Realogy vs. Compass: Analysis and Possible Impact

Realogy vs. Compass: Analysis and Possible Impact

On July 10, Realogy announced it had filed an action against Compass for “unfair business practices and illegal schemes to gain market share at all costs and to damage, or even eliminate competition. To reach its desired ends, Compass steals from, tortiously interferes with, and disparages its competition.”

A few observations about our industry as it pertains to the claims by Realogy. First, predatory, borderline, and unethical activity in the recruiting of agents has occurred ever since the National Association of Realtors® (NAR) dropped its anti-solicitation clause from the NAR Code of Ethics 40 years ago. Most brokerage firms could cite various times when their agents were recruited through the spreading of disparaging, oftentimes untrue, statements about the target brokerage. Most leaders can recall incidents of what would be considered unethical conduct in terms of recruiting tactics.

Unethical Recruiting Tactics

How about a broker that showed up in the lobby of a hotel where a competitor was holding its Christmas party and attempted to recruit people on the way to the party? How about a brokerage that put fliers on the windshields of agent’s autos when they are at a company luncheon? What about recruiters who tell targeted agents that they know for a fact that the company is selling or is going out of business? Each one of these is a true story, and some of this conduct continues to this day.

Financial Incentives

As to the offering of financial incentives to lure agents to another firm, that too has been going on for 40 years. The 100 percent commission plan was just one example of offering financial inducements for agents to leave one firm and join another. There have been many others and more today than ever before.  Compass’s offering of money and stock options is just another example, except that they have tons of money to spread around.  It makes them a more deadly and threatening competitor than many from the past.

We could go on about this but would be pounding the rubble on this topic.

Tortious Interference

As to tortious interference in contracts, this is another matter altogether. I have personally been involved in 11 or 12 cases of claims of tortious interference in franchise contracts in my career. In every case, the plaintiff won damages against brokerage firms that interfered in a franchise agreement. Thankfully, this was years ago, and most brokerage firms know not to tamper with franchise agreements.

I have also been personally involved in two cases of interference and/or breach of employment agreements in the past. In both cases, the judges found the non-compete unenforceable but found that the non-solicitation agreement was enforceable. In both cases, the judges found for the plaintiffs who had been harmed by the breach of an employment agreement with non-solicitation agreements in them. In one case, a judge found that the defendant’s behavior was so egregious that the judge commanded that a special master henceforth would handle all communications between agents and employees for a set period of time.

Inducing Management-level Employees

Thus, a firm that may be trying to induce management-level employees—who have non-compete and non-solicitation agreements with their current employers—to depart that employer and breach their agreements may be adjudged to have committed both a tortious interference claim and a breach of contract issue.  Not being an attorney, I really couldn’t say which.

We have for years, in all of our public statements and written articles, stated quite clearly that we believe in the sanctity of contracts whether franchise agreements or employment agreements. Where a firm is found to have caused someone to breach such an agreement, we think it’s actionable by the harmed party.

Out of Business

Lastly, as far as Realogy’s claim that Compass is trying to put competitors out of business, this would likely have thousands of co-sponsors join them in this part of their claim. While Compass may not have a stated aim to put Realogy, Berkshire Hathaway, Keller Williams, RE/MAX and thousands of other brokerage firms out of business, their business strategies are clearly having a negative impact on the economics of brokerage.

We’ve seen more than enough financial statements of its competitors than to think otherwise. Again, it’s only its size and financial resources that make Compass any different than HomeSmart, Realty One Group, JP and Associates, eXp, and Fathom who have very low-cost options for agents and are also having an impact on incumbent brokerage operations. Compass is simply using their access to large amounts of capital to expedite the growth in their market share faster than more traditional recruiting tactics may take them.

Summary Thoughts

We are fond of saying to our brokerage clients that if it were always and only about the financial aspect of a relationship between and brokerage and an agent, then every incumbent in the country would be out of business. Clearly, this is not the case. Compass has not and will not likely achieve its goal of 20 percent market share in their 20 markets by 2020. We can look at our rankings of the 1,750+ top brokerage firms and 14,500 top-ranked agents and teams to see that they won’t likely get enough of them to get there in all these markets. It’s just a matter of who the incumbents are in each market and how well many of them have already adapted to Compass and other, low-cost competitors.

I have no idea where this challenge from Realogy will end. Time will tell.