Real estate and antitrust: not a pretty picture

Editor’s note: In this three-part series we examine the real estate record on antitrust. Since realty professionals 24 years ago became subject to federal antitrust law, dozens of lawsuits and regulatory actions have been taken. Learn what some of those cases are, who’s behind them and how the industry has reacted. (See Part 2: David Barry takes on real estate antitrust and Part 3: NAR perspective on antitrust.)

For 90 years, real estate was spared from federal antitrust laws. The Sherman Act, which prohibits any combination, contract or conspiracy in restraint of trade, became law in 1890. But in 1980, the Supreme Court case of McLain vs. Real Estate Bd. of New Orleans changed all that when the High Court decided real estate professionals were not above the nation’s antitrust law.

The case argued that real estate brokers in the Greater New Orleans area had engaged in a price-fixing conspiracy in violation of 1 of the Sherman Act. The case was dismissed in a lower court because substantial commerce across state lines was not proven, but the Supreme Court found that it met the test because of the financing aspect of real estate.

The case turned on the argument that there was a “continuing combination and conspiracy among two real estate trade associations and six real estate firms to fix, control, raise and stabilize prices for the purchase and sale of residential real estate by the systematic use of fixed commission rates, widespread fee splitting, suppression of market information useful to buyers and sellers and other allegedly anticompetitive practices.”

This case rocked the world of real estate because the industry has always walked a thin line between cooperation and conspiracy. Our unique system of buying and selling real estate in the United States is based on a system of cooperation among competitors. The first MLS was formed in San Diego nearly 100 years ago when two brokers agreed to show each other’s listings and to split commissions. This simple joint marketing scheme spawned the modern-day MLS and a market place of homes. This, combined with the 30-year mortgage, is what in large part accounts for our modern system of homeownership, which is the envy of the world.   

But this very same system can lead to a conspiracy to thwart off competitors, innovation and discounters.

Which is why 24 years since the McLain case, the industry and its system of cooperation is mired in antitrust complaints, lawsuits and regulatory actions.

Several trends have increased the number of antitrust squabbles:

• We live in a more litigious society, so a prosperous industry is exposed to both legitimate and frivolous claims about antitrust. 

• Technology has hatched a horde of new business models that have threatened the industry and inspired constraint of trade by traditional industry players.

• Industry consolidation has put more power in the hands of fewer companies, and that has lead to market bullying, some of which crosses the line of what is deemed fair or even legal.

Real estate antitrust cases fall into four categories: price-fixing, tying arrangements between Realtor association and MLS memberships, group boycotts and territorial market divisions in which brokers agree not to compete within a specified region.

Tie-in lawsuits against Realtor associations

Recently, a group of real estate brokers filed suit against the Spokane Association of Realtors for allegedly forcing local real estate agents to buy memberships in the association as a condition of belonging to the MLS.

The 19-page complaint filed last month alleges that the practice of forcing agents to purchase memberships in order to purchase access to the MLS violates antitrust law. Plaintiffs seek up to $4,200 for each person forced to pay dues to the Spokane association during the past four years.

In February, a similar suit was filed against the Northern Kentucky Association of Realtors, alleging antitrust violations through Realtor association and MLS membership tie-ins. The plaintiff in that suit is Sherry Edwards, broker of Florence, Ky.-based Buyer’s Corner Realty. The case is ongoing.

The complaint cites six other states – California, Colorado, New Jersey, Florida, Alabama and Georgia – where courts have declared it illegal to tie the sale of trade association services to the sale of MLS membership.

Lawsuits and complaints among competing brokerages

Increasingly, brokers with large market share are feeling the wrath of antitrust as critics fight exclusive listings programs and refusals to split commissions with discount or flat-fee brokers. But the courts turn many of these lawsuits back.

