LEGAL CORNER: Antitrust Issues are Back in the Spotlight
John Dolgetta, Esq. | March 12, 2021
The following occurrences all highlight the importance of real estate licensees having a working knowledge of antitrust laws and dangers associated with any violation of antitrust laws: the recent antitrust lawsuits in the real estate industry, the focus on large technology and social media companies by Congressional leaders, the Department of Justice antitrust lawsuit and settlement with the National Association of Realtors (see https://bit.ly/38o41Iy), and large real estate firms like Zillow becoming licensed brokers and members of multiple listing services.
Brian Levine, Esq., In-House Counsel and Director of Legal Services and Professional Standards for HGAR, highlighted in a recent article (see https://bit.ly/3t5E4W9) the dangers of agents engaging in behavior that could be deemed a violation of federal and state antitrust laws especially where a new player, namely Zillow, has entered the real estate field. On March 9, 2021, a complaint was filed in the United States District Court Western District of Washington in Seattle, by Rex – Real Estate Exchange, Inc. against Zillow, its affiliated entities, Trulia and NAR for antitrust violations (see https://bit.ly/3qy7vyx).
A recent federal court decision in The PLS.com v. The National Association of Realtors, et al. (see https://bit.ly/3t3hbmj) provides a helpful explanation and analysis of the federal antitrust laws. In PLS, the federal district court judge dismissed the antitrust lawsuit brought by The PLS.com against NAR because the plaintiff could not meet the elements needed to establish that NAR and the other defendants engaged in antitrust behavior.
Federal Antitrust Law
In 1890, Congress passed the first antitrust law, which is known as the Sherman Act. The Federal Trade Commission explains the Sherman Act is a “…comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade” (see (https://bit.ly/38q0BF4). In 1914, Congress then passed the Federal Trade Commission Act, which created the FTC, and the Clayton Act. These three laws are still in effect today and are the main antitrust laws in the nation. States also have their own versions of the antitrust laws that are similar to the federal laws. The FTC states that “…for over 100 years, the antitrust laws have had the same basic objective: to protect the process of competition for the benefit of consumers, making sure there are strong incentives for businesses to operate efficiently, keep prices down, and keep quality up.” The courts will apply the laws and determine what constitutes illegal anticompetitive and antitrust behavior.
The Sherman Act
Section 1 of the Sherman Act provides that “every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations, is declared to be illegal.” Early on this provision was fairly broad and could encompass most behavior engaged in by businesses or individuals. The FTC further explains that the Sherman Act also makes illegal, behavior that amounts to “…monopolization, attempted monopolization, or conspiracy or combination to monopolize.”
In PLS, the judge explains that “restraints can be unreasonable for antitrust purposes in one of two ways. Some restraints are unreasonable per se because they ‘always or almost always tend to restrict competition and decrease output.’ If the challenged restraint is not unreasonable per se, then the restraint is judged under the Rule of Reason.” The court points out that most antitrust claims are analyzed under the “Rule of Reason” standard.
The ‘Rule of Reason’
The Sherman Act does not prohibit every restraint of trade, only those that are unreasonable. In 1918, Supreme Court Justice Louis Brandeis enunciated the “Rule of Reason,” which provided clarification as to what constituted illegal antitrust behavior:
“The true test of illegality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition. To determine that question the court must ordinarily consider the facts before and after the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be obtained are all relevant facts. This is not because a good intention will save an otherwise objectionable regulation or the reverse; but because knowledge of intent may help the court to interpret facts and to predict consequences.”
The court in PLS, explains that the goal of “the Rule of Reason analysis is to ‘distinguish between restraints with anticompetitive effect that are harmful to the consumer and restraints stimulating competition that are in the consumer’s best interest.’” In order for a plaintiff to establish that a defendant engaged in violative antitrust behavior, a plaintiff must establish existence of the following:
“(1) a contract, combination or conspiracy among two or more persons or distinct business entities;
(2) by which the persons or entities intended to harm or restrain trade or commerce among the several states, or with foreign nations;
(3) which actually injures competition; [and]
(4) that [the plaintiff] was harmed by the unlawful anti-competitive restraint and that such harm flowed from an ‘anti-competitive aspect of the practice under scrutiny.’”
The Supreme Court has explained that “the purpose of the (Sherman) Act is not to protect businesses from the working of the market; it is to protect the public from the failure of the market.” Therefore, it is important to understand that not all behavior that may restrain competition is violative of the antitrust laws.
