Diving certificate:

• The Ministry of Justice and Eight states sued RealPage, a company specializing in rental income management, was indicted in federal court on August 23. The software provider is accused of turning landlords into accomplices in price fixing by allowing them to set prices in lockstep with one another based on the software’s recommendations.
• “The use of software as an exchange mechanism does not exempt this system from liability under the Sherman Act,” said Attorney General Merrick Garland. said at the announcement the lawsuit, which was filed in a federal district court in North Carolina.
• In a statement, RealPage said the Justice Department’s allegations were without merit. “We are disappointed that after many years of education and cooperation on the antitrust issues surrounding RealPage, the Justice Department has chosen this moment to bring a lawsuit that seeks to scapegoat pro-competitive technology that has been used responsibly for years,” the company said.

Diving insight:

Critics of the agency’s actions say the lawsuit will be difficult to win in court because the Justice Department will have to prove that the landlords are colluding with each other in one way or another, even though they probably have no contact with each other, do not know each other’s identities, and many of them may not even follow the software’s recommendations.

“It is a basic rule of antitrust law that collusion constitutes unlawful anticompetitive behavior,” says Shubha Ghosh, a law professor at Syracuse University. has argued“Price fixing requires the coming together of people who want to act in an anti-competitive manner.”

According to the U.S. Department of Justice, RealPage executives lied by boasting that the software would allow landlords to avoid competition on merit.

“RealPage serves the ‘common good’ by ensuring that otherwise competing landlords deprive Americans of the fruits of competition – lower rents, better lease terms, more concessions,” the lawsuit states. “At the same time, landlords reap the benefits of coordinated pricing among competitors.”

To make the software work, the company asks landlords to provide confidential data about their rental applications, signed contracts, renewal offers and acceptances, forward-looking occupancy plans, and more. This data is analyzed by the software’s machine learning algorithm to make recommendations about how much each landlord should charge for each apartment, taking into account size, amenities, market position, and other factors.

“Landlords agree to provide this information to their competitors because they know that in return they can use their competitors’ confidential information,” the agency said in the complaint.

Although landlords are free to follow the recommendations or not, the DOJ says the system is designed to make compliance easy and non-compliance difficult.

“For any recommendation that (a landlord) does not accept – whether it is waiving or maintaining the previous day’s rent – the property manager must provide ‘specific business comments’ for the deviation from the recommendation,” the complaint states. “This justification, RealPage says, cannot simply be a preference for a different price, but must be based on a factor that the model cannot account for, such as local construction or renovations in the building. It must be a ‘strong, solid, business-oriented approach.'”

“By feeding sensitive data into a sophisticated algorithm based on artificial intelligence, RealPage has found a modern way to violate a centuries-old law,” said the deputy attorney general. Lisa Monaco said.

Jonathan Kanter, antitrust counsel for the Justice Department, said the agency has brought in data scientists to understand how the company uses its code to turn landlord data into price recommendations.

“We have learned that the modern machinery of algorithms and AI can be even more effective than the smoke-filled rooms of the past,” Kanter said.

Ghosh, the Syracuse law professor, says the Supreme Court has made it clear that it distinguishes between anticompetitive behavior by companies and the tools they use to set prices. That means the Justice Department must show “a physical agreement to fix prices” to prove a Sherman Act violation.

By focusing on the rental algorithm, Ghosh said, the agency appears to be sidestepping this essential requirement and instead “inferring from the use of the algorithm that an agreement exists. This shift would undermine traditional antitrust protections for competition.”

Jay Ezrielev, head of the economic consulting firm Elevecon and an adviser to Joseph Simons when he was chairman of the Federal Trade Commission shortly before Lina Khan took over, said the Justice Department is trying to argue that companies that use a common third-party vendor are engaged in a concerted effort to implement price-fixing, even if there is no tacit or explicit agreement between them to manipulate prices.

Not only do they have no contact with each other and do not know each other’s identities, he saidThey do not know the terms and conditions of the seller and the other companies, nor do they know whether others are complying with the alleged price-fixing scheme. Moreover, they may deviate from the algorithm’s recommendations, and there is no reason to assume that each company is not simply acting in its own interest.

“Given the remarkably low threshold for finding concerted action, the Justice Department’s analysis is likely to find concerted action even if a conspiracy to fix prices is unlikely,” Ezrielev says.

The states joining the Justice Department in the lawsuit are North Carolina, California, Colorado, Connecticut, Minnesota, Oregon, Tennessee and Washington.