DOJ Introduces New Twist in Algorithmic Collusion Cases

It has been almost two years since private plaintiffs initiated the first antitrust class action cases against RealPage and owners and managers of multifamily apartment buildings, alleging collusion by algorithm in the use of RealPage's revenue management software to raise rents. Dozens of similar cases were later centralized in multidistrict litigation in the U.S. District Court for the Middle District of Tennessee and are now in discovery. On Aug. 23, 2024, the Antitrust Division of the U.S. Department of Justice (DOJ) came off the sidelines and initiated its own case against RealPage in the U.S. District Court for the Middle District of North Carolina – a development that heightens the stakes for RealPage and introduces even more complexity to an already challenging legal landscape in the enforcement efforts against algorithmic collusion.

The DOJ's case differs from the private class action cases in a several ways. Unlike the private cases, which together named more than 50 multifamily apartment owners and managers as defendants (in addition to RealPage itself), the DOJ's case names only RealPage. Because DOJ enforcement actions typically seek only injunctive relief (unless the government can claim it has suffered damages from the allegedly anti-competitive conduct it challenged), the DOJ ordinarily sues only entities it needs to sue to achieve effective relief. In a suit that seeks to prevent use of RealPage's software in setting apartment rents, the DOJ likely concluded that RealPage was the only necessary defendant, and it did not need the additional complexity of pursuing a case against multiple defendants.

Unlike the private cases, which allege that RealPage orchestrated a price-fixing conspiracy that is per se illegal under the antitrust laws (a characterization that the judge overseeing the multidistrict litigation in Nashville did not support at the motion to dismiss stage), the DOJ's case alleges only that RealPage and users of its revenue management software distorted the competitive process by using the RealPage software as a vehicle to exchange nonpublic, competitively sensitive information about rents and building occupancy (among other information). The DOJ asserts that the widespread availability of this information removes competitive uncertainty for each apartment owner or manager and allows them to agree comfortably with recommendations by RealPage that they increase rents.

By attacking information sharing, rather than following the lead of the private plaintiffs and characterizing the common use of RealPage's software as price fixing, the DOJ passed on the chance to try to establish collusion by algorithm as per se illegal price fixing. By challenging only anti-competitive information sharing, the DOJ will need to prove its claims under the more onerous "rule of reason" standard, requiring that the DOJ establish that the exchange of confidential information harmed competition and increased rents.

In pleading its case only against RealPage and alleging that RealPage facilitated an illegal information exchange, the DOJ has sidestepped what had generally been considered the weakest part of the private plaintiffs' cases. The class plaintiffs' price-fixing case depends on a "hub-and-spoke" theory that requires them to prove that the landlords who comprised the "rim" of the conspiracy agreed to use RealPage's software to increase rents. They seek to do so through allegations that each RealPage user signed on with knowledge that its closest competitors were also using the RealPage software to set their rents and that each shows its commitment to the agreement by regularly adopting RealPage's pricing recommendations – a factual assertion that, as discussed below, the DOJ's complaint indicates might not be true. By alleging only a collusive information exchange, the DOJ's complaint depends on the likely easier-to-prove allegation that landlords using RealPage's software know that pricing recommendations are based not only on their own information, but also on information RealPage acquires from competitor apartment owners and manager. The DOJ alleges that this knowledge establishes the necessary "rim" of the RealPage-facilitated hub-and-spoke agreement among the landlords.

With the benefit of a nearly two-year, pre-complaint investigation, the DOJ was able to supply more details on the use of RealPage's software than the private plaintiffs were able to allege (likely based on a ProPublica investigation and article that preceded the first case). The DOJ's complaint is filled with alleged quotes from RealPage employees and landlords detailing the collusive understanding and intent underpinning the use RealPage's revenue management software. Based on its pre-complaint investigation, the DOJ's allegations also differ in important ways from those in the class action complaints – most notably as to how frequently users of RealPage software accept the rents proposed by the pricing algorithm. Though the class plaintiffs suggest that users adopt pricing recommendations 80 percent to 90 percent of the time – and use those allegations to support the existence of an agreement among apartment owners and managers at the rim of the hub-and-spoke conspiracy that all will accept prices proposed by RealPage – the DOJ's complaint alleges that users accept pricing recommendation only 40 percent to 50 percent of the time. In other words, based on the DOJ's allegations, users of RealPage's revenue management software are more likely to reject a pricing recommendation than they are to accept it.

The issue of how often users of RealPage's software accept its pricing recommendations, and users' discretion to reject recommendations, has been a significant issue on motions to dismiss the private class action litigation (as well as in an enforcement action against RealPage and landlords initiated by the Attorney General of the District of Columbia). Discretion to reject pricing recommendations was also one factor that led to the dismissal of analogous claims brought against Las Vegas hotel owners and the provider of their pricing software. Armed with evidence generated during its investigation that landlords are more likely to reject RealPage's pricing recommendations than they are to accept them, the DOJ's decision to challenge only RealPage's facilitation of the exchange of competitively sensitive information sidesteps this thorny issue – and foreshadows upcoming difficulty for the private class lawsuits at the summary judgment stage.

Finally, in addition to alleging an anti-competitive agreement among RealPage and users of its revenue management software in violation of Section 1 of the Sherman Act, as the private plaintiffs also alleged, the DOJ also asserted that RealPage has illegally maintained a monopoly in revenue management software in violation of Section 2 of the Sherman Act. The DOJ's complaint states that 80 percent of multifamily apartment owners or managers who use revenue management software have selected RealPage's products and that RealPage has maintained its monopoly by encouraging the sharing of competitively sensitive information, allowing it to amass a data set it uses in recommending apartment prices that is vastly larger than any of its competitors. Without comparable data, other providers of revenue management software are diminished as realistic competitors and potential challengers to RealPage's monopoly position.

Conclusion

We are still at a relatively early stage in the development of the legal landscape applicable to claims of collusion by algorithm – which have arisen not only in the multifamily apartment setting, but also in cases challenging uses of common pricing platforms by hotel owners, tire manufacturers and health insurance companies, with likely more cases to come. The involvement of the DOJ, which had previously participated in these cases only through statements of interest supporting plaintiffs, might accelerate development of the legal framework as its enforcement actions often move more quickly than private actions.

Holland & Knight's Antitrust Team will continue to monitor and report on new developments in the evolving area.