‘Per Se’ Violations
While not all behavior that may be anticompetitive is illegal, there is behavior that is recognized to be a “per se” violation of the antitrust laws. The Supreme Court over the years developed certain guidelines and indicated that certain forms of eliminating competition are unreasonable “per se” or “on its face.” Some actions that are considered to be “per se” illegal include price fixing, group boycotts, market or customer allocations and tying agreements. Any agreement to fix or suggest commission rates for example, constitutes a violation of the Sherman Act. Any group of two or more brokers who agree that they will not do business with another broker or particular enterprise, would constitute a group boycott. Agreements that restrict the right of competitors to enter a particular territory are also “per se” illegal.
Price or Commission Fixing
NAR explains that “the antitrust prohibition on fixing commission rates means, simply, two or more real estate firms may not agree on the commission rate that each will charge.” Additionally, NAR points out that “brokers must not agree with others on commission rates, and must take care to avoid even implying that they have discussed and/or reached agreement on fees. Salespeople must exercise similar caution to avoid the implication that the firm with which they are affiliated is part of a price-fixing conspiracy.”
Bid rigging is yet another “per se” violation of the antitrust laws. An example of bid rigging “…is when competitors agree in advance which firm will win the bid. For instance, competitors may agree to take turns being the low bidder, or sit out of a bidding round, or provide unacceptable bids to cover up a bid-rigging scheme. Other bid-rigging agreements involve subcontracting part of the main contract to the losing bidders or forming a joint venture to submit a single bid.” (See https://bit.ly/3bwCvur). An example of bid rigging in the real estate context, is where a property may be sold at auction in connection with a foreclosure.
Fixing Commission Splits is Illegal
Another illegal antitrust behavior, which also involves a form of price fixing, is agreeing on a commission split. NAR points out that “…listing brokers may not agree on the commission ‘split’ to be paid to compensate cooperating brokers who produce a ready, willing and able buyer for a listed property. Conspiracies among competitors to fix the compensation paid to cooperating brokers may also be deemed per se illegal.” NAR explains that “…brokers must determine their cooperative compensation policies in the same unilateral and independent manner that they establish the commission or fees charged to clients.” (See https://bit.ly/3qxltAA).
It is permissible, however, for listing brokers and selling brokers to discuss the commission they will pay to each other in connection with each individual transaction, which should take place in advance of an offer.
Group boycotting is usually considered a “per se” violation of the antitrust laws. In certain instances, group boycotts may also be analyzed under the “Rule of Reason” standard. As pointed out by NAR, “a group boycott is a concerted refusal to deal with a particular party, such as when two or more businesses agree to refuse to deal with another competitor in order to force a change in a competitor’s behavior or to attempt to drive the competitor out of business.” Often the target of the alleged boycott is a broker that employs a ‘discount,’ ‘alternative,’ or other non-traditional commission/compensation arrangement with clients.” The group boycott’s primary effect is to eliminate a competitor in the market.
NAR: Agreements as to Other Terms are Illegal
NAR further points out that the “…agreements among competitors regarding other terms or conditions of a listing agreement, such as the length of the listing, the type of listing accepted, or the marketing services to be provided by the listing broker, although such agreements may not be treated as “per se” violations but may be illegal. Any express or “understood” agreements as to the terms and conditions of listing agreements or other broker-client agreements raise serious antitrust concerns. The lawfulness of such agreements will in many cases be analyzed under the Rule of Reason, which balances the pro-competitive effects of the agreement, if any, against the anti-competitive consequences.
The DOJ and FTC: The Focus on the Real Estate Industry
The FTC and DOJ are clearly focusing their attention on the real estate industry. According to the FTC, “real estate professionals are changing the way they do business: offering potential buyers the chance to view detailed property listings online, using websites to gather leads on potential customers and using the Internet to match buyers and sellers.” As a result, the FTC is enforcing the “…antitrust rules in the real estate business to make sure that increased competition continues to lead to more choices, better prices and stepped-up services for buyers and sellers. For instance, the commission challenged a number of restrictive rules adopted by Multiple Listing Services to keep low-cost and discount brokers off MLS listings and popular websites listing homes for sale.” (See https://bit.ly/3bvqncZ).
Severe Penalties for Antitrust Violations
Brokers and agents must be aware that the penalties for violating the Sherman Act can be severe. The FTC points out that “although most enforcement actions are civil, the Sherman Act is also a criminal law, and individuals and businesses may be prosecuted by the Department of Justice.” In connection with a civil antitrust action a defendant could face treble damages and legal fees incurred by the plaintiff.
In connection with a criminal prosecution, the FTC explains that individuals or companies will be convicted usually when there is intentional and clear wrongdoing such as engaging in price fixing or bid-rigging. Those prosecuted under the Sherman Act could face “…criminal penalties of up to $100 million for a corporation and $1 million for an individual, along with up to 10 years in prison. Under federal law, the maximum fine may be increased to twice the amount the conspirators gained from the illegal acts or twice the money lost by the victims of the crime, if either of those amounts is over $100 million.” (See https://bit.ly/3v3EVZc).