Do Not Minimize Ragnarok: Very Serious Legal Threat, Part 2

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:

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.

Interstate Commerce

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.

Proximate Cause

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 🙂

-rsh

PS: Can you imagine being at that concert below? Hammer of the gods….

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26 Comments

Join the discussion and state your opinion. Some comments may be held in moderation. I try to get to them as soon as possible, but may be traveling or unable to approve comments immediately. I do not censor comments, but reserve the right to remove anything that looks like spam, trolling, or just outright inappropriate.

  1. Great Post. LOVE IT!
    Keep up the great work.
    I love sharing your work!

  2. […] way of cooperating compensation.Just look at commercial real estate as a comparison. Source: notorious-rob.com […]

  3. No. I can’t Imagine being at that concert.

  4. I wasn’t at that concert but I was at the L.A. Forum show for the Song Remains the Same tour. What a show!!!

  5. I’m not an attorney, nor do I play one on TV. I feel that unless you have a tape of the Five Families conspiring to fix commission rates, it won’t be easy to prove conspiracy. After all, we’re not Good Fellas, despite what these hot shot attorneys might think.

  6. Riveting developments and commentary, keep it coming. But on more serious note, Immigrant Song would be my major leagues walk up song………..

    1. LOL. I seriously thought about using this video instead:

  7. The law firm running this has a website asking people who’ve recently bought or sold a home to join the lawsuit. Expect to see ads next. They are playing the long game. Even if the RE industry wins, the consumer may never trust a Realtor again.

    1. Yeah, the PR angle to this whole thing is really worrisome as well. My friend Jessie Beaudoin has been posting about that for a bit now.

  8. interesting, that video is very interesting, neither agent really gave a valid example of their value proposition, or why paying a more reasonable (higher) fee was good for the client…..
    That seems to be the battleground here, defending whatever you charge with valid client benefits, that justify the fee you charge!

  9. Agree anti-trust is a highly complex law. By the time a jury gets the case, they will be educated by both sides such that they will be eligible for law degrees!

    A few points to consider:
    Exhibit A: One company – Trelora – is a unique business model, and some really stupid agents have expressed their concerns. Will the jury then suppose ALL Realtors are represented by the recordings of these agents? (Kind of like presuming all attorneys are like Michael Avenati by showing his videos)

    Exhibit B: The listing is negotiated before it is signed, the total commission and the “co-op” fee is authorized by the seller at the time of the listing. This is set by policy of the individual brokerage. The Seller can agree, negotiate, or not sign it – the choice ALL sellers have. Buyer Brokerage agreements have compensation components where the Broker can accept the fee paid by the seller, or require the Buyer pay any shortage. Again – this is signed BEFORE the journey begins. Buyers are not required to sign them, and sellers are not required to sign listings. They can buy or sell without Realtors at any time and often do. It is a free will decision on both sides of the table.

    In the lawsuit, all arguments are under the presumption of a successful closing. If it does not close – the seller pays nothing. If the buyer does not buy – the buyer pays nothing. This whole argument is based on the fallacy that the closing is a foregone conclusion – when in reality, in some markets 50% of sellers don’t sell, and even more Buyers don’t buy. You are an attorney – aren’t the failed closings (listing or buyer contracts that do not lead to a closing) just as relevant in the “anti-competitive” argument? If not, why not?

    Buyers receive commission breaks every day. Rebates, referrals, brokers “eating” costs by reducing commissions, etc. etc. etc. Sellers receive concessions every day. All of these concessions occur prior to contract, during negotiations, and prior to closing. These fees are merely an artificial staring point at the start of the journey. Sure – the plaintiffs can cherry pick a couple hundred circumstances where a closing did occur that illustrates their point, but the defendants can counter that with thousands upon thousands of individually negotiated successful closings with varied commissions, and thousands of failed attempts with varied commissions where nothing was paid to anyone after labor and money has been expended. In my view, Trelora is exhibit A for the defense. ALL sellers could choose them going in but many do not – why not?

