DOJ backs tenants in rate-fixing case against big landlords and real estate tech firm — ProPublica

The U.S. Justice Department late Wednesday intervened in a massive antitrust lawsuit filed by dozens of tenants who accuse a technology company’s apartment software of helping landlords collude to raise rents.

The DoJ action comes after a ProPublica investigation last year found that Texas-based software provider RealPage used algorithms to recommend rents to landlords across the country to maximize profits — a practice that experts said may violate antitrust legislation.

By throwing its weight behind the plaintiffs in the price-fixing case, the Justice Department waded into a fraught corner of federal antitrust law that could have a far-reaching impact not only on the way companies use technology to generate profits, but also on consumers in the marketplace. confront.

Previously, collaboration occurred with “a formal handshake in a secret meeting,” they wrote.

“Algorithms are the new frontier,” federal prosecutors said in their filing. “And given the amount of information an algorithm can access and digest, this new limit poses an even greater anti-competitive threat than the last one.”

After the first federal lawsuit was filed, RealPage said it “vigorously denies the allegations and will vigorously defend itself against the lawsuit.” The company did not immediately return a request for comment on the Justice Department filing, which opposes RealPage’s efforts to have the case dismissed.

Antitrust enforcers have struggled to apply decades-old laws to new technologies such as RealPage’s rent-setting software, which have changed the way competitors interact with each other and with customers.

But, prosecutors said, whether firms use a software algorithm or human interactions to create the scheme “should be without legal significance.”

“Automating an anticompetitive arrangement does not make it less anticompetitive,” the DOJ said.

As described in federal lawsuits filed by tenants, RealPage invited concerted action among landlords, including sharing non-public data with the software, for the purpose of raising rents, prosecutors wrote in their memorandum. The arrangement is still price-fixing, regardless of whether competing landlords ever communicated with each other about prices, prosecutors said.

“Simply put, RealPage allegedly replaces independent competitive rate-making, often leading to lower rates for tenants, with a rate-fixing combination that violates” federal antitrust law, prosecutors wrote.

Not every use of an algorithm to set price violates federal law, they noted, but it is “illegal when, as alleged here, competitors knowingly combine their sensitive, non-public pricing and delivery information into an algorithm that they rely on , when they make pricing decisions, with the knowledge and expectation that other competitors will do the same.”

The DOJ action adds to the legal pressure facing RealPage, a private equity-owned venture.

Tenants around the country filed dozens of federal lawsuits alleging antitrust violations by dozens of large landlords — including some that provide student housing — following ProPublica’s investigation into RealPage in October 2022. The story revealed how landlords share proprietary data with RealPage. Legal experts said the arrangement could facilitate cartel-like behavior among landlords if they used the software to coordinate prices.

These lawsuits were consolidated in federal court in Nashville, Tennessee.

Together, the federal lawsuits and another filed in the District of Columbia Superior Court in early November 2023 described a complicated system set up by RealPage to pressure landlords’ employees to adopt the software’s suggestions.

Twelve witness statements, rental rate and occupancy data, economic evidence and investigations “confirm the anticompetitive conduct” in the rental housing market, the federal lawsuit says.

In a news release, Realpage offered its property management clients the option to outsource daily rent determination and income monitoring. “We believe in overseeing properties as if we own them,” the company said in a presentation that the plaintiffs’ lawyers referenced in the lawsuit.

The lawsuit cited an unnamed witness, a RealPage price advisor, who said some price advisors told property management employees to follow the software’s recommendations. A leasing manager at a RealPage customer said, “I knew it [RealPage’s prices] were far too high, but [RealPage] barely budged” when the manager asked to deviate from the proposed rent.

An update to the software tracked not only the customers’ acceptance rate, but also the identity of the landlords’ employees who had requested a variance from RealPage’s price, the lawsuit said. Compensation for some property management staff was even tied to compliance with company recommendations, it said.

As a result, RealPage’s system raised rental prices above competitive levels, the lawsuit alleges. Another witness, a former RealPage executive who was directly involved in the software’s creation, “expressed dismay at the way RealPage has enabled landlords to collectively raise rents at a record pace,” the lawsuit said. The witness said the practice of setting rental rates centrally and consistently raising them had “bastardized” the company’s original supply and demand model.

