Antitrust laws are designed to promote business competition and prevent the creation of illegal monopolies. Antitrust laws are public protection laws but they are often used by business competitors and rivals as weapons. The operation of antitrust laws can be extremely complex. They are easy to violate and they are enforced by both state and federal agencies. Antitrust laws allow citizen lawsuits. The penalties are very stiff. REALTORS® need to understand enough about these laws to avoid walking into an antitrust action.
Antitrust laws are, for the most part, Federal laws. Chief among these Federal laws are the provisions of the Sherman Antitrust Act. Sherman Antitrust statutes prohibit any “contract, combination or conspiracy which unreasonably restrains trade or tends toward monopolization of a market; discriminates with an anti-competitive effect; or constitutes an unfair or deceptive trade practice.” Most states, including Oregon, have what are called “Little Sherman Acts.” These are state laws modeled after and enforced in the same way as the Federal laws.
A “contract,” for antitrust purposes, is any agreement with anyone. The agreement can be written or oral or implied. A “combination” is an agreement among separate entities to act as a single entity. A “conspiracy” is a combination for an illegal purpose. i.e., to restrain trade or create a monopoly or to discriminate or commit an unfair or deceptive trade practice.
A conspiracy to fix prices is the most common of antitrust violations. In real estate, that means a conspiracy to fix commissions. Price fixing is what the courts call a “Per Se” violation. That means there is no defense to having fixed prices. The court will not inquire into the reason prices were fixed or the effect of price fixing on the market. Price fixing is simply illegal.
Because price fixing is illegal without regard to intention or effect, REALTORS® must establish fees unilaterally without consultation or discussion with competitors. Commissions should never be discussed in a manner that would suggest the services are not independently priced. For instance, an agent questioned by a seller about their commission rate should never say: “Everyone charges that.”
Trade associations are called “walking conspiracies” by antitrust lawyers. A trade association is by definition made up of competitors. That creates an opportunity to conspire that just wouldn’t be there if there was no trade association. Given the ease with which competitors can conspire through a trade association, it is critical that certain subjects be avoided in Association meetings. Chief among these subjects is commissions.
As late as the 1960’s, local REALTOR® boards actually published a “board commission rate.” Board fixed commission rates ended when the Federal government started suing boards and winning. In its place, however, some brokers in some areas of the country started using board meetings or board facilities to “discuss” commission rates. This conduct resulted in a second round of Federal price-fixing suits. As a result, REALTORS® are, and should be, very paranoid about any discussion of commission rates.
Because commission rates are set individually, there is no “proper” or “traditional” or “expected” commission. As with any market, the market for real estate services will tend toward a market price. There will, however, be variations in that market. Discounts, promotions and price differences based on service differences are an ordinary part of any market. Commissions must always be viewed as a market phenomenon, not as what the industry charges or local brokers charge and never “what everyone charges.”
Price fixing is mostly an issue on the listing side. That is, historically, the price fixed was the commission charged to sellers by listing brokers. That is the case because coop commissions affect a much smaller, more integrated market and, therefore, show less variation. Because market participants are on both sides of the deal, there is little incentive to conspire to drive coop prices up or down. Instead, on the coop side the incentive is to engage in group boycotts.
A group boycott happens when two or more firms agree not to cooperate or to cooperate on less favorable terms with a third firm. Like price fixing, group boycotts are a “Per Se” violation of antitrust laws. Group boycotts involve ganging up on competitors to drive them out of the market. There is nothing more human – especially when it is existing firms getting together to drive out newcomers.
One way to drive out newcomers is for existing market participants to have an agreement not to cooperate with newcomers or to cooperate on less favorable terms. Real estate has historically depended on cooperation among participants. Without cooperation in the form of commission sharing, small operators simply cannot compete. Click here for a discussion of the economics of commission sharing. It is for this reason that MLS rules make it difficult to refuse to cooperate with other members of the MLS or to cooperate with some members on less favorable terms.
Under MLS rules, a coop commission must be stated as a percentage of the sale price or as a sum certain. This is done so the MLS cannot be used as a vehicle for group boycotts. If everyone is offered the same coop rate before the listing broker knows who they will be cooperating with, there is no opportunity to refuse or to cooperate on less favorable terms. Recent attempts by some MLS members to misuse the “variable commission” rules to avoid having to make a uniform offer of compensation raise serious antitrust issues because of the group boycott potential they create. Click here for a detailed discussion of variable commissions.
Cooperative commissions have also become antitrust matters when brokers attempt to control cooperative rates by publishing their cooperation policies. For instance, brokers sometimes publish statements that say they will pay cooperating brokers only what the cooperating broker pays on their listings. Thus, if a cooperating broker pays 1.5% on his listings, they will receive the same 1.5% when they are the cooperating broker. A broker who pays 3% on their listing will receive 3% when cooperating. This manner of doing business depends on either misuse of MLS rules (typically by misuse of the “V”) or stating low coop rates in the MLS and then having side deals with other “favored” brokers to pay them more than listed in the MLS. These side deals are conspiracies in restraint of trade.
Unfortunately, the real estate industry has a long history of antitrust activity. As this risk management tool is being developed, the Federal Department of Justice is suing the National Association of REALTORS® for adopting MLS policies the Department considers in restraint of trade. Whatever the merit of the suit or NAR’s conduct in the case, the suit should remind us that real estate and antitrust are not strangers. Brokers and agents alike should carefully consider their actions and policies with respect to commissions in light of this historic fact.
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