The Real Deal National

Realogy’s explosive suit against Compass may be “seriously misguided:” antitrust expert

Venture-backed brokerage has been hit by 10 lawsuits from its competitors in the past five years
By Erin Hudson | July 16, 2019 05:46PM

Compass CEO Robert Reffkin and Realogy CEO Ryan Schneider

Compass CEO Robert Reffkin and Realogy CEO Ryan Schneider

UPDATE, Wednesday July 17, 6:35 p.m.: Compass is no newcomer to courtroom drama.

Since 2014, the SoftBank-backed brokerage has been slapped by 10 separate lawsuits accusing the company of engaging in aggressive tactics to expand in new markets that range from outright law-breaking to unethical behavior.

In the explosive lawsuit filed last week, Realogy accused the $4.4 billion brokerage of using “unfair business practices and illegal schemes” to gain market share and beat out its competitors before colluding to raise prices.

Within the complaint, Realogy underscored the “overwhelming number of lawsuits that have been filed by competitors across the country, all alleging similar patterns of misconduct.”

The Real Deal examined Compass’ legal track record and reached out to antitrust experts, as well as state and federal agencies that enforce anti-competitive behavior, to understand the potential fallout — and pitfalls — of Realogy’s suit.

A laundry list of litigation
Realogy’s suit is the 10th in the past five years — and the third time the national holding company, which owns and franchises traditional real estate brokerages, has initiated litigation against Compass. Here’s how the other nine suits turned out:

1 Avi Dorfman (2014)
Tech entrepreneur Avi Dorfman sued Urban Compass (as it was then known) and Reffkin for building a business using his proprietary software, and then reneging on an agreement to offer him a stake and job at Compass and buy his startup. The suit is ongoing.

2 Citi Habitats (2014)
Citi Habitats, a subsidiary of Realogy, sued Compass for allegedly hacking into its proprietary listing database at least 25 times. A judge granted a temporary restraining order to prevent Compass from entering the database. The case ultimately settled in 2015.

3 The Corcoran Group (2015)
Corcoran, which is also owned by Realogy, sued Compass (and former agents and managers) for “brazenly and intentionally” raiding the firm’s key offices on the heels of the tech brokerage hiring away more than 50 agents. The dispute was settled later that year.

4 Brown Harris Stevens (2015)
BHS sued its former Hamptons manager Ed Reale and Compass. Reale was sued for violating his non-compete agreement for the country of Suffolk, while Compass was sued for hiring Reale in spite of allegedly knowing the terms of his agreement with BHS. The matter settled in 2016.

5 Saunders & Associates (2015)
Andrew Saunders’ eponymous firm sued Compass and former vice president agent Meg Salem, alleging she stole proprietary data and joined the rival firm in a breach of contract. Days after the suit was filed, Compass booted Salem and Saunders eventually dropped charges against Compass. But in May 2016, Compass filed a third-party complaint claiming Saunders was using former agents and staffers to “blunt” Compass’ success in the Hamptons.

6 Douglas Elliman (2016)
The Howard Lorber-led firm sued Compass and then-president, now-chief evangelist Leonard Steinberg, alleging an “unlawful scheme” to poach brokers and strong arm their way into Elliman’s exclusive contracts. The case settled in 2018.

7 Zephyr Real Estate (2018)
Zephyr was granted a restraining order against Compass after it alleged Compass tried to recruit its managers as the two companies were in talks for Compass to acquire the San Francisco-based brokerage, which claims to have more than 300 agents and generate more than $2 billion in annual sales.

8 Modern Spaces (2018)
Eric Benaim’s Long Island City brokerage accused Compass of stealing trade secrets (and photos). The case was disposed later that year and spokesperson for the company said it was settled in 2019.

9 Zillow (2019)
The Seattle-based listings giant filed two lawsuits against Compass in April 2019, alleging the brokerage poached three technology executives who took confidential company data with them when they left. The suits were settled July 11, the same day the Realogy suit was filed.

“Seriously misguided?”

George Hay, a former director in the U.S. Department of Justice’s Antitrust Division, called Realogy’s complaint “just allegations” at this stage.