Iowa Realty, which has a dominant presence in the Des Moines area, has been wrestling with antitrust suits for at least the past five years. One suit, filed by Next Generation Realty over Iowa Realty’s alleged refusal to share commissions, alleged Iowa Realty violated state antitrust laws. The Iowa Supreme Court this month threw out the suit, saying the injuries Next Generation sustained did not result in harm to “the consumer or competition generally,” according to the published 56-page opinion.

But Iowa Realty’s troubles don’t end with the close of that suit. In March, the company announced plans to launch a program that would’ve created a category of for-sale listings exclusive to Iowa Realty agents and its sister company First Realty. Before the program even started, Coldwell Banker Mid-America blew the antitrust whistle and filed a suit alleging the company was using its market dominance to eliminate competition by creating such a category.

A judge has since thrown out the anticompetitive allegations, according to Iowa Realty spokeswoman Jamie Buelt. But the exclusive listings program is pending until a previous contractual agreement the company has with Coldwell Banker expires in June 2005. After the contract expires, Iowa Realty intends to launch the exclusive listings program, Buelt said.

In the Northwest, Seattle-based real estate company MacPherson’s sued market leader Windermere in 2001, alleging the company’s structure and practices violated the Sherman Antitrust Act. The suit ultimately was unsuccessful after a judge ruled MacPherson’s failed to prove it was harmed by antitrust behavior.

Price-fixing

In San Diego, five Realtor associations and Sandicor, a regional MLS owned by those associations, were found to have illegally fixed prices of MLS services sold to thousands of real estate agents in San Diego County.

The case is still awaiting trial on the damages phase of the case in the federal district court in San Diego. The lawsuit was brought on behalf of real estate agents Arleen Freeman and James Alexander. Each seeks about $5,000 for overcharges.

The regional MLS used a fixed fee structure to pay the five associations for the assistance they are contractually obligated to supply in connection with operating the MLS. The associations have argued that their MLS pricing structure was designed to avoid the possible closure of the smaller less-efficient associations at the time the regional MLS was established. The court has rejected that argument as a defense against the price-fixing allegations.

“Inefficiency is precisely what the market aims to weed out,” the court stated. “The Sherman Act, to put it bluntly, contemplates some roadkill on the turn-pike to Efficiencyville.”

The U.S. Supreme Court last year denied review of the Ninth Circuit Court of Appeal’s decision, rendering that decision final. Earlier this year, a federal court issued an injunction against price-fixed by Sandicor and the five Realtor associations.

Anti-competitive actions

The Justice Department last year began investigating certain activities of Supra and RISCO, the two lockbox manufacturers owned by Interlogix, a subsidiary of GE Industrial Systems.

The two companies claim to operate as independent competitors despite being owned by the same parent company. At the time of the investigation, Supra controlled more than 90 percent and possibly even as much as 95 percent of the national lockbox market.

Brokers and sales associates complained about Supra’s near-total domination of the marketplace because they believe the lack of competition places them at a serious disadvantage in renegotiating expired contracts for their electronic lockbox key systems.

New competitors have since come into the marketplace: SentriLock, a company in which the National Association of Realtors owns a majority stake, and EasyShow.

Pending anti-trust investigations

In 2003, the U.S. Justice Department’s antitrust division opened a full-scale investigation of the National Association of Realtors’ latest online listings policy for virtual office Web sites.

The investigation has focused on a provision within the policy that allows brokers to opt out listings from other brokers’ Web sites on a blanket or selective basis. The Justice Department also has taken interest in a provision that restricts the use of names and contact information collected through a Web site in connection with referrals of business to companies other than real estate brokers.

In Michigan, brokerage Tomie Raines ended up with a $125,000 fine last year from the Greater Lansing Association of Realtors after a competitor complained the company’s online listings Web site gave it an unfair advantage over those offices that couldn’t afford to implement such technologies.

Tomie Raines appealed the decision, which is still pending. Tomie Raines president Debbie D’Valentine recently said she couldn’t comment on the fine.

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