So my flight is delayed… for hours… which usually leads to drinking. I thought I might do something else instead.
Since I posted about the antitrust lawsuit filed against NAR and four large real estate companies, I’ve read a ton of comments from people who are not antitrust attorneys about why this case is frivolous, why it won’t go anywhere, etc. etc., blah blah blah. I’m thinking, “I did go to a top five law school, passed the Bar Exam, but I don’t know enough about antitrust law to really comment… but here are people who apparently know why there is no legal basis to this suit! REALTORS really do have superpowers!”
So in my flight delay boredom, I thought I would look through just a tiny bit of antitrust law and how things might play out.
I’m going to emphasize again that I am not an attorney (currently retired from NY Bar), and antitrust was never a focus of my studies. Given that antitrust is one of the most complicated areas of the law, I’m certain that I’m leaving things out, possibly getting things wrong, and so on and so forth. (If you are an actual antitrust attorney, and want to comment on this lawsuit, please contact me as I’d love to either interview you or have you on a podcast or perhaps have you write a guest post on this topic.)
At the same time, I thought it might be of service if I could shed a bit of light on how this lawsuit might go, what could be important and what is likely unimportant, just so real estate people are better informed as to the seriousness of this threat.
Because while you should not be panicking that merely filing a lawsuit means everything is over, neither should you blithely assume that everything is fine because of something about how sellers can negotiate commissions or your MLS allows $1 coop compensation.
The Grounds of the Lawsuit
First, note that this is a Sherman Act Section 1 claim. The basic allegation is that the defendants formed a conspiracy in order to engage in illegal price-fixing.
I found that this document from the American Bar Association was helpful in understanding how the court and the jury will be looking at this case, especially since that document includes jury instructions. Let’s summarize that briefly, shall we?
The claim of a Section 1 violation has four elements, which the plaintiff must prove at trial:
First: That there was a combination or conspiracy between or among the Defendants to fix the prices of (in this case) real estate commissions;
Second: That such combination or conspiracy constituted an “unreasonable” restraint on interstate commerce;
Third: That the Defendants’ business activities had a substantial effect or the potential of causing a substantial effect on interstate commerce and the Defendants’ challenged activities involve a substantial amount of interstate commerce; and
Fourth: That the Plaintiff suffered injury in its business or property as a proximate result of the combination or conspiracy.
If the lawyers bringing this lawsuit did not think that they could prove all four to a jury, they never would have filed the suit. As I pointed out in my first post, the law firms involved here are not your average ambulance chasers. They are extremely successful, extremely experienced big time corporate plaintiff’s lawyer firms who take on major corporations all the time and win. Most people have no experience with this caliber of litigators. Do not make the mistake of thinking that Cohen Milstein and Hagens Berman are like some of the real estate and personal injury lawyers you know.
So let’s look at those four elements.
Combination or Conspiracy for Unlawful Purpose
Laymen might get hung up on the word “conspiracy” as it brings to mind some sinister hooded figures in a dark cave or some such. In the antitrust context, it simply means more than one person/company coming to an agreement or an understanding. As the ABA guide above says:
A combination or conspiracy is formed whenever two or more persons or corporations knowingly join together to accomplish an unlawful purpose by concerted action. The essence of a combination or conspiracy is an agreement between two or more persons or corporations to violate or disregard the law. However, the evidence in the case need not show that the members of an alleged conspiracy entered into any express or formal agreement.
What a preponderance of the evidence in the case must show is that the Defendants knowingly came to a common and mutual understanding to accomplish, or to attempt to accomplish, an unlawful purpose.
To act “knowingly” means to act voluntarily and intentionally, and not because of mistake or accident.
This one seems like a slam-dunk for the plaintiffs to me. I mean, there is no doubt that NAR exists. There is no doubt that the Buyer Broker Commission Rule (and other rules) exist. Those rules are the result of a group of people meeting, discussing, and voting on and passing them. Nobody involved thought they were doing something other than debating rules and passing them. This is as voluntary and as intentionally as it gets.
