Realogy slams Compass with explosive suit
Compass — the $4.4 billion Softbank-backed brokerage that’s shaken up the real estate landscape over the past seven years — was hit with an explosive and wide-ranging lawsuit Wednesday by a key rival accusing it of price-fixing and collusion, “predatory” poaching and unfair business practices.
Realogy, in a 68-page complaint filed in New York State Supreme Court, alleges the firm routinely engages in “illegal schemes to gain market share at all costs and to damage, or even eliminate, competition.”
In stark terms, Realogy details its main rival’s modus operandi for attracting agents with astronomical splits and navigating non-competes in what it says is “predatory recruiting and poaching” practices.
And it accuses Compass CEO Robert Reffkin of personally soliciting Realogy to enter into an illegal price-fixing agreement “where the two companies would agree to limit agent compensation and ‘compete on brand,’ but not on price.” Realogy said it declined Reffkin’s overture.
In a statement, Compass sought to shut down the accusations by accusing its rivals of being slow to innovate — instead turning to the court system to prop up their businesses. “At Compass we focus on providing the best possible experience for our employees, agents and their clients,” the statement said. “Instead of building a better future for the real estate industry, our competitors are using the court system to stifle competition, but these efforts have been unsuccessful.”
In fact, Realogy has been stung by agent losses around the country, where it has faced competition from Compass and Warren Buffett’s Berkshire Hathaway. The real estate conglomerate has gone head-to-head with Compass before, most recently when a Realogy executive blasted Compass for “taking advantage” of its agents. https://therealdeal.com/2019/02/21/nrt-ceo-goes-after-compass-for-taking-advantage-of-its-agents/ Meanwhile, the conglomerate has seen its stock crater in recent months.
In May, the company — once valued at more than $7 billion — saw its market cap sink below $1 billion for the first time since it went public. As of midday Wednesday, the company’s market cap was hovering around $703 million.
Realogy’s suit claims Compass has taken advantage of its vulnerability.
“Many agents who have been solicited by Compass but who remain with Realogy report that Compass recruiters say that Realogy is going bankrupt and/or is going out of business,” it said.
In truth, Realogy’s financials — which are in the public domain — say nothing of the sort.
“But Compass gives the impression that it speaks from a place of authority, as if it were some sort of industry or Wall Street insider,” the complaint read.
In a statement, a Realogy spokesperson said “open and honest competition is part and parcel of our business…. But when a competitor jeopardizes that integrity with illegal and unfair actions, we take it very seriously.”
Since Compass’ founding in 2012, the firm has been sued by several competitors nationwide — including Corcoran and Citi Habitats. Those suits, which accused Compass of “brazenly” poaching agents, were ultimately settled. On Wednesday, so were two suits filed in April by Zillow Group, which accused Compass of hiring three tech executives in violation of their non-competes.
But Realogy’s latest suit seeks to demonstrate a pattern in Compass’ “illicit growth strategy,” which it said is based on enticing recruits to breach non-competes “while often promising to indemnify these employees for these breaches if and when they are sued.” The suit goes on to say Compass has engaged in the practice for seven years. “This is not a collateral consequence of Compass’s business plan — it is Compass’ business plan,” the suit claims.
According to the suit, it is standard practice for Compass to offer employee salaries so high “they cannot refuse.” And it claims Compass has tapped a deep pool of VC money to offer agents “grossly inflated compensation packages, commission payments, and fee allocations that render the company unprofitable.” The suit claims it has reason to believe that once Compass achieves sufficient market share in targeted areas, the firm intends to raise commission splits and fees “and otherwise restrain trade including by collusive actions.”
To avoid non-competes, Realogy said Compass has “manufactured false business titles” for employees who supposedly work out of alternate locations.
The complaint cited the case of Joe Fuer, a Corcoran office manager in Brooklyn Heights, who joined Compass in 2018. The suit claims that when Corcoran raised the issue of Fuer’s non-compete, Compass said he would be working as a director of communications. By 2018, Fuer’s LinkedIn profile said he was working in Atlanta as an expansion sales manager. And as of this past April, Fuer’s LinkedIn profile said he was working as a regional sales manager in the Hamptons. The complaint argues that his entire employment was “in violation of his restrictive covenants to Corcoran.”
The complaint is replete with similar examples, but a tipping point seems to have come in May when Compass hired a longtime Realogy finance executive, Urvin Pandya.
According to the suit, Pandya had “virtually unfettered access to Realogy’s confidential business information,” including compensation agreements, pricing strategies and information about agent performance, recruitment and retention. Most significantly, he knew details of Realogy’s strategic plan for upcoming franchise renewals, including expiration dates.
Although Pandya’s non-compete prohibited him from working for a competitor within 50 miles for six months, Compass said he would work out of Philadelphia. To stop him from starting the new job, Realogy got a court to grant a temporary restraining order. The suit said Compass opposed the application by saying the information Pandya possessed wasn’t significant to Compass’ business because it wasn’t in the franchise business.
But according to the suit, Compass has solicited multiple Realogy’s franchisees in California, Colorado, Florida, Maryland, Texas, Washington, D.C., and Wisconsin.
In New York, Realogy said Compass has “flouted” co-brokerage rules set forth by the Real Estate Board of New York, which governs exclusive listings held by firms. The complaint said Compass recruits gave clients a “certification form” and urged them to cancel their exclusives with Corcoran and move them to Compass. With the form in hand, Compass allegedly posted the listings to its website improperly.
In some cases, the suit alleges, Compass encouraged agents to manipulate Corcoran’s listing system by marking listings as “sold” or “temporarily off market.” As soon as the agents moved to Compass, they manually marked the listings as “active” on Compass’ website.
According to the suit, Compass has dipped into its deep pockets to cover fines levied by REBNY as well as indemnity costs when Realogy has tried to enforce non-competes or franchise agreements. The company treats those fines “as the cost of doing business, having a ‘we’ll pay it’ mentality,’” the suit claims.
Compass has leveraged more than $1 billion in funding from investors to make up for the losses, Realogy claims. “Compass eagerly courts these losses as the price it must pay to drive competitors out of the high-end real estate markets in New York, San Francisco, Los Angeles, Seattle, and other cities.”