Inman News reports that the Sixth Circuit Court of Appeals has ruled against Realcomp II in a years-long case:
Michigan’s largest multiple listing service “unreasonably restrained competition” among real estate brokers by refusing to transmit exclusive agency property listings favored by discount brokers to Realtor.com and other public-facing Web sites, a federal appeals court has ruled.
At issue was whether Realcomp’s refusal to transmit Exclusive Agency listings to places like Realtor.com was anti-competitive. Since Realcomp’s policy only applies to a tiny fraction of listings in the market, Laurie Janik, the outgoing General Counsel of NAR, suggested this wasn’t that big a deal:
NAR General Counsel Laurie Janik said that because other MLSs don’t have similar rules in place, the appeals court ruling is unlikely to have a wider impact. “I’m sure it’s extremely disappointing news to the folks at Realcomp, but it’s not the kind of case that’s going to send ripples across the rest of the industry,”
That’s especially true since the NAR’s MLS Policy prohibits the MLS from excluding Exclusive Agency listings from feeds, as Realcomp had done.
Nonetheless, I respectfully disagree with Ms. Janik. I think this ruling will send ripples across the rest of the industry. At the very least, it should since the next case that comes down the pike will surely look at Realcomp II, Ltd. v. FTC as precedent.
(By the way, for the non-lawyer folks, this case is especially significant because it came from the Sixth Circuit Court of Appeals. The only higher court is the Supreme Court. At least within the Sixth Circuit, which covers Kentucky, Michigan, Ohio and Tennessee, this ruling is binding. And throughout the country, the ruling will be extremely persuasive.)
Before we dive into why I think this ruling is significant, since I am doing law-blogging here, I have to say that this is in no way a legal opinion (I mean, c’mon, it’s a blog post) and that you should consult your own qualified legal counsel.
Perhaps a few of you will want to read the full opinion, which is available here. The basic holding is that internal rules of an MLS that restricts Internet distribution of one kind of listing is anti-competitive. I read that as the actual holding.
So Janik is correct in the sense that if the MLS doesn’t distinguish between the kinds of listings (Exclusive Agency vs. Exclusive Right to Sell) in its Internet distribution policies, this ruling doesn’t apply.
However, the reasoning that the Court uses here to reach the holding has far wider applicability. The Court’s analysis is in three big parts:
- Is there Market Power?
- Is the policy anti-competitive?
- Even if it is, are there any pro-competitive benefits to justify it?
Yeah, yeah, I know I’m condensing things way too much, and we can get into all the different shades of those, but… hey, you can read the ruling for yourself for such detailed analysis, or pay your attorney (or me!) for more detailed analysis. 🙂
What I find so interesting is that the language the Court uses in each of these analytical steps.
This one was brief, because Realcomp didn’t really contest that it had market power. No MLS would really contest that, since the MLS almost by definition is an organic monopoly. But it is interesting to see how the Federal Trade Commission and the Court really took “network effect” into consideration in determining market power:
The value of an MLS to home sellers (or their representatives) increases with the number of home buyers (or their representatives) using the site, and, similarly, the value to home buyers increases as more home sellers list their properties on the MLS.
In any event, this one is easy: the MLS has market power, and will in virtually all cases.
This really is the heart of the ruling. The question is whether the policy in question is or is not anticompetitive. There are certain types of activities and policies that are presumptively anti-competitive, like excluding certain kinds of brokerages from membership altogether, but that’s not at issue here. The other kinds of activities/policies are ones that might have anti-competitive tendencies:
Because Realcomp possesses substantial market power, we next evaluate the anticompetitive tendencies of the Realcomp website policy. Realcomp does not regulate rates of commission, offers of compensation, or other price terms; thus, we examine the effect of Realcomp’s restrictions on consumer choice, specifically, the reduction in competitive brokerage options available to home sellers. [Emphasis mine]
The Court goes through all sorts of precedents and so on, talking about nascent threats and such, but the bottom line is that the the Court (and the FTC which started the whole thing) looks at whether the policy tends to inhibit competition. Then we get to this:
Nonetheless, similar to excluding discount brokers from the MLS altogether, the website policy limits exposure of discount listings. “[L]istings [are] not . . . distributed as widely as possible” due to the website policy, “resulting in inefficient sales prices,” which is the same kind of economic harm caused by MLS exclusions. Thompson v. Metropolitan Multi-List, Inc., 934 F.2d 1566, 1580 (11th Cir. 1991); cf. Ind. Fed’n, 476 U.S. at 461–62 (holding that proof of higher prices is not required in the context of “[a] concerted and effective effort to withhold (or make more costly) information desired by consumers for the purpose of determining whether a particular purchase is cost justified”) [Emphasis mine]
Am I the only one with an eyebrow raised here? The Court goes on:
Given the significance of the Realcomp MLS to the advertising of real-estate listings, and given the role of the internet in providing consumers with the ability to self-provide certain real-estate services, substantial evidence supports the Commission’s conclusion that Realcomp’s website policy is likely to have an adverse impact on competition by restricting consumer access to discount listings. [Emphasis mine]
Um, “significance of the MLS to the advertising of real-estate listings”? What’s that about “given the role of the internet in providing consumers with the ability to self-provide”?
