DOJ’s collusion case claims RealPage’s algorithm is the reason rent is too high

Have you been paying too much for rent? Across the country, rent prices skyrocketed in 2022 and 2023 and it could be because of illegal activity. The Justice Department on Friday, Aug. 23, filed an antitrust suit against RealPage, a Texas-based software company that is accused of using algorithms to allow widespread collusion among landlords.

"Everybody knows the rent is too damn high . And we alleged this is one of the reasons why," Attorney General Merrick Garland said. "When companies, and in this case, landlords, use a software tool to facilitate cooperation with respect to rents , they violate the antitrust laws, they make rents higher than they would otherwise be, and they prevent rents from going down."

The federal government joins attorneys general from eight states in suing RealPage. The company, which has been fighting these allegations for years, said the case lacks merit and will do nothing to bring down rent prices.

"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," RealPage said in a statement.

To understand more about the case and its merits, Straight Arrow News interviewed Spencer Weber Waller, a professor and director of the Institute for Consumer Antitrust Studies at Loyola University.

This interview has been edited for length and clarity. Watch the full interview in the video above.

Simone Del Rosario: Professor, what is the difference between RealPage suggesting rent prices and what we see from a Zillow or Redfin estimate?

Spencer Waller: RealPage is a software system that has a very high market share among landlords in places like New York and some other cities. And the gist of this case, and it's interesting, it's a collusion case, it's a price-fixing case, it's a cartel case, but it's not one where the landlords are accused of directly communicating or agreeing among themselves.

It's kind of what we would call a hub-and-spoke conspiracy, where the landlords are using a common agent, a third party, to coordinate their behavior. And the complaint talks about how each of these large landlords feeds a variety of confidential proprietary information, and then the algorithm and RealPage communicates with them only, but it's effectively the same as them communicating with each other because RealPage has access to all of this confidential information, uses it to formulate, according to the complaint, common recommendations that are inevitably followed by the landlord. And you end up with essentially the same result as if they had gone into a room or emailed each other and agreed to a common and ever-escalating rent for the various apartment buildings and other stuff that they own.

Simone Del Rosario: RealPage has been fighting these allegations for a couple of years now. They argue the software is not the reason prices are so high, that it is a lack of housing. They also say that their customers aren't required to use this price, and in fact, many of them don't use the suggested price. So what arguments does the DOJ and these other states have to make in order to prove their case?

Spencer Waller: There are two sets of cases going on: One is this government action that was filed late last week, and then there are separate class actions where groups of consumers are saying that they've overpaid. So the antitrust laws would not deal with a situation where a landlord had high prices on their own unless they were a monopoly and that isn't at stake here. So high prices by themselves are not a violation of the antitrust laws without something more.

The something more in this case — a civil case, nobody's going to jail, the government case has no fines — [is] the government is trying to stop the use of a common platform, a common algorithm, a common coordination point. And this has been done before.

If you go all the way back to the 1930s, there was a similar kind of case involving the movie industry where the government won, where they couldn't really prove that the movie studios were trying to coordinate on price that would be charged in the movie theaters during the Great Depression; they couldn't really prove that the movie studios talked to each other, but they had each sent sort of a common letter to their distributors talking about the prices that would be set. And that was enough.

So this hub and spoke where you use a third party to coordinate is an accepted legal strategy. Of course, the government has to prove this, but the complaint has a solid legal theory.

Other countries use similar kinds of coordination. I was an expert for the government of Chile some years ago where supermarkets were coordinating their price through a wholesaler. But again, there was no evidence that they specifically talked to each other. They may have, but the government couldn't prove it. But to use a common agent to then formulate a plan to set a common price and/or raise it, those are illegal under U.S. law. Again, if you can prove it.

Simone Del Rosario: We are entering an era where AI and algorithms are going to be ruling business. What sort of things can we take away from the fact that algorithms are going to be calling a lot of the shots more and more?

Spencer Waller: Antitrust is grappling with this. The basic requirement for violation of Section 1 in the Sherman Act is some agreement in restraint of trade. It doesn't have to be a written agreement. It doesn't even have to be a formal agreement. It can be approved by direct or circumstantial evidence.

If you saw a bunch of people and you asked them how much for an apple on the street, and they each said $0.4325, that would be kind of odd. And you look into it, and you try to see if they had some mechanism by which they coordinated that price.

Now, it would be a pretty cut-and-dry case if each real estate company or anybody else coordinated through an accountant, through a trade association, or just like some expert consultant. There are all kinds of cases like this, where if you feed this common, highly-proprietary, highly-detailed, forward-looking information to a third person who formulates recommendations and then the recommendations are followed. That has held in other circumstances, other factual circumstances, to be enough to show an agreement. And that's what the government is alleging here. And the fact that it's a permutation involving an algorithm rather than a human or an old-fashioned way of coordinating is interesting. But that's acceptable in a legal theory. And again, the law is reasonably easy. The facts are hard.

Simone Del Rosario: What do you expect RealPage to come forward with to say this is not collusion and it's not an antitrust violation?

Spencer Waller: Well, at this stage, a complaint has been filed. I'm going to put on my hat as a civil procedure professor rather than an antitrust person. What happens now is the defendant has a choice. They can either file an answer, which just says, you admit, you deny, or you don't know about the allegation. They would admit that they're RealPage and they're incorporated wherever they're incorporated. And they would then admit and deny the key paragraphs of the complaint. And then the case goes into discovery.

Most defendants in this situation file a motion to dismiss that says even if everything in the complaint is true, it doesn't amount to a violation of the law. A judge has to decide that. As I understand it, the government's case is going to be decided by a judge, not a jury. The judge has to decide a motion to dismiss and the judge has to accept everything in the complaint as true and then measure it up against the law.

And as I was saying, the law is supportive of the government's case. They're smart people. They have good lawyers on this. The states are important partners in this case. They have other very gifted antitrust lawyers who work on this in conjunction with the DOJ. A little bit's about the predilections of the judge, but I would expect that this is a strong complaint that's a good chance of making it through the motion to dismiss.

At that point, the defendants have kind of a moment of truth. Do they want to spend the time and money turning over all their documents and depositions and other information to the government, a bunch of which they've already had to do? So they sort of know what's coming.

And at that point, given that nobody's going to jail and the government doesn't get any money out of this, I would expect them to have some serious conversations about settling this case if, again, if it survives that motion to dismiss. If the defendants are successful in their motion to dismiss, the case is over and the government would have to appeal.

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