Commercial Magazine

Closings: Will RealPage face a long line of court cases?

By Jeff Bond

Judging by the news these days, you might think that RealPage CEO Dana Jones is commercial real estate’s Public Enemy No. 1. Her company has certainly garnered plenty of negative publicity for its YieldStar Revenue Management software that collects data about rental units and then tells landlords how much they can charge for an apartment.

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

The company was at the center of investigations about how RealPage’s YieldStar program had potentially played a role in the extreme jump in rents being seen across the country. A variety of tenant associations have sued the company in the wake of the ProPublica pieces, claiming the software algorithm allowed landlords using the product to share information and essentially agree to a set a daily price for available apartments.

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

The company didn’t respond to requests for comment, but spokespeople have said in the past that RealPage is innocent of all charges. They contend that the use of the software program was being misunderstood.

Whether or not the prosecutors and plaintiff’s attorneys understand the inner workings of software algorithms is unclear. But what is easy to understand is that RealPage’s clients don’t seem interested in fighting this issue in court. In February, lawyers for the renter-plaintiffs in one of the first class-action lawsuits concerning the YieldStar software program announced they had reached a settlement with Apartment Income REIT Corp., which does business as AIR Communities, and Pinnacle Property Management Services LLC. Pinnacle, which is owned by Cushman & Wakefield, is one of the largest multifamily property management firms in the country. The terms of the settlement were not disclosed.

In a statement to Reuters, an AIR Communities representative wrote that the lawsuit claims were baseless, and that AIR was pleased to exit the litigation early in a favorable manner.

The antitrust case may be relatively straight forward in its meaning, but technology can give it a new twist. In many of complaints against the YieldStar software, renters are charging that the program advises landlords of residential apartment complexes that they can maximize earnings by setting rents at a certain level, which renters say can be above market levels. The landlords and management teams are also being accused of providing non-public, commercially sensitive data to RealPage which was then used by the software algorithm to help calculate what pricing levels the market would allow.

Peter Carstensen, a former attorney at the antitrust division of the U.S. Department of Justice and now a professor of law emeritus at the University of Wisconsin-Madison, said there are two elements to an antitrust conspiracy case. The first is whether there is an agreement between parties. The second is whether that agreement involves a restraint of competition.

“The first element seems to me to be almost beyond doubt here,” Carstensen said about RealPage. “There is no problem proving there was an agreement. All the parties signed contracts. The question is whether the exchange of information constitutes a restraint on competition.”

It remains to be seen if state prosecutors or attorneys for renters can prove that the YieldStar system raised rents in a given area and hurt competition. ProPublica reported that customers have praised the product for helping them boost earnings. The nation’s largest property management firm, Greystar Real Estate Partners, was quoted as saying that even in one downturn, its buildings that used YieldStar outperformed the general market by nearly 5%. One article stated that in Seattle, 70% of apartments in a certain neighborhood were managed by companies using YieldStar. That could limit choice and competition, in that one neighborhood. A former RealPage employee added that 90% of apartment managers took the software’s suggestions for rent pricing. Still, would such testimony be enough to prove that the software program was anti-competitive?

Because of all the scrutiny, Carstensen said some of RealPage’s clients may be realizing a sea change is underway and that could be leading them to settle some suits. The civil trials will most likely end with financial settlements. It remains unclear what the future of this type of software might be when federal and state officials get involved.

Carstensen said in recent decades, the courts have been open to taking on collusion issues in a variety of industries. He pointed to a series of cases involving the pork and poultry industries. Even the cardboard box industry has gotten folded up in antitrust issues.

“There is actually a Supreme Court decision involving cardboard boxes where the defendants had a practice of sharing what they were charging for cardboard,” he explained. “The reason they did it was so they wouldn’t get into a price war, and the Supreme Court said that’s illegal. So, in this case, if there were more formal verification revealing a sharing of confidential information that they would not tell the general public, that would be a problem. That would be what I’d look for in these trials.” ●


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