Copyright battle teaches MLSs, tech companies a costly lesson

When Jonathan Cardella founded NeighborCity in 2007, his big idea was to use objective statistical data to match consumers with local, experienced, high-performing agents — and take a cut of an agent’s commission when deals successfully closed.

“Opinions come from a certain context that is lost. Numbers don’t lie,” Cardella told Inman in an interview at the end of 2009.

But the question of where NeighborCity got those numbers — and other listing information that powered its listing and referral site — eventually landed the company in hot water.

In the spring of 2012, two of the biggest multiple listing services in the country filed copyright infringement suits against the owner and operator of NeighborCity, American Home Realty Network.

The suits were filed not long after NeighborCity updated profile pages for 850,000 agents on its site that featured agent scores and performance metrics based on the agents’ transaction histories.

NeighborCity later filed antitrust suits against both MLSs and included the National Association of Realtors as a defendant in its counterclaim against MRIS.

The tech company alleged that the copyright infringement suits, one of which had financial backing from NAR, were part of a “concerted anti-competitive group boycott” organized by NAR to drive NeighborCity out of business and eliminate it as a provider of services to real estate brokers.

The fallout from those cases would cause NeighborCity to change parts of its business model, but retain its core matching service. It would also serve as an expensive lesson for MLSs about documenting copyright ownership and as a warning for tech companies eyeing a business model similar to NeighborCity’s.

Taking up the MLS banner

The MLSs that sued NeighborCity were Rockville, Maryland-based Metropolitan Regional Information Systems Inc. (MRIS), which has more than 45,000 members, and St. Paul, Minnesota-based Regional Multiple Listing Service of Minnesota Inc., which does business as NorthstarMLS and has nearly 15,000 members.

What was it like to be one of the MLSs leading the charge?

“I would call it unpleasant at best, but necessary. Somebody had to do it,” said NorthstarMLS President John Mosey.

NorthstarMLS wanted to make sure its subscribers’ intellectual property rights were protected, but it also quickly became apparent that NeighborCity’s actions affected everybody in the real estate business, Mosey said.

During the discovery phase of litigation, NorthstarMLS found out that NeighborCity had not been obtaining the MLS’s data from a broker that was not licensed to share it, as the MLS had originally suspected, Mosey said.

Instead, NeighborCity had been mostly scraping the data from the only site where virtually all 800-plus MLSs in the nation display their data: realtor.com. Cardella denied this.

While Mosey found the judicial process itself “frustrating” and “interminable,” he is pleased that the outcome made the consequences of “helping yourself without consideration of the ownership of the listing content” clear to anyone else coming along.

Had NeighborCity stopped “poaching” photos from MLSs early on, he said, there would never have been a cause for action in the first place and “a boatload of money would have been saved on both parties’ part.”

Mosey declined to say how much the MLS had spent on the litigation.

“I don’t want to go into that because it hurts,” he said. “We were supported very well by the national association and the state association and other MLSs in the country and I couldn’t be more grateful.”

NAR contributed “a little north of $700,000,” according to NAR Associate General Counsel Ralph Holmen. Mosey declined to say which MLSs had provided assistance, saying he had not asked for their permission to disclose names.

“We’re grateful for all the help we got and we’ve been grateful for the thanks we’ve received for having taken this role along with MRIS,” Mosey said.

Mosey is a founding board member of REDPLAN Inc., a nonprofit that launched last year to help real estate organizations safeguard their information from data pirates.

“I’m hopeful that the REDPLAN concept will be successful in large part because I’m not so sure that organizationally a company like ours could tackle this again in the near term,” he said.

“Somebody else would have to step up.”

An economist weighs in

To Longwood University economist Scott Wentland, both sides in these cases have a legitimate argument that they make the market better.

“Anytime that a website makes the market more transparent, that can help buyers and sellers. That’s obviously beneficial for the market,” he said.

“But the other side of this, which is important … was that the information that’s provided by the MLS isn’t free. It didn’t come from nothing.”

The information in the MLS is the result of time and effort put in by individual agents, and the information might not be in its current form if the MLS didn’t exist, Wentland said.

“Real estate is all about matching buyers and sellers. The MLS helps agents do that. But that’s what NeighborCity is about, too. It’s about transparency in this market,” he said.