We turn to the FTC ruling that Realcomp challenged to find out more about this “role of the internet” business:
The Realcomp Policies are, in essence, an agreement among horizontal competitors to restrict the availability of information that consumers can use to evaluate the prices and other features of competing providers’ offerings, the effect of which is to make such information more difficult and costly to obtain. Such practices have been found to be particularly problematic where, as here, the incumbent providers are restricting such dissemination of information so as to impede the marketplace participation by relatively new entrants offering low-cost or discounted products or services….
Realcomp’s Policies restrict (albeit not destroying entirely) the ability of low-cost, limited service brokerages to get their listings included on heavily used public websites, thereby making it more difficult and costly for them to participate fully in the marketplace. As a result, these policies tend to alleviate downward pricing pressure on traditional brokers’ commission-based pricing model. We accordingly conclude, under the first step of our Polygram analytical framework, that the Realcomp Policies are inherently suspect and, thus, presumptively unreasonable. [Emphasis mine]
Got that? Restricting the availability of information that consumers can use to evaluate the prices and other features, such that such information is more difficult to obtain, is a problem.
The Pro-Competitive Counter
Now, the deal isn’t done just because the Court or the FTC finds a policy to have anticompetitive tendencies. If there are enough justifications, particularly ones that enhance competition in the marketplace leading to lower prices for consumers, then maybe it’s ok.
Realcomp put forth two justifications.
First, Exclusive Agency listings create a “free-rider” problem because listings that don’t offer cooperation and compensation are using the investment of those who do. (That is, with cooperation, TWO brokers who pay the MLS dues are involved; without it, only ONE is.)
Second, Exclusive Agency creates a “bidding disadvantage” for buyers who are represented by a broker over buyers who are not, since the seller would have to pay cooperation directly to a represented buyer’s broker, but would not to someone who was not represented.
The Court in Realcomp didn’t buy the MLS’s reasons. Let’s take them in reverse order.
On the “bidding disadvantage” issue, the Court essentially laughed at Realcomp’s argument:
The website policy also purportedly eliminates a “bidding disadvantage” faced by a buyer represented by a cooperating broker when bidding against an unrepresented buyer in an EA transaction. Pet’r Br. at 56. But rather than enhance competition, such a policy insulates cooperating brokers’ commissions from competitive pricing pressure. As the Commission found, the bidding-disadvantage justification “reinforces the conclusion that [the policies] have an anti-competitive effect” by deliberately protecting established commissions and preventing the reduction in the cost of selling a home.
Yeah, that’s the equivalent of a beatdown in a legal opinion, which essentially says, not only is your excuse weak, but it actually proves that what you were doing was trying to inhibit competition.
On the “free-rider” issue, look at this language:
The ALJ concluded that, without the website restrictions, home sellers with EA agreements “would free ride on the Realcomp members who invest and participate in the MLS through the payment of dues and who otherwise undertake to support the cooperative endeavor of the MLS.” Pet’r App. Vol II at 182 (Dec. at 121). However, as the Commission found, the circumstances of this case do not establish free-riding. EA home sellers making use of the Realcomp MLS still must employ a listing broker who is a paying Realcomp member. Realcomp charges equal membership fees to all users. Therefore, Realcomp’s services to EA home sellers are compensated through payments of the EA seller to her listing broker, who in turn pays Realcomp for the benefit of participation in the MLS. [Emphasis mine]
The Court is saying, it seems to me, that the MLS is getting paid adequately by the member who takes an Exclusive Agency listing. There is no “free-rider” problem simply because TWO members are not involved.