The four named real estate companies all have executives who have been active members in NAR. At a minimum, they have communicated their views on a variety of issues and rules and policies to NAR staff and elected leadership over the years. Of course they did. NAR is a trade organization, after all.
So the “common and mutual understanding” between and among the defendants will not be a problem. The challenge will be to establish that what they came up with is to an “unlawful purpose.”
There, what the court and the jury will look at is whether the “price-fixing” (in this case, the sharing of commissions through cooperation and compensation, and the various rules at issue here) is a “natural result of ordinary competitive behavior in a free and open market” or if it “must have been contrary to the Defendants’ individual economic self-interest such that they would not have engaged in the practice if they were not conspiring to fix prices or otherwise restrain trade.”
This will be somewhat more difficult to prove. This is where all kinds of testimony about common practice in the industry for listing brokers to compensate buyer brokers will come into play. This is where history will come into play, since before the creation of buyer agency, real estate agents were “sub-agents” of the listing brokerage and actually worked for the seller.
But in my semi-informed judgment, this might not be insurmountable for the plaintiffs. There are plenty of brokerage firms out there who charge low listing fees, such as Redfin, but offer full cooperating compensation. What “natural result of ordinary competitive behavior” could explain that? “I’m only going to charge you 1%, but you really need to pay 3% to the other guy” doesn’t sound right to a member of the public who will be on the jury.
Furthermore, it’s not difficult to find all kinds of REALTORS all over social media (including on video) talking about how they won’t show houses that don’t offer the “full cooperating compensation.” In fact, here’s a video from 2015, from a Tom Ferry event:
Watch from 33:58, where he talks about offering more than 3% to incentivize buyer agents to bring their buyers around. I wrote about this back in 2015:
Randy actually says this: “I’ve been around the water cooler in my office enough to know that some agents aren’t gonna show the 2.5% [listings], everybody is gonna show the 3%, and everybody is going to go out of their way to show the 3.5%.”
The husband actually asks Randy if he thought agents really wouldn’t show the 2.5% homes. His response is, “Could you afford to give up a third of your income with a lower price commission?”
Randy makes it clear that to be in the 2.5% stack is a “tough road”, while being in the 3.5% or higher stack is “the best”. At one point, he calls the lower-price stack “the kiss of death.” He then crumples up the listing with the 2.5% and says, “That’s what agents do.”
So… how hard is this going to be to prove?
“Unreasonable” Restraint of Commerce
The question here is going to be whether cooperation and compensation practices are “per se” violations or not.
I really have no idea how this is going to play out. I imagine the plaintiff lawyers will argue that it is a per se violation, while defendant lawyers will argue that it is not.
But the way the complaint reads, the lawyers are prepared to argue both. Even if cooperation and compensation is not a “per se” violation, they’ll argue that it is an unreasonable restraint on the “Rule of Reason” analysis. The way that they have identified the relevant market area (20 MLSs) and talking about market power says they’ll go down that path if they can’t win the “per se” argument.
Thing is, if it isn’t a per se violation, then the court/jury will consider the totality of the circumstances, including whether the conduct tends to have pro-competitive advantages. There, I think the defense has some strong arguments.
The MLS does make it far easier for consumers to buy and sell houses, after all. Just look at commercial real estate as a comparison. Cooperation and compensation is at the heart of the MLS, as it incentivizes everyone to be part of it, and being part of it, incentivizes them to submit listings and keep the data accurate.
So it may be that the defense prevails under a “totality of circumstances” analysis. As Legal Information Institute at Cornell University puts it:
A per se violation requires no further inquiry into the practice’s actual effect on the market or the intentions of those individuals who engaged in the practice. Some business practices, however, at times constitute anticompetitive behavior and at other times encourage competition within the market. For these cases, the court applies a “totality of the circumstances test” and asks whether the challenged practice promotes or suppresses market competition. Courts often find intent and motive relevant in predicting future consequences during a rule of reason analysis. [Emphasis added]
So intent and motive are important; if the motive behind cooperation and compensation is to make information about the whole market available to as wide a group of buyers and sellers as possible, I think a good argument could be made there.