Consumers always want free information, but it’s not obvious to him that they should get it, he said.

“If these pictures are available to everybody, you’ll potentially ruin the incentive for the agent to join the MLS. The agent would just put their stuff on NeighborCity and the MLS would cease to exist,” Wentland said.

He reviewed an appellate court opinion in favor of MRIS issued last year and noted that, from the average homebuyer perspective, it makes real estate agents more powerful.

“That could be a good thing, but from the NeighborCity perspective, it’s probably not a good thing,” he said.

Claims and counterclaims

The lawsuits, filed in March and April 2012, alleged that American Home Realty Network (which does business as NeighborCity) reproduced, displayed and distributed copyrighted listing content, including photographs, without the MLSs’ authorization.

The complaint filed by MRIS also alleged the company violated copyright laws through “the creation of unauthorized derivative works incorporating the MRIS database.”

In November 2013, a federal district judge in Maryland ruled NeighborCity should be allowed to argue antitrust claims the company brought against NAR, noting that the trade group had launched a pilot agent ratings program earlier that year, and in doing so became a NeighborCity competitor.

That pilot program has since fizzled, after reportedly low adoption rates by agents and lack of support for the program from NAR.

In March 2013, HomeServices of America subsidiary Preferred Carolinas Realty Inc. became the first brokerage to file a copyright infringement suit against NeighborCity.

A month later, NeighborCity added HomeServices of America and another one of its subsidiaries, Edina Realty, as defendants in NeighborCity’s antitrust suit against NorthstarMLS.

Settlements and unfinished business

The brokerages were first. In June 2014, HomeServices of America, Preferred Carolinas Realty, Edina Realty and NeighborCity reached a settlement resolving all litigation between them.

NeighborCity agreed to “no longer copy, display, or otherwise use real estate property listing photographs” belonging to HomeServices’ subsidiaries and affiliates as part of the settlement, but none of the parties admitted any liability, HomeServices said. No other settlement terms were disclosed.

In a Sept. 15 court filing, NeighborCity and MRIS agreed to dismiss all claims between them as part of a settlement agreement. As part of the dismissal, the court made a preliminary injunction granted against NeighborCity in November 2012 permanent. The injunction bars NeighborCity from using any photograph or image bearing an MRIS copyright notice.

A day later, NorthstarMLS announced that the MLS’s copyright claims against NeighborCity had been settled. In October, a Minnesota federal court threw out out NeighborCity’s antitrust claims against NorthstarMLS and granted a permanent injunction blocking NeighborCity from using photographs, agent remarks and public remarks for which NorthstarMLS owns or co-owns the copyright.

NeighborCity has filed a notice of appeal to challenge the court’s ruling on its antitrust claims against NorthstarMLS.

NAR continues to face NeighborCity’s antitrust claims. The 1 million-member trade group has asked the court to throw out those claims, but it’s impossible to know when the judge will make a decision, said NAR’s Ralph Holmen.

“We think it’s straightforward and should be sooner rather than later, but it’s in entirely in the judge’s hands,” he said.

What was and was not resolved

Because these cases were settled, some questions are left up in the air. The court did not rule on whether NorthstarMLS’s and MRIS’s copyright claims were valid. Each side says they would have prevailed if the cases had gone to trial, but we may never know.

But there are at least some things the industry gained from the copyright cases, according to Brian Larson, an attorney at Larson Skinner PLLC. Larson represented NorthstarMLS in its case against NeighborCity, but did not speak to Inman on NorthstarMLS’s behalf or on behalf of any other client.

“First, I think (the cases have) established important precedents regarding the ability of MLSs to collect, register and enforce copyrights, particularly the text and photos,” Larson said.

A couple of appellate court opinions, one in the MRIS case and one in an unrelated case in Alaska, held that when a compilation of collective work (such as a listing database) is registered with the U.S. Copyright Office, the individual components of that database (such as photographs) do not have to be individually registered for them to be copyrighted.

Individually copyrighting each photograph, along with the compilation, on a quarterly basis would be expensive and impractical for an MLS, Larson said.

