While we’re still a long way away from a final ruling, a federal court in Missouri has ruled the National Association of REALTORS® and most major residential real estate brokerages are in violation of the Sherman Anti-trust Act, one of the oldest laws ensuring a free market in the United States.
The punishment? Damages of $1.79 billion.
In a nutshell, the courts determined the National Association of REALTORS®, along with companies like Re/Max, Century 21, Keller Williams and more, squashed competition by forcing any real estate agent who wants to use the MLS database must use their rules for commission payments. According to the ruling, this prevented free market competition and eliminated any negotiations on who pays commissions and how much they are paid.
The attorneys at The Orlando Law Group work with local real estate agents and their teams on a wide range of services, including contracts and closings. This is a subject we are watching closely as it could rework how real estate agents are paid.
The Basics of the Class Action Suit
In 2019, a group of people who sold homes in Missouri sued the National Association of REALTORS® and the real estate companies, saying the group has agreed to “adopt, promote, and implement anticompetitive rules through the association’s governance.”
By having an association that prevents members from allowing their associates to compete with one another for commissions, and by agreeing to follow and enforce these anticompetitive rules, the National Association of REALTORS® acted to further its implementation and enforcement.
The main arguments from the plaintiffs included:
- The MLS is controlled by local associations, and access to the MLS is conditioned on brokers agreeing to follow all mandatory rules set forth by the National Association of REALTORS®.
- The National Association of REALTORS®’ policies restrain competition in the real estate market. This restraint forces the sellers to pay the buyer’s agent commission that, in a competitive market and were it not for the association’s anticompetitive restraint, would, or could, be paid by the buyer.
- The “Adversary Commission Rule” which is a policy of the National Association of REALTORS®, effectively requires the seller to predesignate a commission for the buyer’s agent, and further limits the ability to negotiate that commission amount.
- Since the MLS requires the seller to list a commission percentage, this provides the buyer’s agents the opportunities to selectively show clients properties the agent deems to be” worth their time.” This places sellers who choose to pay less in commission in a disadvantageous position, as the buyer’s agent usually gives priority to showing homes that pay a higher commission, and selling brokers are incentivized to provide a higher buyer broker commission to comply with NAR’s mandatory rule.
- Failure to abide by the MLS and association rules can lead to expulsion from the National Association of REALTORS® and access to the MLS, which restricts real estate agents who are not REALTORS® from listing properties on the centralized database.
Overall, the plaintiffs argued if these rules didn’t exist, buyers and sellers would be free to negotiate amongst themselves regarding the amount of commission paid. This would make the market more competitive and would likely drive down the prices paid to agents to lower commissions.
Additionally, it would cease the requirement that the seller pay the buyer’s agent’s commission.
Essentially, the association’s policies contribute to fixed commission prices, regardless of the individual factors of each sale at levels that would not exist in a competitive marketplace.
What is the Sherman Anti-trust Act
The Sherman Anti-trust Act was passed in 1890 and was the first law in the United States prohibiting monopolies. At the time, many companies had formed that dominated industries. These companies had no competition and, thus, drove prices significantly higher than a free market would allow.
Since that time, there have been many high-profile cases where monopolies have been broken up, like General Electric, Standard Oil and AT&T. Perhaps the highest profile case is Major League Baseball, which has been able to defeat any push to call them a monopoly.
The purpose of the Sherman Anti-trust Act is to preserve free and unfettered competition in the marketplace and that competition produces the best allocation of our economic resources, the lowest price, the highest quality, and the greater material progress.
To establish that any defendant violated Section 1 of the Sherman Anti-trust Act, the plaintiffs were required to prove:
- a conspiracy existed to follow and enforce the Cooperative Compensation Rule in the subject MLSs,
- the Defendants knowingly, voluntarily, and intentionally joined in the conspiracy,
- the conspiracy had the purpose or effect of raising, inflating, or stabilizing Broker commission rates paid by home sellers,
- the conspiracy caused the class plaintiffs to suffer injury to their property.
Here is an example the plaintiffs used to show how they believed the National Association of REALTORS® violated the act. In their Code of Ethics, Standard Practice, 16-16, “REALTORS®, acting as subagents or buyer/tenant representatives or brokers, shall not use the terms of an offer to purchase/lease to attempt to modify the listing broker’s offer of compensation to subagents or buyer/tenant representatives or brokers nor make the submission of an executed offer to purchase/lease contingent on the listing broker’s agreement to modify the offer of compensation.”
What does this mean for real estate agents and for you?
While this case is pending final resolution through the appellate court, and possibly even the Supreme Court, it is unknown how this case will affect the day-to-day real estate operations and what could happen to the real estate industry, but it could have drastic impacts. However, knowing what the exact effects are will likely take a few more years.
The attorneys at The Orlando Law Group can help real estate agents in Orlando, Waterford Lakes, Altamonte Springs, Winter Garden, Lake Nona, St. Cloud, Kissimmee, and throughout Central Florida.
If you have questions about anything discussed in this article or other legal matters, give our office a call at 407-512-4394 or fill out our online contact form to schedule a consultation to discuss your case. We have an office conveniently located at 12301 Lake Underhill Rd, Suite 213, Orlando, FL 32828, as well as offices in Seminole, Osceola and West Orange counties to assist you.
The articles on this blog are for informative purposes only and are no substitute for legal advice or an attorney-client relationship. If you are seeking legal advice, please contact our law firm directly.