After the company bought its main software competitor in 2017, RealPage’s reach doubled — to include more than two-thirds of all revenue management usage nationwide, according to the complaint. Around 50 large landlords are named as defendants in the case.

In response to the allegations in the federal lawsuit, lawyers for RealPage and other defendants called the allegation that the software company and landlords had formed a conspiracy “unlikely.” They said the complaint does not show direct evidence of such a deal, such as “smoking gun” documents or recorded phone calls. “Overall, plaintiffs have not alleged a plausible horizontal price-fixing conspiracy,” the response said.

The response accused Tenant’s attorneys of trying to “create the false impression that users must obtain approval from RealPage before rejecting the software’s recommendations.” RealPage lawyers pointed to a company FAQ that said output from the software “may be monitored, modified or ignored by an apartment provider.”

It also said the fact that the defendants held meetings and participated in online user groups and trade associations “does not imply unlawful collusion.”

The DOJ filing comes after District of Columbia Attorney General Brian Schwalb announced earlier this month that his office was also suing RealPage and 14 of the city’s largest landlords “for colluding to illegally raise rents for tens of thousands of DC residents.” “

In the greater Washington, DC metropolitan area, more than 90% of large apartment buildings — meaning those with 50 or more units — use RealPage’s revenue management software to set rents, Schwalb’s lawsuit alleges. The complaint, filed in the District of Columbia Superior Court, said RealPage has become “the ‘Big Tech’ company for rental housing,” promising landlords it can increase revenue by 2-7% by using its software.

“Increases of this magnitude translate into millions in improperly increased rents in the last four years alone,” Schwalb’s complaint says. “Every dollar in increased rent that the cartel illegally extorts from the District’s tenants contributes to widening the wealth gap, forces hard-working residents to forego other uses for their money, and pushes residents out of a District whose housing they increasingly can not afford.”

The Washington case, whose defendants include one of the nation’s largest apartment owners, Greystar, said the use of the software marked a departure from the traditionally competitive rental market, and said that when a former senior executive at Greystar was asked if landlords uses RealPage software to collude to raise rents, “he replied that of course they did — that’s the whole reason landlords used the software.”

Greystar could not immediately be reached for comment.

In a statement released to media at the time, a spokesperson for RealPage criticized Schwalb’s lawsuit, saying, “In attempting to draw a causal link between revenue management software like ours and increases in market-wide rents, this copycat case repeats the inaccuracies of the previous cases.” The statement said the complaint and others like it are “incorrect in fact and in law.”

The Washington lawsuit claimed the system was designed to monitor cartel compliance. It cited RealPage training documents that urged customers to have the “discipline” to accept the software’s price suggestions 90% of the time or more. Training documents urged regional lettings officers to beware of “rogue” leasing agents who too often override the software’s guide prices. Rejections would also often trigger outreach from a RealPage pricing advisor, the suit said.

Lawmakers had urged the Justice Department to step into the dispute in letters in March 2023 and November 2022.

In late October 2023, US Senator Amy Klobuchar, who chairs a Senate panel on antitrust policy, held a hearing on competition and consumer rights in housing that included the RealPage controversy.

In testimony, University of Tennessee law professor Maurice Stucke, a former prosecutor in the Justice Department’s antitrust division, noted that in several cases, data showed that property managers who used algorithms to set rents saw their revenues rise even as they left more apartments vacant .

“So an issue for you is whether antitrust laws can effectively punish and deter this alleged anticompetitive behavior?” he told the subcommittee. “The short answer is yes, if people agreed among themselves to set the price, and RealPage’s pricing algorithm was then used to facilitate their coordination.”

But Stucke said that given the way competitors’ opportunities to cooperate are changing with new technology, he called for reforms to address loopholes in the law. He recommended changes to the way the Federal Trade Commission considers antitrust claims and how the government reviews corporate mergers that could reduce competition. He also said Congress should look at how to improve privacy laws to better protect tenants if landlords use new technology.

Klobuchar, who has already proposed antitrust reform, called Stucke’s comments “music to my ears.”