The appellate court opinion in the MRIS case also established that copyright can be assigned or transferred (say from a broker to an MLS) in a click-through electronic agreement, so MLSs do not have to rely on paper agreements, Larson said.

However, the court did not make a decision on whether subscribers’ assent to MRIS’s electronic terms of use agreement actually constituted a valid agreement — just that its electronic form does not prevent it from being valid.

MRIS declined to comment for this story.

Limited as the results may be, the cases can be instructive to MLSs in terms of the approaches they should take in documenting copyright ownership, Larson said.

“MLSs should have written participant and subscriber agreements with all of their brokers and agents,” he said.

“It might be worth changing your listing input system to track whether the listing agent is the author of the content.”

MLSs should also register their MLS compilations on a quarterly basis and think about the kind of watermarks they should put on MLS photos, Larson said.

“(NeighborCity) made the argument that MLS are misusing copyright law. There are ways that MLSs could avoid those arguments if they did their watermarks appropriately,” he said.

Another big benefit to the industry as a result of these cases is that they served as a warning, Larson said.

“If you base your business model on taking creative works from MLSs and brokers without permission, it’s going to be at risk,” he said.

“You don’t want to be putting yourself in a place where MLSs and brokers regard you as infringing their copyrights.”

That makes it less likely that the next company that comes along is going to scrape proprietary data to populate its systems, Larson said.

Lastly, the litigation has already caused at least one big change the industry may smile upon: changes to NeighborCity’s business model.

Changes at NeighborCity

Jonathan Cardella is what Larson has called a “true believer,” fighting tooth and nail against what he perceives as corruption in a world of organized real estate. He settled, but he got there kicking and screaming.

“I was dead set on going to trial,” Cardella said, but NeighborCity’s insurer, Travelers Casualty Insurance, was allowed to settle out the claims and did, paying the MLSs and brokerages “substantial sums” to do so, according to a court filing.

“I intended to win. This to me is not what I had in mind. A draw is not OK,” Cardella said.

“I think we came really close to effectuating some real change but fell a yard short,” he added.

He can’t say much about the settlements due to confidentiality, but he estimates that all parties combined spent multiple millions of dollars on the cases.

NeighborCity itself didn’t spend much — Cardella doubted it was more than $100,000 with the rest paid by the insurer — but he admits that part of the cost of the litigation was that it took away the focus of the company at the price of faster growth.

Still, NeighborCity learned how to change its business model so that the company wasn’t susceptible to lawsuits any longer and “that was worth something,” Cardella said.

NeighborCity.com no longer includes photographs on its listing pages, replacing them instead with Google Street View images. Listings on the site also no longer feature listing descriptions, also known as “agent remarks.”

While the changes may make the site less attractive to consumers, the company’s value lies in helping people pick the right agents, Cardella said, and the lawsuits haven’t affected that part of the business. NeighborCity continues to rank agents according to their transaction history.

“The moral of the story is you can’t stop agent rankings by suing the hell out of everybody,” Cardella said.

“Hopefully they will think twice before suing another company.”

He declined to say how exactly NeighborCity obtains transaction data, except to say that it comes from agents and brokers, not MLSs. He added that transaction history is all factual and no one can copyright facts.

“What we realized from our case is that no one can own all that stuff. A fact is a fact. You can own the layout or the container, that arrangement, but you can’t own the facts,” Cardella said.

NeighborCity gets threatened daily from agents who don’t like their ratings, he said.

Agents don’t like having numbers assigned to them, but if agents are going to hold themselves out as fiduciaries, that “means disclosing your performance,” he said.

Cardella would like to see transaction information everywhere. Instead of “pandering to advertisers” with rating systems where agents get an average of 4.8 stars out of 5, he said, “let’s drive real innovation and real value by helping the consumer. That’s still my philosophy.”

He sees hope in that the idea of agent ratings and rankings seems to be becoming more mainstream.

“Perhaps eventually MLS data will be used for that. I think we’re getting closer — I don’t think we’re there yet,” he said.

Cardella is no longer CEO of NeighborCity, though he remains chairman of the company’s board.

“It’s been fun. I definitely don’t regret doing it,” he said of the lawsuits.

“We’re looking to rebuild NeighborCity, too. Give it a fresh start again in terms of remaking some of the website technology,” he added.