Robo price-fixing: Why the Justice Division is suing a software program firm to cease landlords colluding on rents

Of all the explanations it might be arduous to pay lease every month, did you might have an algorithm-powered unlawful cartel in your checklist?

Thousands and thousands of individuals throughout the US are paying way more lease than they’ll moderately afford, with rental housing costs rising far faster than family revenue. In 2022, 22.4 million U.S. households had been spending greater than 30% of their revenue on lease and utilities, up from 20.4 million in 2019.

Many of those households confronted extreme price burdens, with an all-time excessive of 11.6 million fighting housing prices that eat greater than half of their revenue. In Chicago, Cincinnati, Minneapolis, Virginia Seashore and Washington, year-over-year rental costs are climbing at double-digit charges.

A number of components drive the excessive price of leases, together with growing demand, a dwindling provide of low-rent models, the rising price of capital to construct new leases, and regulatory limitations proscribing the development of multifamily models.

However there’s one other shocking issue driving up rental costs: landlords colluding with the assistance of expertise. The U.S. Justice Division is suing the corporate RealPage, Inc., accusing it of promoting software program to landlords that permits them to collectively set costs – the unlawful observe of price-fixing. As a former official within the Justice Division’s Antitrust Division and a regulation professor, I’ve been following the case carefully.

The perils of price-fixing

The Federal Commerce Fee defines price-fixing as an settlement, conspiracy or mixture amongst opponents to lift, repair or in any other case preserve the worth at which their items or providers are offered.

Any settlement that restricts value competitors violates the antitrust legal guidelines. Examples of price-fixing agreements embody commitments amongst opponents to carry costs agency, undertake an ordinary components for computing costs, or adhere to a minimal charge or value schedule.

So when opponents share proprietary, confidential present value data – immediately or not directly by way of an middleman – to stabilize or management business pricing, they’ve crossed the road into unlawful collusion, in accordance with the FTC. That’s the case in main parts of the U.S. rental market, the Justice Division argues.

One algorithm for all

In August 2024, the Justice Division and eight states filed a lawsuit in a federal court docket in North Carolina in opposition to RealPage. The Justice Division accused the corporate of promoting software program to landlords that collects nonpublic data from competing landlords and makes use of that mixed data to make pricing suggestions.

Landlords who use the software program enter the rental costs they cost, and the software program aggregates all the information from the corporate’s prospects. The software program’s algorithm then makes suggestions for what to cost. The suggestions are typically greater than the present market price, and most prospects take the suggestions, which push costs in a market greater.

Even when landlords retain some authority to deviate from the algorithm’s suggestions, it’s unlawful for competing landlords to collectively delegate key elements of their pricing to a standard algorithm, in accordance with the Justice Division go well with. The Justice Division declared that “RealPage replaces competitors with coordination. It substitutes unity for rivalry. It subverts competitors and the aggressive course of. It does so overtly and immediately – and American renters are left paying the worth.”

The case is uncommon in that, not like a typical price-fixing cartel, the landlords used RealPage’s algorithms to dramatically enhance their potential to interact in price-fixing. Algorithmic price-fixing is often simpler and more practical than different kinds of cartel habits. The software program can simply combination large quantities of proprietary knowledge, optimize cartel positive factors, monitor real-time deviations from cartel pricing and decrease incentives to cheat.

“It’s a lot simpler to price-fix while you’re outsourcing it to an algorithm versus while you’re sharing manila envelopes in a smoke-filled room,” Justice Division antitrust chief Jonathan Kanter informed The New York Instances.

Since 2022, RealPage and numerous property managers have been named as defendants in additional than 30 class motion lawsuits alleging the RealPage software program is used to unlawfully repair rental costs. Federal courts are typically sympathetic to such arguments, as proven within the denial of a movement to dismiss the case in one of many non-public lawsuits filed in opposition to RealPage.

In that case, the court docket held {that a} price-fixing settlement might exist as a matter of regulation. Landlords supplied RealPage’s algorithmic system with their proprietary industrial knowledge, understanding that RealPage would require the identical from their opponents and would use all of that knowledge to advocate rental costs to the entire firm’s shoppers.

Traditional price-fixing or data-driven choices?

Some landlords appear to be conscious that in sharing confidential value data to RealPage’s software program, they had been facilitating the illegal monitoring and elevating of rental costs. The Justice Division grievance quoted a landlord commenting on RealPage’s software program, “I at all times favored this product as a result of your algorithm makes use of proprietary knowledge from different subscribers to counsel rents and time period. That’s basic price-fixing.”

Even RealPage’s personal executives have boasted that when landlords collectively use their software program, they’ll use “each doable alternative to extend value,” in accordance with the grievance.

RealPage argued that its software program “merely helps landlords make data-driven choices” in a aggressive market. The corporate claims its instruments are designed to mirror market situations and optimize occupancy charges, to not have interaction in price-fixing.

The corporate describes the impression of its alleged collusion with landlords as “a rising tide [that] raises all ships.” Maybe a greater description for his or her service is a rising tide that raises all ships for individuals who have one.

The Justice Division’s case and the non-public circumstances are within the early levels of litigation. If the division is profitable, RealPage can be barred from participating within the anticompetitive practices associated to serving to landlords share proprietary pricing data.