must fully understand and comply with antitrust and competition laws, which is especially important.” The document also advises franchisees to consult their own attorneys if they have questions. It maintains that franchisees “always retain ultimate authority over pricing.”

William Kovacic, director of the Competition Law Center at George Washington University, believes that, considering that the Federal Trade Commission and other antitrust regulators are currently reviewing algorithmic pricing collusion, these warnings “essentially acknowledge the presence of potential issues here.”

Other legal experts, however, have a different view. They argue that McDonald's is not at significant risk of regulatory litigation—as the actual competitors are separate franchisees, and decades of case law have generally allowed brands broad latitude in controlling franchisee pricing.