Thomas N. Jacobson
When we hear of anti-trust laws and the acts that may cause the government to undertake prosecution, it is easy to dismiss such actions on the basis of, “Not my problem.”
The Real Estate industry has long been a target of regulators and prosecutors. It is important that agents recognize activities triggering a potential anti-trust violation.
The basis of most anti-trust enforcement is the Sherman Act (15 USC, $1). It is divided into two sections. Section 1 prohibits any “contract, combination or conspiracy” that unreasonably restrains the nation’s domestic or foreign commerce. Though initially the language may not be familiar or understandable by non-lawyers, violations can be categorized, and the following are of significance to the real estate industry:
- Horizontal Price Fixing
- Vertical Price Fixing
- Horizontal allocation territories
- Vertical allocation territories
- Group Boycotts
- Tying Arrangements
- Exclusive Dealing Agreements
Violations of Section 1 are enforceable both criminally and civilly. It may carry a fine as high as $10 million for corporations or $350,000 for individuals. It may be enforced by either the government or by private individuals.
Section 2 prohibits monopolistic conduct, and though it will not be addressed directly in this article, it as an important part of the government’s enforcement policy and should be referred to if there is any question concerning the activities of a particular business to eliminate competitors through monopolizing the market.
The language of the statute establishes a threshold requirement for finding of a violation. There must be a “concerted action” normally consisting of some type of collusive action through a “contract, combination or conspiracy” restraining the free marketplace. A unilateral action by a single individual or business is not a violation of Section 1 of the Sherman Act, such as when a broker, without consulting with anyone outside the company, sets a fee policy that the minimum commission that will be accepted by the office on a listing shall be X%.
Judicial decisions have established a standard that in order for there to be a finding of a violation the challenged conduct must be unreasonable. A single set of MLS Rules and Regulations, though entered into by concerted conduct to establish rules for the operation of an MLS, is not “unreasonable” because it brings order to the operation of the MLS but does not restrain competition, and actually benefits the market and consumers.
Another caveat deserves mentioning, before examining the categories of violation. The courts have adopted a concept known as a “per se” violation. This concept can be described as a presumption that if various conduct is shown to have occurred there is no defense or mitigation that may be introduced to provide a defense to the conduct. In other words, the conduct is presumed to be a violation of the Sherman Act.
The Anti-Trust laws distinguish between horizontal restraints and vertical restraints. “Horizontal” is a term used to identify persons or entities that are participating in the marketplace on the same level. A good example occurs in the oil industry with service station owners, because they are on the retail level. As they are all retailers they are said to be horizontal competitors. The vertical example in the oil industry is the exploration company, refiner, wholesaler and service station operator. As the product works its way through the market place, it takes a “vertical” path.
Horizontal Price Fixing occurs when firms or individuals at the same level of the market structure (such as a group of brokers) agree to fix or otherwise stabilize the prices they will charge for their products or services. Horizontal agreements to fix prices have long been held “per se” violations of Section 1 of the Sherman Act, thereby foreclosing defense arguments as to the reasonableness of defendant’s conduct. This rule has been applied to not only pricing floors (“minimum price fixing”) but also price ceilings (“maximum price fixing”).
The classic violation in the real estate industry was fixing the commission rates charged by brokers by the reference to the “standard” commission. The industry traditionally referred to a commission rate of 6% as “standard” and precluded sellers from negotiating lower rates because the industry established and held to the standard. The courts found this conduct to be illegal and a violation of the Sherman Act, and most agents today are aware there is no “standard” rate and that they cannot use the term “standard” in their vocabulary.
In spite of the restriction on formally setting commission rates, several entities and persons have engaged in activities constituting horizontal price fixing. Examples include discussing commission information in trade organization meetings, speaking with competitors about agents “that won’t conform” and refusing to cooperate on sales with brokers that did not abide by the “unwritten rule” concerning “standard” commission rates and splits, and other conduct that attempts to address amounts charged by brokers for their services.
Horizontal price fixing goes beyond commissions. It also includes other products and services that may be offered to either the buyer or seller. By way of example, if several brokers get together and agree to charge a specified and agreed upon “processing fee” on each transaction, such conduct will be a per se violation of the Sherman Act.
