Closures: Will RealPage face a long line of lawsuits?

Judging by today’s news, you might think that RealPage CEO Dana Jones is Public Enemy No. 1 in the commercial real estate industry. Her company has certainly received a lot of negative publicity for its YieldStar Revenue Management software, which collects data on rental apartments and then tells landlords how much they can charge for the apartment.

I first wrote about the Texas-based software company last February. At the time, more and more consumer groups were joining a series of class-action lawsuits against the company, which were the subject of a series of ProPublica investigations.

The company has been at the center of an investigation into the potential role of RealPage’s YieldStar program in the extreme rent spike seen across the country. Following ProPublica’s articles, various tenant associations sued the company, maintaining that the software’s algorithm allows owners using the product to exchange information and essentially agree to a set daily price for available apartments.

Currently, RealPage and many of its clients are facing increasing legal and regulatory pressure. States from Arizona to North Carolina are investigating the company, and at least one Ohio senator is calling on the state’s attorney general to follow suit. According to The Wall Street Journal, RealPage also faces possible civil enforcement actions and a criminal investigation by the U.S. Department of Justice.

The company did not respond to requests for comment, but its spokespeople have said in the past that RealPage is innocent. They claim that the use of the software has been misunderstood.

It is unclear whether prosecutors and plaintiffs’ lawyers understand the inner workings of the software’s algorithms. However, it’s easy to understand that RealPage’s clients don’t seem interested in fighting this case in court. In February, attorneys for tenant plaintiffs in one of the first YieldStar class-action lawsuits announced they had reached a settlement with Apartment Income REIT Corp., which does business as AIR Communities, and Pinnacle Property Management Services LLC. Pinnacle, owned by Cushman & Wakefield, is one of the nation’s largest multifamily property management companies. Terms of the settlement were not disclosed.

In a statement to Reuters, a representative of AIR Communities wrote that the claims in the lawsuit were without merit and that AIR was happy to settle the proceedings early in a favorable manner.

An antitrust case may be relatively simple in its meaning, but technology can give it a new twist. In many of the complaints about YieldStar, tenants allege that the program advises apartment complex owners that they can maximize profits by setting rents at a certain level that tenants believe may be above market levels. The owners and management teams are also accused of providing RealPage with non-public, commercially sensitive data, which was then used by the software’s algorithm to calculate the price level the market would accept.

Peter Carstensen, a former lawyer in the antitrust division of the U.S. Department of Justice and now a retired law professor at the University of Wisconsin-Madison, said the antitrust conspiracy case has two components. First, whether there is an agreement between the parties. Secondly, whether the agreement involves a restriction of competition.

“I don’t think the first element is in any doubt here,” Carstensen said of RealPage. “There is no problem in proving that there was an agreement. All parties signed contracts. The question is whether the exchange of information constitutes a restriction of competition.

Time will tell whether prosecutors or tenants’ attorneys will prove that the YieldStar system has raised rents in a given area and harmed competition. ProPublica reported that customers praised the product for helping them increase their earnings. The nation’s largest property management company, Greystar Real Estate Partners, was quoted as saying that even in one downturn, its YieldStar-enabled buildings outperformed the overall market by almost 5%. One article stated that in Seattle, 70% of apartments in a given area are managed by companies using YieldStar. This could limit choice and competition in this one area. A former RealPage employee added that 90% of apartment managers used the software’s suggestions regarding setting rent prices. But would such testimony be enough to prove that the software was anti-competitive?

Carstensen said that as a result of all the analysis, some RealPage customers may realize that fundamental changes are coming, which may prompt them to settle some disputes. Civil lawsuits will most likely end in a financial settlement. It’s unclear what the future of this type of software will be if federal and state officials get involved.

Carstensen said courts have been open to considering collusion issues across industries in recent decades. He pointed to a number of issues regarding the pork and poultry industry. Even the cardboard box industry has become embroiled in antitrust issues.

“There is actually a Supreme Court ruling regarding cardboard boxes where the defendants had a habit of sharing what they charged for the cardboard box,” he explained. “The reason they did it was to avoid a price war and the Supreme Court said it was illegal. So in this case, if there was a more formal verification revealing the release of confidential information that would not be disclosed to the general public, that would be a problem. That’s what I would look for in these trials. ●