Revived Putative Class Action Against Zillow Brings the Legality of its Co-Marketing Program Center Stage Again

By: Steven J. Kubik

A class action lawsuit against Zillow Group, Inc. (“Zillow”), its CEO, and CFO was recently revived despite the Court granting Zillow’s motion to dismiss a prior version of Plaintiffs’ complaint last year. After considering the second amended complaint, the Court denied Zillow’s most recent motion to dismiss.[1] Most notably, the Court ruled that based on the Plaintiffs’ allegations, Zillow designed its co-marketing program[2] to violate RESPA, and such violations were occurring. Mortgage lenders that permit the use of Zillow’s co-marketing program should take note and consider the on-going risk of doing so.

Brief History

Zillow has been plagued with legal woes over its co-marketing program for the past several years. In May 2017, Zillow announced that the CFPB was investigating their co-marketing program for compliance with the Real Estate Settlement Procedures Act (RESPA). This investigation quickly prompted a civil suit in the Western District of Washington against Zillow, its CEO, and CFO, alleging securities fraud claims under Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5. Among other things, the shareholder-Plaintiffs alleged misstatements by Zillow regarding its co-marketing program’s compliance with RESPA and the CFPB’s investigation of the same.

In June 2018, Zillow announced that the CFPB “had completed its investigation [and] that it did not intend to take enforcement action.”[3] Thereafter, in October 2018, the Court in the civil suit granted Zillow’s motion to dismiss. The Court dismissed the action because Plaintiffs failed to satisfy the heightened pleading standards for securities fraud claims, but granted Plaintiffs leave to amend and file a second amended complaint. Naturally, Plaintiffs’ filed a second amended complaint attempting to cure its prior pleading defects, and Zillow filed another motion to dismiss. After considering Plaintiffs’ second amended complaint, the Court denied Zillow’s motion to dismiss and ruled that plaintiffs had largely cured the defects of the prior complaint.

The Court: Based on the Allegations, Zillow’s Designed its Co-Marketing Program to Violate RESPA

Plaintiffs’ claims primarily allege that Zillow’s co-marketing program was designed to allow participating real estate agents to refer mortgage business to participating lenders in violation of Section 8(a) of RESPA, 12 U.S.C. §§ 2601, 2607.[4] Plaintiffs further assert that Zillow made a series of misleading statements regarding Zillow’s legal compliance by failing to disclose the co-marketing program’s illegality, which caused Plaintiffs to purchase Zillow stock at artificially inflated prices.

Naturally, whether Zillow’s co-marketing program violates RESPA has taken center stage as crucial to determine whether Zillow made any misstatement/omission to Plaintiffs. Much to the chagrin of mortgage lenders, the Court ruled that the co-marketing agreement violates RESPA based on Plaintiffs’ allegations:

“Based on the [the second amended complaint], the Court can draw a reasonable inference that Zillow designed the co-marketing program to allow agents to provide referrals to lenders in violation of RESPA, and that such referrals were occurring.”[5]

The New Whistleblower Allegations.

Plaintiffs’ second amended complaint added factual allegations from two anonymous witnesses who worked at Zillow during the relevant time period. Below are some of the most noteworthy allegations from these witnesses’ affidavits:

  • Co-marketing lenders received fewer leads than their co-marketing agents but continued to participate in the program because lenders expected real estate agents to refer business;
  • “[E]very agent and lender knew” that the co-marketing program was for the lender to get leads and referrals;
  • “[E]veryone knew” that the lenders paid the agents for leads and referrals.
  • Zillow trained sales representatives to track the number of referrals lenders received from the co-marketing program, and ask agents “how much they did in lender referrals” in quarterly business assessments.[6]

These witnesses’ allegations were sufficient to support an “agreement or understanding for the referral of business” based on a “pattern or course of conduct” in violation of RESPA, the court said, with occurring violations based on the testimony of the anonymous witnesses regarding how participants were using the co-marketing program and the structure of the program itself. The court observed:

“The second amended complaint contains particularized facts alleging that there was an understanding between Zillow and the co-marketing participants, that in exchange for lenders paying a portion of agents’ advertising costs, lenders would receive mortgage referrals from their partnering agents. That arrangement – although not ostensibly based on an oral or written agreement – is evinced by participating agents allegedly providing, and Zillow allegedly tracking, referrals to participating lenders.”[7]

The Court Rejects Zillow’s Safe Harbor Defense.

The Court also concluded that Plaintiff’s allegations supported an inference that the co-marketing program did not fall within the RESPA “safe harbor” exception that would apply if the pricing was consistent with market value. In light of new allegations that the pricing structure of the co-marketing program was significantly more expensive than comparable product offerings, and statements from the anonymous witnesses describing advertisers’ excessive payments, the Court held that the second amended complaint included factual allegations sufficient to draw a “reasonable inference” that Zillow had designed the program in a way that fell outside RESPA’s safe harbor provision.[8]

Take-Away for Mortgage Lenders.

As a reminder, RESPA Section 8 grants borrowers a private cause of action for violations. Accordingly, it’s only a matter of time before borrowers lodge similar allegations involving Zillow’s co-marketing program against mortgage lenders in civil lawsuits. Lenders using Zillow’s co-marketing tools should consider abandoning the practice or finding alternatives unless Zillow implements additional safeguards. Zillow will continue to garner attention as this case is litigated, and with a current trial date set for January 11, 2021, a quick resolution is doubtful.


[1] In re Zillow Group, Inc. Securities Litig., No. C17-1387-JCC, 2019 WL 1755293 (W.D. Wash. Apr. 19, 2019), also available here (Docket No. 54, at 1).

[2] Zillow’s co-marketing program allows mortgage lenders to pay a percentage of real estate agents’ costs for placing a listing on Zillow, in exchange for the lender appearing in the listing.

[3] Zillow Group, Inc. Form 8-K dated June 22, 2018, available here.

[4] Section 8(a) of RESPA provides that “[n]o person shall give and no personal shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” Id. § 2607(a). Simply put, Section 8(a) prohibits, in relevant part, paying for a referral (e.g., a mortgage lender paying/providing a thing of value to a real estate agent for the referral of a borrower).

[5] Docket No. 54, at 9-10.

[6] Id. at 6-7.

[7] Id. at 10.

[8] Id. at 14.