    All of this seems to me an attempt to prove a negative – which is difficult at best and never results in certainty. The MLS sets a policy that requires payment of the commission the broker states. They do not set what it “should” be. If a buyer broker selectively presents homes based on commission, that is a problem of the individual broker. It is NOT a widespread practice. It certainly isn’t in my market (widespread that is) Every agent I know has had a Buyers broker signed where the Buyer purchased a non protected FSBO or home where the commission was short or nonexistent, and the agent walked away with reduced or without any compensation so the buyer could achieve their goals. I can video them and perhaps THAT video can be used to demonstrate “the realtor community” rather than the idiots caught on tape.

    It will be interesting to watch though, and thank you for making us go “Hmmm” once again.

    1. That seems to pretty much wrapped it up!

      Thanks,
      Brian

    2. I think you nailed one of the critical issues.

      If the defense can present a ton of evidence that MOST REALTORS happily show homes with reduced compensation, then I think they have a very strong case. If they can’t, or the plaintiffs overwhelm the jury with videos like the ones above and testimony from REALTORS and sellers who say, “We have to offer high compensation or buyer agents won’t show the house” then things look very bad.

      Keep in mind that the plaintiff lawyers will do everything in their power during voir dire to keep people who are real estate agents or related to them off the jury, and get people who sold homes using a REALTOR on the jury. The defense will naturally try to do the opposite. 🙂

      Anyhow, the whole thing is bound to get more interesting once NAR and the defendants file their Answer.

      1. Rob,

        Should be fairly easy to look at historic offers of compensation in the MLS records and see if they’ve sold or if compensation increases happened before the offer(s) came in. Cross-linked to ShowingTime-type data and the picture should get very clear. I’m guessing the Plaintiff’s attorney will create a (non open source) RESO-based solution for access.

        I think Tom Woiwode’s point regarding consumer choice is valid. Consumer can FSBO, auction, or list with a REALTOR® and if they list, there are a large number of options available. Also, ask anyone who has ever done a FSBO how many agent calls they get asking if the seller will pay a buyer’s agent commission if a ready, willing and able buyer is produced.

        Some friends asked me about listing and co-op strategy last month as the agents they have interviewed were offering all kinds of co-op options. I get that most consumers don’t live in this world but they seem to be more savvy when it comes to commission splits.

        Thank you for the birthday wishes. Looking forward to catching up soon.

        rqd

  10. And I always thought the killer class action suit would be over Restraint of Trade: The setting of commissions charged by the Broker. Basically, the inability of the Seller to negotiate commissions because the salesperson can’t and that isn’t disclosed. And the Seller doesn’t know that the Broker sets the commission and is the actual Agent of the Seller. This could be interpreted as a violation of Fiduciary Duty.

  11. Seems too many agents were asleep during their real estate training when it was taught brokers/agents are not qualified nor authorized to give legal or tax advice. I’m taking your advice to heart and will not minimize this legal threat. During my rookie year over a decade ago, a broker told me the Buyer Broker Agreement has as much value as toilet paper. If brokers won’t change their behavior then lawsuits like this one may make them change.

  12. As usual. Fantastic job on this commentary Rob.

    And all I am experienced enough to say as it relates to this subject matter is the same thing that has served as the basis for the offer of my services to the industry. And that is this.

    Now it gets interesting.

  13. Re: First Element “Price Fixing”: There is no price fixing. No association, broker, or mls, has ever directed me to pre-fill a document or tell a seller that any buyer broker commission is required in any amount. If the compensation was pre-filled or if the local associations were directed by the national to put 3% for the buyer’s agent, that could be deemed as price fixing. But since it’s not that way, it’s not.

  14. A Realtor who will not show a property due to the cooperating commission being offered has breached their fiduciary responsibility to the client and the Realtor Code of Ethics. I understand we all have overhead and need to feed our families so “best practice” would be for each agent to establish a compensation model that personally works for their business and explain it to their client. At that point, present your client with a Buyer Broker Agreement that includes a compensation component that would be the buyer’s responsibility should the cooperating commission not hit that minimum threshold. Think of the FSBO out there that may not want to pay a Buyer Agent commission but meets your client’s criteria.

  15. What may also be relevant are laws preventing buying agents from negotiating a commission structure that pays the agent on an inverse basis to the purchase price ( ie higher commission as the purchase price is lower, lower commission as the purchase price is higher ).