“Allegations are not that hard to make,” Hay, now a law professor at Cornell, told TRD. The “real underlying facts” will only come out if the case moves to discovery, he said. In the 10 cases filed against Compass and surveyed by The Real Deal, only two (Dorfman and Saunders’ cases) have gone to discovery, so it’s unlikely it reaches that stage.

Realogy says the documented history of allegations makes clear that Compass is competing “unfairly” by encouraging recruits to violate employment agreements or inciting theft.

That history doesn’t bother Eleanor Fox, an antitrust expert and professor at New York University School of Law. She said that a lengthy track record does not infer wrongdoing. (She also noted that one violation is all it takes to make a case legally viable.)

But Harry First, the former chief of the antitrust bureau of the New York Attorney General’s Office, said the string of disputes raises a red flag.

“The fact is there’s a lot of lawsuits and I’m not sure what to make of it,” he said. “Something weird is going on.”

First, who is also the co-director of NYU law school’s antitrust program, also said that accusations related to poaching could present a problem for Realogy and other brokerages.

“I would be afraid that what would be uncovered would be some underlying agreement not to poach,” he said. If an agreement not to hire among companies was uncovered, “that would be a legal problem,” he explained because “no poaching is illegal.”

In 2011, a class-action lawsuit was filed on behalf of about 64,000 employees against Silicon Valley’s biggest companies, including Google, Apple, Adobe and two subsidiaries of Disney, for an illegal no-poaching scheme that operated between 2005 and 2009. The suit sought billions in damages for lost wages due to the anti-competitive agreement. Ultimately, it resulted in a $415 million settlement amongst the companies, who now routinely pick up their opponents’ best talent with massive compensation packages. (It should be noted that the tech workers received about $5,800 apiece; attorneys received $41 million.)

Realogy argues in its complaint that its VC war chest allows Compass “make up for the losses it has incurred by grossly overpaying-and thus poaching-its competitors’ employees and independent real estate agents.”

The complaint goes on to say that Realogy believes that this “illicit growth strategy” is premised on getting competitors’ employees to breach employment agreements and share, or steal, proprietary information.

But the allegation that a company using funds from external investors to pay employees more money is illegitimate could open them up to questioning, or pique the interest of enforcement agencies to investigate what constitutes “inflated” compensation packages, according to NYU’s First.

Realogy could be “blindly tripping into an area that is of intense interest to prosecutors today,” he said. “They may all be seriously misguided in taking this on.”

Hazy enforcement

One of the key allegations underpinning Realogy’s complaint is that Compass is seeking to gain market share with the intent of then colluding to “raise its commission splits and fees and/or otherwise restrain trade.”

Realogy alleges that Compass CEO Robert Reffkin personally solicited participation in a price-fixing scheme “where the two companies would agree to
limit agent compensation and ‘compete on brand,’ but not on price.” Realogy also said that Reffkin has similarly solicited other companies to join similar agreements.

The authorities that investigate and penalize violations of antitrust laws, such as price-fixing, include the Department of Justice, the Federal Trade Commission and state-level agencies and Attorney Generals — in New York, that means the AG’s antitrust bureau.

There’s no question price-fixing, if proven, is a serious charge. But there’s a legal dispute around the attempt to fix prices, according to First. Some lawyers say that the claim that even if there is true evidence that Reffkin really did suggest fixing wages and other terms of employment, it doesn’t constitute breaking the law.

“If the competitor did not agree, it’s not price fixing,” Hay wrote in an email. “It may be evidence of bad motive but standing alone [sic] not a violation of a federal statute.” (Realogy claimed they declined Reffkin’s alleged offer.)

But the FTC could bring a case that requires Compass to “cease and desist from making these kinds of offers,” said First.

No agency has announced any investigation or enforcement action taken against Compass to date.

Both Realogy and Compass declined to elaborate on their respective legal strategies.

Correction: The status of Modern Spaces’ case against Compass was clarified; the case was disposed in 2018 and settled in 2019. The story was also updated to reflect that Dorfman’s case has gone into discovery.