In a real way, the Court is suggesting that treating members differently on the basis of an economic argument (“free-rider”) is going to be problematic. This is especially the case since earlier cases have firmly established that the MLS cannot exclude discount brokers or alternative-model brokers from membership, and since the market power of the MLS is undisputed.
Application to the Syndication Issue
While I do hate talking even more about syndication, I’m making an exception because it isn’t every day you get a Court of Appeals ruling. Let me give you the bottom line first.
After this ruling, I think policies like the one adopted by CLAW out in the LA area are going to be problematic. I further think that policies of non-syndication by the MLS may have to run the gauntlet as well, and unless very carefully structured, could run afoul of antitrust law. Let’s take a look.
Discrimination Against Syndication
First, policies like CLAW’s, which still engages in syndication but in a discriminatory fashion, will be found to be in violation of antitrust should any litigation arise.
Market power, again, will not be an issue. The issue will be whether the policy has anticompetitive tendencies, including attempting to defend against “nascent threats”. Importantly, the Court stresses time and again that actual harm to consumers need not be shown (even though it then takes time in the Realcomp opinion to lay out a bunch of facts and studies). If it appears under a complicated “rule of reason” analysis that a policy tends to inhibit price competition, it will be found to be anticompetitive.
The critical step here, I think, is the amount of emphasis that both the Court and the FTC (which the Court upheld) places on the importance of the Internet, and consumer access to information over the Internet.
The Court’s citation of the Thompson decision is meaningful here:
“[L]istings [are] not . . . distributed as widely as possible” due to the website policy, “resulting in inefficient sales prices,” which is the same kind of economic harm caused by MLS exclusions.
The Thompson case was about whether MLS membership can be conditioned on Association of REALTORS membership. The Realcomp court is equating MLS internet policy with MLS membership policy here. That seems significant to me.
Furthermore, the Realcomp Court is more or less saying that listings that are not distributed as widely as possible results in economic harm. Granted, the context of that was the Exclusive Agency listings, but a lawyer should be disbarred if he fails to cite this case all over the place in any dispute that arises going forward. Take a look at this language from the FTC ruling:
Our examination of the nature of the restriction leads us to find that the Realcomp Policies create significant competitive hazards. By their nature, the Realcomp Policies tend to impose a significant impediment to access to limited service listings by contributing brokers seeking homes on behalf of buyers on the MLS, and by buyers directly seeking homes through public websites. [Emphasis mine]
Leaving the legal world aside for a moment, this elevation of the internet just makes sense. In 2014, it’s impossible to argue that the internet is not important. The industry’s own literature and discussion talk about just how important the internet is to the real estate brokerage industry. So it doesn’t shock the imagination that digital distribution policies are now as important as membership exclusion policies.
Given that, if the MLS continues to provide syndication to third party portals, but discriminates against syndication feeds (in CLAW’s case, it’s a 48 hour delay), then I can’t see how the FTC or a court would not find that to be anticompetitive.
Not Syndicating At All
A different issue is when a MLS decides not to syndicate at all, and leave such things up to the brokerages themselves. Such is the policy of companies like Austin Board of REALTORS (ABOR).
This is obviously less problematic than straightforward discrimination against syndication. But again, given the logic and language of the Realcomp court, I can see some problems.
First, if an MLS does not syndicate, but does send listings to certain Most Favored Websites (such as the MLS’s own public facing website), I’m not sure how that would be classified as anything other than anticompetitive. ABoR, for example, still sends listings to Realtor.com, AustinHomeSearch.com (owned by ABoR), and TexasRealEstate.com (owned by Texas Association of REALTORS).
Second, even if an MLS doesn’t do Most Favored Websites type of a deal, I seriously wonder about the legality of IDX after the Realcomp ruling. The basic idea behind IDX is that if you’re a member of the MLS, a “participant”, then you can have access to the listings of other participants, under various rules governing IDX. At the heart of IDX is quite obviously the importance of the internet. From a rule-of-reason perspective, the entire point of IDX is to leverage the power of the internet for the benefit of the MLS participant broker/agent.