MLS activities are not immune from allegations of horizontal price fixing. In the infamous California case of Freeman v. Sandicor et al., the individual associations that participated in the regional MLS agreed on the uniform MLS fee to be charged by each association. The fee was agreed upon based on the expenses the least efficient association incurred in supporting MLS fees. Not surprisingly, the court did not have difficulty finding price fixing.
Broker meetings held under the auspices of the Association of REALTORS® or the regional MLS should be carefully introduced and monitored to avoid opening discussions into areas that constitute violations of the anti-trust laws. At no time should participants discuss any economic aspect of their respective businesses. Even inquiries by one broker to another concerning what they charge or do not charge clients can lead to an anti-trust violation. Broker meetings should concentrate on non-economic issues, such as legal updates, efficiencies in the operation of the MLS that do not relate to what individual participants charge clients and educational opportunities explaining legal or administrative details of the operation of the MLS.
Individual agents should refrain from discussing with other agents economic matters relating to charges for services or products or other competitive information. The trap for most agents is that they participate in community activities with other agents, and innocent quips such as, “I wish my friends would stop panicking and offering lower commissions than what we have usually done in the community,” must be avoided.
Another activity that must be avoided is the “dual” commission structure depending on whether you are a member of the “in” crowd or “out” crowd. Though the activity is also a group boycott, discussed later, there is an element of price fixing in any activity that involves favorable treatment to anyone that “complies” with the “standard.” By way of example, if a group of brokers agree at a marketing meeting to offer attendees a “bonus” that is a higher percentage of the commission split than is published in the MLS, there is an element of price fixing because the bonus in not available to those that do not participate. The intent is to control the market and economically benefit those that attend the meetings.
Vertical Price Fixing
Prices are vertically fixed when firms at different levels of the market structure agree to fix prices. In the real estate industry vertical price fixing is not as apparent to the individual agent because the vertical nature of the real estate industry is generally limited to franchise operations such as the familiar brand names of “Prudential,” “Keller Williams,” “Century 21, Re Max, Coldwell Banker, etc.(apologies to those omitted).
Vertical price fixing occurs if a franchisor having sufficient market share to affect the economics of a market attempts to set commissions or other fees charged by its franchisees.
Horizontal Allocation Of Territories
One of the most overlooked potential violations of the Sherman Act is when individuals or entities overtly or otherwise carve up territories or customers. The courts refuse to consider possible economic justification for such conduct and consider such conduct inherently anti- competitive.
An example of an illegal horizontal allocation occurs when Real Estate Firm “A” agrees with Real Estate Firm “B” that it will only take listings in the area South of Sesame Street if Firm “B” agrees to take listings only in the area North of Sesame Street. This is an example of an overt act of allocation.
A passive violation occurs when there is no overt agreement, but Firm “A” refuses to take listings North of Sesame Street and Firm “B” refuses to take listings South of Sesame Street. In some cases there is a direct referral, but that is not necessary to find a violation of the Sherman Act.
Significantly, it is not necessary for the Court to find “price fixing” in a case of horizontal allocation of territory. The mere act of carving up the market will suffice. Even if Firm “A” and Firm “B” never discussed commissions or fees charged by their respective firms, the act of carving up the market constitutes a violation of the Sherman Act.
Allocation needs to be distinguished from the true unilateral action an agent takes when the agent elects to only work a specific geographic area. There is no concerted effort and nothing collusive about the decision. In fact, it has always been good business policy for an agent to work only those areas familiar to the agent.
A broker may condition employment to agents based on only working certain geographic areas. Again, if there is no agreement or collusion with another broker, the decision of the broker to limit agents to a specific area is predicted on good business sense and assuring agents know the geographic area they work for the benefit of clients.
Associations have long thought of their activities as being focused on a particular geographic area. Several years ago “Board of Choice” became the rule throughout the industry. This allowed Associations to compete with each other for members. This concept should not be reversed by formal agreement or otherwise. Associations should not agree on “standard” dues or any other fee charged to members. Brokers should not be prevented from joining because they live “outside” the area.
Horizontal Allocation Of Territories
Vertical allocation is generally not a problem in the real estate industry. It involves a restraint by a franchisor on the area in which a franchisee may market.
Vertical restraints are not viewed by the courts with the strong presumption afforded horizontal restraints. Manufacturers and Dealers have long been allowed to restrict the number of retailers in a particular area. The same is true for real estate franchises.