This just won’t be argued much by either side. Just about everything today is interstate commerce, and certainly the real estate market is interstate — buyers move from one state to another, and some of the MLSs named are across state lines. The defendant companies are national in size and scope.
The final issue is whether the plaintiff’s lawyers can prove that the “harm or injury” was cause by cooperation and compensation. That doesn’t strike me as particularly challenging. Sellers are claiming that they paid out the buyer agent’s commissions because they were forced to.
The cause-effect relationship is simple and straightforward. So if the plaintiffs win on the other key elements, we can assume they win on this one.
The Key Issue: How Buyer Agents Behave
So it appears to me that as this case gets litigated, the key issue is whether buyer agents do or do not show houses where the cooperating compensation is low or non-existent.
What the defense counsel will say is likely a variation of the arguments being advanced by REALTORS all over Facebook and the comments section of blogposts (including my previous post): the unilateral offer of compensation is a contract between the listing broker and the selling (buyer’s) broker. The consumer is not a part of it. The consumer is free to negotiate the commission, and to offer $1 if he wants to. Nothing is stopping that, so if the seller is offering compensation, it’s normal competition, normal economic behavior.
What I think the plaintiff lawyers will do is to show the Randy Ora video above, call people like Glenn Kelman to the stand, see if Joshua Hunt of Trelora wants to testify (I’m going to guess, the answer is probably Yes) and so on. Why Joshua Hunt? Watch this:
His sin at Trelora was not offering enough in the way of cooperating compensation.
Play that video in front of a jury and it’s going to take some doing to convince a bunch of regular non-REALTOR people that everything is kosher in our world.
It’s going to be much harder for the defense to establish the pro-competitive benefits of the MLS and the cooperating compensation rule if buyer agents routinely behave like that. Much better would be a scenario where buyer agents do bring clients by those homes, but have a buyer agency agreement in place so the buyer has to make up the difference.
I suspect who prevails there is a matter of dispute, credibility of the witnesses, the quality and credibility of expert witnesses, and studies as to which is more commonplace: angry ranting, or a big shrug and acceptance of whatever is being offered as compensation.
What Is Likely Irrelevant
To my non-expert but-not-entirely-ignorant-of-the-law eyes, what seems irrelevant to all of this is whether home sellers have the ability to negotiate commissions or not. I mean, the issue is definitely going to be raised, but unless the defense can summon statistics that show that 60% of the listings in the named MLSs have a compensation of $1 (implying negotiation), I don’t know that it’s going to matter much.
“There are 7 listings in the MLS out of 92,000 where the cooperating compensation is really low!” is not real strong support, you know?
The fact that the NAR rules and MLS rules do not require a minimum cooperating compensation does not strike me as being all that relevant, especially in light of the Randy Ora video and the Trelora video above. When the members themselves act like a mob, does the lack of minimum required compensation by the organizations really matter all that much to the jury?
It’s also likely irrelevant that buyers often can’t afford to pay their own agents out of pocket and have to have the buyer’s commission be wrapped up in the sale price of the home so they can finance it in the mortgage. No jury or judge anywhere is going to have a lot of sympathy for that, right? Maybe that’s something NAR could take up with legislatures — for example, allowing lenders to capitalize buyer agency fees. But I’m not sure I see a lot of traction with the idea that sellers ought to pay for buyers to get represented because they can’t afford it otherwise.
Summarizing: Buyer Agents and Pro-Competitive Benefits
So as I see things (and I’m going to say again that I’m not an antitrust attorney), I think the two key issues are going to be buyer agent behavior and the possible pro-competitive benefits of the MLS (which requires cooperation and compensation to function). Everything else is likely not all that relevant, including just about all of the RAWR! commentary and protests from REALTOR ranks.
Your comments are welcome, of course, but… like I said, keep in mind that antitrust is one of the most complicated and complex areas of the law. Do not dismiss this lawsuit unless you know something that the rest of us don’t. And if you do, by all means, enlighten us 🙂
PS: Can you imagine being at that concert below? Hammer of the gods….