Membership restrictions for the Multiple Listing Service of Hilton Head Island Inc., the subject of a lawsuit accompanying a proposed settlement agreement with the U.S. Department of Justice, were “rooted in protecting the consumer,” a lawyer for the MLS said Wednesday.

A proposed settlement submitted by the Justice Department and the MLS (see Inman News) would delete several sections from the MLS bylaws and rules, including requirements that broker members of the MLS must have an office in an eight-county area served by the MLS, must be a resident in that area, and must operate their offices during “reasonable business hours.” Approval of the settlement agreement, called the proposed final judgment, would resolve the issues outlined in the related civil antitrust lawsuit.

The Justice Department alleges in its lawsuit that the MLS rules “raise entry barriers for potential competitors by imposing burdensome prerequisites for membership; provide a means of identifying potentially aggressive competitors so they can be excluded from membership; stabilize the price of brokerage services through the prospect of price controls; deter the emergence of Internet-based brokerages; stabilize the price of, and reduce consumer options for, brokerage services by dictating the services that all brokers must provide; and discourage entry of potential competitors who raise funds through public ownership.”

The announcement this week is the latest in a series of actions taken by the Justice Department and U.S. Federal Trade Commission over alleged anticompetitive activities in the real estate industry. The Justice Department has been engaged in an antitrust lawsuit against the National Association of Realtors trade group for the past two years, for example, and the FTC last year announced that it was targeting several MLSs for rules that placed restrictions on properties based on the type of listing contract.

The Hilton Head MLS is owned and controlled by its member brokers and is not affiliated with the National Association of Realtors.

Bret Pruehs, an associate with the McNair Law Firm that is representing the MLS, said that some of the Hilton Head MLS rules targeted by the Justice Department were antiquated and not actively enforced. And some of the membership requirements related to the unique character of the real estate market, as the majority of Hilton Head Island is comprised of private communities called planned-unit developments.

“The MLS of Hilton Head was addressing the concern that agents who were not familiar with these particular planned-unit developments would be offering an inadequate service for consumers. That was the basis for these membership restrictions,” Pruehs said. “Many of them … have a unique architectural scheme, and include rights to repurchase held by local property owner associations or by the developer. The intricacies of the developments require a specialized knowledge, and that was the original purpose in imposing these rules.”

The proposed settlement agreement, which is subject to a 60-day comment period and court approval, would require the MLS to delete a bylaw that requires listing brokers to “specify a commission split or other compensation which would be reasonably expected to encourage cooperation by other full members.” That bylaw also states that any member that the MLS board of trustees “believes is consistently establishing compensation which would discourage the intended cooperation by other full members may have its membership terminated by a majority vote.”

Pruehs said that the MLS board had “never exercised the authority” to take action against a member based on the compensation offered to a cooperating broker. “They don’t really believe that it ever did have an impact. There are approximately 1,800 agents here on Hilton Head and they have always competed amongst themselves and are free to compete on the basis of price and the variety of services they offer.”

The Justice Department, in its civil antitrust lawsuit that accompanies the proposed settlement agreement, charged that the MLS authorized its board “to adopt rules that would regulate commissions and impose discriminatory requirements on Internet-based brokers. The mere prospect that the board might adopt such rules likely inhibits price and service competition.”

Approval of the proposed agreement submitted by the Justice Department and MLS would also delete language in the bylaws that applicants to the MLS may be required to submit character references from three current members of the MLS and “a history of business experience and employment information concerning all persons, including all partners and shareholders, who have any ownership interest in the applicant.” And the proposed agreement requires the MLS to delete language stating that “only MLS exclusive right to sell listing agreements are accepted.”

The MLS has been in discussions with the Justice Department since July 2006, Pruehs said, and the MLS “was responsive to the Department of Justice. We understand the Department of Justice’s position.”

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