  16. This lawsuit will die soon.

  17. This is from a reader who requested anonymity and that I post this on his behalf:

    I found your article on the NAR antitrust case to be extremely well done. In a sea of hyperbole and dismissal, your article was a rare find.

    As the owner of a small RE brokerage offering flat listing fees, I am regularly branded as a “discount brokerage” and am the subject of a fair share of FUD [Fear, Uncertainty, Doubt] being spread by other area agents.

    Naturally, my clients tend to be more price conscious, so it’s not uncommon for them to offer less commission to cooperating agents than what is typically seen on listings. In those cases, without fail, I will have a few agents call me to express their displeasure and threaten not to show their client the home. How many are choosing not to show their client, but never call me to complain? Impossible to guess…

    In one of the more egregious examples, I recently had an agent leave the following note taped to my seller’s door a few days after I listed their home for sale. While the agent’s goal was to influence the seller to reconsider their choice of a “discount broker”, the result was completely the opposite. My client was appalled, and it only further confirmed why they didn’t want to use a “traditional” RE model in the first place.

    I can’t imagine I’m alone out there.

    Photo of the letter: https://drive.google.com/file/d/0B95irc2_L5ToNDctQVh1cEZ3UVNTMUN0SEQwMXBKZ09Rc0RR/view?usp=sharing

    Crossposting to FB.

  18. What about all the times we as brokers have given up parts of our commission in order for both parties to be successful in the transaction? It happens all the time.

  19. So these concerts were armed with a bunch of stoned attendees and band members. Which I relate to when explaining to my clients, friends and family how our business works. After about 1/4 way through these conversations they are looking at me like I have 4 heads and I am exhausted trying to explain and also making sense out of it as I go along. Can you imagine trying to explain to a jury how this business works. Our business is changing in many ways, some good things may come out of this and some things we don’t like will come out of this, but the reality is it’s changing whatever the result, a good head banging concert may sound good when it’s all over.

  20. Rob, thank you for being a brilliant voice in the industry who is ALSO courageous enough to deal with the slings and arrows of your detractors! In my last few years working in “traditional” real estate, I witnessed more greed and unethical behavior than I imagined possible in an industry.

    My hope is that the NAR et al lawsuit will begin to reveal deceptive practices rampant in real estate. To add to your damning video list, other evidence the plaintiff’s attorneys might use (if they haven’t already) is the shocking content of NAR’s 2015 D.A.N.G.E.R. Report. For the study, Swanepoel interviewed 70+ real estate industry experts – wouldn’t their depositions be useful? Although, the interview transcripts themselves might reveal more valuable candid responses.

    Here is just one relevant quote from NAR’s very own D.A.N.G.E.R. Report:

    “…numerous participants in the [real estate] industry are guilty of violating key parts of The Consumer Bill of Rights, especially the consumers’ rights to be informed (of all the facts), to choose (from among competing services), and to be heard (to have all their questions understood and answered). The root cause is often the failure to listen, or worse, appearing to listen but failing to respond by focusing on the transaction and not the consumer.”

    The most crucial part of the quote (aside from the “guilty of” phrase) is “failure to listen, or worse, appearing to listen but failing to respond…” If Agents hear, but ignore Clients’ concerns, isn’t that a breach of fiduciary duty? Which brings me to one more point: what other profession has a fiduciary duty to Clients, yet is rewarded by sales volume?

    Other fiduciaries like Attorneys and Accountants don’t advertise how many Clients they’ve served (like McDonald’s and its billions of burgers) or aspire to become members of the “Multi-Million Dollar Platinum Top Producer’s Club.” Besides, Clients don’t care how many homes Agents have sold and – sort of like dating – who really wants to know how many ex-boyfriends are out there?

    Just a few thoughts. In any case, I will continue to follow this lawsuit closely AND your enlightening writing. Thanks again for fighting the good fight!

  21. After 30 years in the industry selling, managing and now software development for transaction management one would think this lady would be close to getting those superpowers. No sign of it happening soon. I will say reading your posts on this subject makes the hair on my neck stand up. We work in a very unique and confusing if not less than transparent compensation environment. I for one do not take this threat to the current mo lightly. This could be a huge disrupter. Thanks for your in-depth posts.

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