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Real Estate

Compass’s next battle: trade secret lawsuits

An array of complaints including a blockbuster from Howard Hanna accuse the brokerage of stealing agents and confidential information. But how serious are these complaints?

HW+ Robert Reffkin Compass
Compass CEO Robert Reffkin

On her website bio, Pittsburgh real estate agent Jen Crouse describes why she finds meaning in her work.

“At the end of the day,” Crouse states. “We all want to love where we live and who we invest our time with.”

But who Crouse invests her own time with is a heated dispute between the agent’s old brokerage, the venerable Howard Hanna, and her new one, meteorically growing Compass.

Crouse is a defendant in a lawsuit that claims New York City-based Compass conspired with Howard Hanna agents and employees to break their contracts and provide Compass with an array of confidential information about Howard Hanna.

But Crouse has denied the allegations and filed a counterclaim that Pittsburgh-headquartered Howard Hanna owes her $29,000 in unpaid commissions.

Branches of Better Homes & Gardens, and Christie’s also in the past month filed lawsuits against Compass in Pennsylvania and in New Jersey that accuse the brokerage of persuading agents to break their contracts and steal information on their way out the door.

Realogy is in year three of a similar lawsuit filed against Compass in New York. There are also lawsuits by individual agents in California who claim Compass failed to deliver on its recruiting pitch.

The slew of litigation calls into question whether Compass’s recruiting tactics are anti-competitive, even for an industry known for tabloid-y splits between top agents and brokerages.

Compass is a juicy target, what with the grandly stated ambitions of its CEO Robert Reffkin, shares trading on the New York Stock Exchange since April, and an unclear long-term business model.

But it’s too soon to say if the allegations are severe. And though Compass is a brokerage some agents love to hate, agents are not crazy about getting their mobility scrutinized.  

“Agents are independent contractors of their brokerages,” said Monique Bryher, a real estate broker in Los Angeles. “Not indentured labor.”

Pittsburgh alleged pirates

Howard Hanna Jr. founded his eponymous real estate brokerage in 1957 amid the Shadyside neighborhood of Pittsburgh.

Hanna’s son, Howard “Hoddy” Hanna III, helped the business expand in the 1970s and 80s and is now CEO. Hoddy Hanna’s son, Howard “Hoby” Hanna IV is brokerage president.

The dynastic business dominates western Pennsylvania, and enjoys sizeable market share in Ohio, upstate New York, New Jersey, and also North Carolina following the 2018 acquisition of Allen Tate.

Howard Hanna was the fifth-largest brokerage in the country by transaction volume in 2020, according to RealTrends, with 105,455 sides. They were the seventh-largest brokerage by sales volume, per RealTrends, with $27 billion.

But Compass, founded in 2013, racked up $152 billion in 2020 sales volume, second only to Realogy. The brokerage, which declined to comment for this article, has lapped much of the competition when it comes to sales volume. Its methods include brokerage acquisitions, signing bonuses and favorable commission splits to agents, and – as Howard Hanna would tell it – by urging agents to break their contracts, and collect insider intelligence on rivals.

A lawsuit filed in March in Pennsylvania state court by Howard Hanna claims that a former sales manager, Michael Hornung, breached his contract by accepting an employment offer from Compass. There was allegedly a clause in the contract that Hornung could not join a competitor.

The case, filed by prominent Pittsburgh attorney William Pietragallo, also alleges that – a week before joining Compass – Hornung emailed himself the profit and loss report for two Howard Hanna branch locations, those branches’ weekly sales reports, and a sheet with the contact information of Howard Hanna agents.

“In Michael Hornung,” the lawsuit reads. “The Compass defendants located a person with a similarly low opinion of proprietary information and contractual responsibilities.”

Indeed, Howard Hanna portrays Hornung as a vessel of Compass’s Machiavellian ambitions.

“The business model of the Compass defendants revolves around stealing employees and trade secrets from competitors,” the lawsuit reads. Howard Hanna representatives said they cannot comment about pending litigation.

In an answer to the complaint, lawyers for Hornung and Compass admit that, well, Hornung really did email himself a profit and loss report, and sales information before leaving Howard Hanna.

But Hornung denied providing what he emailed to Compass. And he denied breaking laws in either emailing himself the reports or joining a Howard Hanna competitor. Also, Hornung filed a counterclaim alleging that Howard Hanna owes him north of $20,000 in unpaid salary and bonuses.

In addition to Hornung, Howard Hanna is individually suing Crouse and Leah George, both who jumped to Compass after six years each at Howard Hanna.  

Crouse and George allegedly took home listings that belonged to Howard Hanna. It is residential real estate etiquette – and sometimes written in contracts and local trade group bylaws – that a brokerage, not an individual agent, technically holds a listing.