So keeping IDX in place, while turning off syndication… I can’t imagine how a court will not find that to be anything other than anticompetitive. An interesting note on that is that during the discussion of market power, both the FTC and the Court defined the “market” of the MLS as including “supply of MLS services”. Well, what might that be, exactly, in the Court’s eyes?
A hint comes from the FTC ruling itself:
The creation of the MLS system has been one of the most significant competitive developments in the real estate industry. IDF 428. It is the most effective marketing tool and substantially more important than any other method of promoting the sale of residential real estate in southeastern Michigan. IDF 430. An MLS exposes listings to all other MLS members, “dramatically increasing” the listing brokers’ marketing reach. RX 154-A-026-027; Sweeney Tr.1315 (the MLS provides “a huge buyer stream available” for brokers’ listings).
The FTC and the Court seem to think that the MLS is essentially a marketing tool, and its value is tied to increasing the listing brokers’ marketing reach, and providing a stream of buyers.
Question for the audience: If this suit were brought today, would the FTC include major portals like Zillow, Trulia, and Realtor.com as a “significant competitive development” that “dramatically increases the marketing reach of listing brokers” and provides a “huge buyer stream” to brokers? If the answer is Yes, as I think it would be, then in the eyes of the FTC and the courts, are these portals not a competitor in the market for “supply of MLS services”?
Of course, simply because a policy might have anticompetitive tendencies does not mean it’s an antitrust violation. The MLS will have the burden of proof in showing that there are pro-competitive reasons for those policies.
The key question then is whether there is a pro-competitive justification.
Whenever the syndication debate goes down, there are a few major justifications put forth.
The most important is the issue of data accuracy. ABoR’s press release includes this:
Cathy Coneway, President of ABoR, explained: “Unlike REALTOR® organizations, third-party websites that receive syndicated data are not regulated to provide reliable property information or to protect consumers through the REALTOR® Code of Ethics. This lack of regulation has resulted in outdated, inaccurate property information being displayed online that disappoints homebuyers and frustrates sellers.”
I’m using ABoR as the example because it is the most recent, but every MLS that has made similar decisions, as well as brokerages that have stopped syndication, have cited data integrity as justification for not syndicating.
The Realcomp Court:
A full rule-of-reason inquiry “may extend to a ‘plenary market examination,’” Continental Airlines, Inc. v. United Airlines, Inc., 277 F.3d 499, 509 (4th Cir. 2002) (quoting Cal. Dental Ass’n, 526 U.S. at 779), which may include the analysis of “‘the facts peculiar to the business, the history of the restraint, and the reasons why it was imposed,’” id. (quoting Nat’l Soc’y of Prof’l Eng’rs v. United States, 435 U.S. 679, 692 (1978)), “as well as the availability of reasonable, less restrictive alternatives,” id. [Emphasis mine]
If the FTC or a court were to look at the data accuracy issue under such an analysis, would they find that there are reasonable, less restrictive alternatives to shutting off syndication to preserve data integrity?
Like, for example, the existence of the IDX feed? Or the feed that MLS sends to the “Most Favored Website”? Keep in mind that the MLS holds those up as shining examples of trustworthy, accurate information.
So if an anti-syndication policy is found to have anticompetitive tendencies, the FTC/courts might ask, “Why not just provide these already existing, totally accurate data feeds to the portals instead of engaging in anticompetitive behavior?”
The MLS Is Not A Public Utility
The second major justification is that the MLS is a by the members, for the members, of the members business cooperative whose whole raison d’etre is to benefit the members. It is not a public utility, and the copyrighted listing information held inside the MLS can, may, and should be used to benefit the members, not some third-party website.
The issue here is that this argument is so very closely tied to the “free-rider” problem that the Sixth Circuit addresses in Realcomp. The rejection of the free-rider argument by Realcomp amounts to the Court telling the MLSs that they make their money from the subscription fees they charge. If that’s not enough, then charge more, but don’t bring in the “free-rider” issue.
Here’s the thing. While Zillow itself may not be relevant to that analysis, since it truly is a separate, third-party, well-capitalized company, the brokers and agents who use Zillow are MLS subscribers. The Realcomp court’s restraint of trade analysis was focused on MLS subscribers with “alternative models” that put price pressure on traditional brokerages. They found that forcing listing brokers who have Exclusive Agency agreements to join another MLS without such restrictions, or do other things to get around Realcomp’s policy, was anticompetitive.