Group boycotts (also known as concerted refusal to deal) constitute a per se violation of the Sherman Act. The real estate industry has been especially prone to allegations of group boycotts and agents must be careful not to engage in activities that may constitute a group boycott.
One of the most infamous group boycotts occurred in the San Diego area when several established brokers became upset at the discount policies of another broker in the area. The brokers agreed between themselves they would not show the listings of the discount broker and they would not make their listings available to the discount broker. The courts did not have much difficulty in finding this to be a group boycott.
Group boycotts also arise when brokers tacitly agree not to market listings that do not meet certain commission criteria. In addition to possibly violating the broker’s fiduciary obligation to the client, it is a per se violation of the anti-trust laws to only show listings conforming to an agreed upon rate. The tacit agreement can arise from off-hand comments at an Association marketing meeting, a friendly social encounter at Starbucks or while traveling to an industry convention.
One of the most dangerous places for a group boycott is at an Association or industry-sponsored marketing meeting. During the course of a meeting when agents are pitching listings, one agent anxious to sell a property may offer to raise the commission split to anyone in the room that brings a successful offer in within the next week. This is a group boycott because the same offer is not being made to those that did not attend the marketing meeting.
Another type of group boycott involves a concerted refusal to deal with brokers in a transaction offering limited services. Even mere discussions out of frustration at a meeting of a group of agents can lead to an understanding that the group will not show properties when the seller’s agent is offering limited services. Buyers’ agents can easily protect themselves from reduced compensation offers and Sellers that are not receiving services by entering into Buyer-Broker agreements and specifically informing Sellers they are not being represented by the buyer’s broker.
The essence of any group boycotts is an agreement, overt or tacit, that results in an advantage to those forming the agreement, or a disadvantage to those outside the agreement, and altering the conditions of the market. As abstract as this may seem, the first indication of a potential group boycott is when competitors communicate about any matter that either excludes another competitor or offers something between the communicating competitors not available to other competitors.
A tying arrangement occurs when the purchase of one product or service is tied to the purchase of another product or service.
For years, the real estate industry has attempted to address a particular arrangement that has been held illegal in some states and remains undecided in a few. This involves tying Association memberships to MLS participation. California was one of the first jurisdictions to address this issue and decided that the trade associations could not require membership (Board Membership) as a condition of participating in the MLS.
The real estate industry confronts other potential tying arrangements with the consolidation of brokerage service, escrow, title, home inspection and home warranty programs. Though there is nothing that prevents a broker from recommending or forming a particular escrow company, the broker must be careful not to tie their services into the escrow services. By way of example, if a broker having a substantial share of the market advises its clients that in order to obtain a favorable commission agreement the client must use the escrow services owned by the broker, this could constitute an illegal tying arrangement because it ties the favorable commission to purchase of the escrow services and precludes the client from effectively shopping for competing escrow services.
This is to be distinguished from a situation when the broker has a controlling interest in the brokerage and the escrow but does not compel the client to use the services of both as a condition to any incentive or negotiation of the commission. As long as the client is advised of the common ownership and is free to choose competing services there is no violation of the anti-trust laws merely because the broker controls both a brokerage company and an escrow company.
Exclusive Dealing Agreements
Exclusive dealing agreements involve an agreement by one party to only purchase products or services of another party. It is very similar to a tying arrangement.
In an exclusive dealing arrangement there are certain circumstances in various industries when the courts have allowed such agreements, however, in the real estate industry there has been more scrutiny because the rationale for such agreements is less persuasive.
An example of an exclusive dealing agreement is when a broker agrees with a title company only to purchase title insurance services from that title company. One of the reasons this does not surface in the real estate industry is because consumers have the right to select title companies and a broker cannot guarantee a title company all of its business for title.
The real estate industry has been closely monitored over the years for possible violations of the anti-trust laws. Brokers and agents should understand the activities that can lead to possible violations and take affirmative steps to avoid being compromised. As a general rule competitors should never discuss pricing structures, combining to address unwanted competition or business models or entering into agreements to avoid doing business with certain brokers. Brokers and agents should be especially careful when participating in meetings with other licensees when it can be very easy to make a disparaging comment about someone that is not present or to offer a special incentive to someone at the meeting to help sell a property.