But Crouse has fired back. In a counterclaim, the agent stated she’s done eight deals since joining Compass that were kept under the Howard Hanna name, and that she has not received her cut from the sales.

“Based on Howard Hanna’s conduct to date,” reads the counterclaim, filed in April. “It remains unclear whether Howard Hanna intends to pay Crouse a commission for these properties.”

Stealing secrets and poaching agents

Henry Sneath teaches trade secrets at the Duquesne University School of Law in Pittsburgh, and on the first day of class he presents students with the classic trade secrets claim – a sales list. It’s the first lesson, explained Sneath, who is also a lawyer at Houston & Harbaugh, because Business B allegedly stealing clients from Business A demonstrates the law’s muddy terrain.  

Is the client list truly private data locked in a proverbial vault? Or can it be accessed by anyone with Internet research skills? Are the client’s hot prospects on the verge of purchase? Or people who once called the office?

Like many trade secret lawsuits between well-financed antagonists, the Howard Hanna/Compass litigation will “be a fact-intensive inquiry,” Sneath said, facts that are not clear by the initial court documents.

Claims of one worker illegally jumping to a competitor are also full of ambiguity. Dave Walton, an attorney at Fisher & Phillips, said he had a six-week jury trial over an unlawful worker recruitment claim that came down to one word.

“We were fighting over the meaning of ‘accept’ in a non-compete clause in a contract,” Walton said.

Also, trade secret and poaching claims are common in the world of sales.  

“These claims come up a lot with insurance, with real estate, any business where there’s a client list, and meetings with clients,” said Chad Fitzgerald, an attorney at Kinsella Weitzman Iser & Kump.

That backdrop makes it difficult to assess whether the lawsuits might change Compass’s business practices or penalize the brokerage.  

Douglas Elliman and Zillow previously filed lawsuits against Compass unlawfully poaching employees and agents. Both cases caused a stir when they were filed in 2016 and 2019, respectively, but later quietly settled for terms not disclosed in public records.  

Compass’s registration statement to become a publicly traded company summarizes the Realogy lawsuit. But the S-1 discusses liability exposure in generic terms, stating, “We are periodically subject to lawsuits, government investigations and other proceedings that may adversely affect our business, financial conditions, and results of operations.”

Other brokerages have waged turf wars – for example, a jury in 2017 found William Raveis liable for $5.4 million for efforts to “decimate” Douglas Elliman’s presence in Westchester County, New York. But the Compass allegations, spread out across multiple areas, appear distinct.

As courts weigh these allegations, the powerful National Association of Realtors is not involved. The organization’s detailed guidelines on how agents and brokerages should behave includes warning not to publicly speak ill of a competitor, but little on recruitment between brokerages. NAR declined to comment.

One trade group that has gotten involved is the Real Estate Board of New York, which slapped Compass with a $250,000 fine in January for purportedly encouraging newly recruited agents to take listings with them. Compass responded with an antitrust lawsuit in March, accusing the trade group of selective and discriminatory rules enforcement that “directly limits” recruiting.

When recruiting goes bad

Judith Abbott draws charts that track the movement of agents and sales managers in her home of Fort Worth, Texas. It can be a full-time hobby and includes Abbott’s own career, “five companies, seven physical locations, and 11 office managers,” including her current position at Coldwell Banker.

Bury your head long enough in legal complaints, and you believe sales managers, agents and brokerages are purely rational decision-makers. But Abbott, who is 72 years-old and began in real estate putting listings in three-ring binders for her mother, believes, “People tend to move because they get mad at somebody and then vow to find the best deal they can.”

Abbott’s sentiment was echoed elsewhere – people move constantly and it’s hard to know why. What might be different, observers allowed, is if Compass persuaded agents and sales managers to blatantly break contracts.

“When poaching is inappropriate is when the party being poached is under an employment agreement with a non-compete or non-solicitation or non-disclosure requirement,” said Steve Murray, president of Real Trends.

“These things do, once in a while, happen,” Murray said.

The claim with less precedent is that managers like Hornung were persuaded by Compass to clean out their old company’s files. But it’s not clear what Howard Hanna could have on file that really helps Compass.

“How is my spreadsheet on financial operations going to help you sell houses?” said Ken Johnson, a real estate professor at Florida Atlantic University and former agent. “There are few company secrets on the brokerage level.”

The trade secrets that matter, Johnson argued, are leads and neighborhood intelligence – knowledge mostly on the agent, not brokerage, level.

Abbott agreed that valuable trade secrets are hard to come by, stating “Most agents don’t have access to anything that would hurt the company and they would have to be motivated.”

Still, the veteran agent allowed for the possibility of such vengefulness. “People in real estate,” Abbott said, “Can get into horrendous fights.”

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