Why wouldn’t they do the same when it comes to syndication?
Zillow, Trulia, et. al., cannot stay in business without somebody paying them. Those somebodies paying them are real estate brokers and agents, the vast majority of whom are REALTORS and subscribers to the local MLS. When the MLS ceases syndication — while keeping up IDX and Most Favored Websites treatment — those brokers and agents have to take on additional costs in time or money, and it becomes more difficult for them to compete.
This is a straightforward argument applying the logic of Realcomp v. FTC to syndication. No one has to go to making the MLS a public utility; the case will be about making it harder for Zillow subscribers to compete with those who do not.
I have a feeling that this argument will be especially powerful if the larger, more established brokerages in the MLS have spent huge sums on their own websites, have tech staff to do direct syndication, etc., and the Zillow subscriber is some newbie, a mom-n-pop independent who was relying on the MLS to send listings to Zillow.
Again, ABoR ceased syndication in large part to “address concerns about the business practices of non-REALTOR® consumer websites”. And few people in real estate like the business practices of third-party portals, whether it is that they charge to enhance listings (“use my data and then force me to pay for it?”) or they send leads to paying customers (“three-headed monster”) or whatever. The most common rallying cry is that the leads on listings should go to the listing broker/agent.
But as we see above, the Realcomp court’s analysis focused on MLS subscribers who were using alternative business models. They even want to protect “nascent threats” to existing models. The whole goal of antitrust law, if you will, is to threaten incumbents.
Perhaps there are brokerages/agents out there who use Zillow to create massive lead flow to do buyer agency with rebates. Maybe there are models who use third-party websites and the “three headed monster” to offer B2B brokerage services to agents at lower cost (i.e., higher splits).
Whatever it is, after Realcomp, would a court really look with favor on an organized local monopoly with market power (undisputed, remember) taking an interest in the business models and business practices of companies and their customers — who are paying subscribers of the MLS?
Wouldn’t that analysis by FTC/courts take into account that the “leads on listings should go to the listing broker” is completely, 100% violated by the entire structure of IDX? After all, the whole point of IDX is to use someone else’s listing to capture the buyer lead on that listing, isn’t it?
There may be other justifications that I’m not thinking of right now that could carry the day. But the overall thing here is to keep in mind that the courts are looking at whether those justifications have pro-competitive tendencies, defined almost solely as driving prices down.
In light of the Realcomp ruling, which elevates MLS policies governing distribution of listings over the internet as the equivalent to excluding people from the MLS itself, one wonders how many MLS rules there could be with pro-competitive, price-lowering tendencies.
Chances are, most people will look at the Realcomp ruling and not worry too much, especially since Laurie Janik pretty much said not to worry. The tut-tutting will be over the $3.5 million that Realcomp has to pay to settle the case, and the $200 per subscriber charge.
It is probably not shocking to regular readers that I’m taking the contrarian position here. [Ed: I’m shocked, shocked to see gambling going on here!] I think Realcomp v. FTC is a potential blockbuster for many of the issues at the heart of the industry. I think it is a significant blow to the anti-syndication cause, and I would not be surprised to see this case cited time and again by lawyers suing the MLS in the future around internet listing distribution rules.
One way out might be to try something like what North Alabama MLS (ValleyMLS.com) is doing with MLS Direct Syndication under Kipp Cooper’s leadership. Maybe by crafting the right rules that impose no costs on subscribers to do syndication, but manage some of the worst abuses of the portals themselves, there may be a way for the MLS to control syndication without running afoul of antitrust laws.
But I do note that ValleyMLS has Most Favored Websites, and IDX still very much in place, distinguished from syndication. I don’t know that they’re immune from a Realcomp-based attack on what they’re doing. Perhaps their legal team can chart the way forward.
In any case, if you’re an MLS director or executive, I can only advise you to call your lawyer and get a solid legal opinion based on Realcomp v. FTC. If you want to know what to do strategically, there are a lot of experts and gurus and consultants you can call. (Ahem, including yours truly, *cough*.) But I would advise you to take this seriously.
Court of Appeals opinions do not come around that often, and only the Supreme Court can overrule them. This one will have major controlling and persuasive authority for years and years to come.
So ask somebody whether your policies are going to pass muster.
Your opinions and comments are, as always, welcome.