Dive Brief:

• The Department of Justice and eight states sued rental revenue management company RealPage in federal court August 23, accusing the software provider of turning landlords into price-fixing collaborators by enabling them to set prices in lockstep with one another based on what the software recommends.
• “Using software as the sharing mechanism does not immunize this scheme from Sherman Act [antitrust] liability,” Attorney General Merrick Garland said in announcing the lawsuit, which was filed in a federal district court in North Carolina.
• In a statement, RealPage says the Justice Department’s claims lack merit. “We are disappointed that, after multiple years of education and cooperation on the antitrust matters concerning RealPage, the DOJ has chosen this moment to pursue a lawsuit that seeks to scapegoat pro-competitive technology that has been used responsibly for years,” the company said.

Dive Insight:

Critics of the agency’s action say the lawsuit faces a tough battle in court because DOJ must show landlords are somehow colluding with one another even though they likely have no contact, don’t know each others’ identities, and many of them might not even be following the software’s recommendations. 

“It is a basic maxim of antitrust law that collusion is unlawful anticompetitive behavior,” Shubha Ghosh, a law professor at Syracuse University, has argued. “An agreement to fix price requires the meeting of human minds intending to act anti-competitively.”

DOJ says RealPage executives have given away the game by boasting about the way the software enables landlords to avoid competing on the merits.  

“To RealPage, the ‘greater good’ is served by ensuring that otherwise competing landlords rob Americans of the fruits of competition — lower rental prices, better leasing terms, more concessions,” the complaint says. “At the same time, the landlords enjoy the benefits of coordinated pricing among competitors.”

To make its software work, the company asks landlords to share proprietary data on their rental applications, executed leases, renewal offers and acceptances, and forward-looking occupancy plans, among other things. That data gets analyzed through the software’s machine learning algorithm to recommend what each landlord should be charging for each unit by size, amenities, market position and other factors. 

“Landlords agree to provide this information for use by their competitors because they understand they will be able to leverage the sensitive information of their rivals in turn,” the agency says in the complaint. 

Although landlords are free to act on the recommendations or not, the system is built to make compliance easy and non-compliance hard, DOJ says.  

“For every recommendation that [a landlord] does not accept — whether overriding or keeping the previous day’s rent — the property manager must provide ‘specific business commentary’ for diverging from the recommendation,” the complaint says. “This justification, RealPage instructs, should not be a mere preference for another price but must be based on a factor that the model cannot account for, such as local construction or renovations occurring in the building. It must be a ‘strong sound business minded approach.’” 

“By feeding sensitive data into a sophisticated algorithm powered by artificial intelligence, RealPage has found a modern way to violate a century-old law,” Deputy Attorney General Lisa Monaco said.  

DOJ’s antitrust chief Jonathan Kanter said the agency brought in data scientists to help it understand how the company uses its code to convert the data from the landlords into price recommendations. 

“We learned that the modern machinery of algorithms and AI can be even more effective than the smoke-filled rooms of the past,” Kanter said. 

Ghosh, the Syracuse law professor, says the Supreme Court has made it clear it distinguishes between anticompetitive behavior among companies and the tools they use to reach their pricing decisions. That means DOJ must show “a physical agreement to price-fix” to prove a Sherman Act violation. 

By focusing on the rental algorithm, Ghosh says, the agency appears to be sidestepping this essential requirement and instead is “creating an inference of an agreement from the use of the algorithm. This shift would undermine traditional antitrust safeguards for competition.”

Jay Ezrielev, principal of economic advisory firm Elevecon and an advisor to Joseph Simons when he was chair of the Federal Trade Commission just prior to Lina Khan taking that role, said DOJ is trying to argue that firms using a common third-party vendor are engaging in a concerted action to implement a price-fixing conspiracy even if there is no agreement among them, tacit or explicit, to manipulate pricing.

Not only do they have no contact with one another or know each other’s identity, he has said, they’re unaware of the commercial terms of dealings between the vendor and the other firms, and they don’t know if others are complying with the alleged price-fixing scheme. What's more, they’re free to deviate from what the algorithm recommends, and there’s no reason to believe each firm isn’t simply acting in its own self interest.

“Considering the remarkably low threshold for identifying concerted action, the DOJ’s analysis is likely to find concerted action even when a price-fixing conspiracy is implausible,” Ezrielev says. 

The states joining DOJ in the lawsuit are North Carolina, California, Colorado, Connecticut, Minnesota, Oregon, Tennessee and Washington.