The Bombshell that could tank an industry continues to smolder

by | Aug 31, 2021 | Legal Corner, MLS and NAR | 0 comments

It was back in March of 2019. A shocking Inman News Headline read:

The bombshell lawsuit that could undo the US real estate industry

Can you remember your reaction back then? Like many of us, was your reaction one of disbelief, confusion, or maybe a response that was something like “that’s crazy!” At that time, the consensus resonated with “It will never happen,and surely the case will be quickly terminated.”

Seasoned Inman editor, Andrea V. Brambila got the juices flowing with this articulate introduction when she wrote:

The complaint, filed March 6, takes aim at some of the industry’s top players, alleging the National Association of Realtors and real estate franchisors Realogy Holdings Corp., HomeServices of America, RE/MAX Holdings, and Keller Williams Realty are violating the Sherman Antitrust Act by requiring listing brokers to make a “blanket, non-negotiable offer of buyer-broker compensation” when listing a property on the MLS, which the suit refers to as the “Buyer Broker Commission Rule.”

The suit alleges this rule has inflated costs for sellers by requiring sellers to pay a higher commission than they otherwise would if, instead, buyers paid buyer’s agents directly.

Click below for the actual “Class Action Complaint” filed by the Moherl attorneys in the Federal District Court of Northern Illinois

Class Action Complaint – Moehrl case

What’s interesting is the timeline of activity in the lawsuit, reviewing events from that March day to what’s happening right now:

Timeline start date:

  1. March 2019 Complaint filed March 6, 2019
  2. October 9, 2019 Defendants NAR and Corporate Defendants file Motions To Dismiss
  3. October 10, 2019 the U.S. Department of Justice filed a statement of interest in this lawsuit.
  4. May 30, 2020, the Honorable Andrea R. Wood of the United States District Court for the Northern District of Illinois appointed Cohen Milstein Interim Co-Lead Class Counsel to represent home sellers in this putative antitrust class against the National Association of Realtors.
  5. October 2, 2020, the Honorable Andrea R. Wood denied Defendants’ motions to dismiss (including NAR), allowing all of Plaintiffs’ antitrust claims to proceed.
  6. Discovery activity increased with numerous pleadings, requests for documents, hearings; the most recent one being August 6, 2021 when Keller Williams refused to collect documents from its franchisees opting to have the court subpoena them. January 6, 2021 Home Services was not successful in arguing that sellers had signed arbitration agreements that precluded litigation.
  7. Next critical milestone is the scheduling of a trial and the certification of the class. Right now, the status of the case is a putative, or proposed, class action by one of the named plaintiffs on behalf of an unnamed class of similarly-situated plaintiffs. Until the court certifies the case as satisfying the criteria set out in Federal Rule of Civil Procedure 23, however, the case remains a putative class action and the unnamed class members remain the putative class.

Motion To Dismiss

 In the March 2006 issue of The Practical Litigator, the author addressed considerations on moving to dismiss on substantive grounds, especially exploring the judge’s attitude on Motions To Dismiss. “Is the judge likely to write a blueprint for the plaintiff? You must be wary of judges who, in denying motions to dismiss for failure to state a claim, frequently appear to provide a road map for plaintiffs to prove their claims. If you have such a judge, and do not have a clear winner, a motion to dismiss may not be advisable.”

Let’s examine some of the key points United States District Judge Andrea R. Wood covered in her 25-page denial of the Defendant’s motions to dismiss (supported by case citations).
  • For the purposes of the motions to dismiss, the Court accepts all well-pleaded facts in the Consolidated Amended Class Action Complaint (“CAC”) as true and views the facts in the light most favorable to Plaintiffs as the non-moving parties.
  • The Multiple Listing Policies Handbook Section 2-G-1 requires any broker listing a property for sale on an MLS to make a blanket unilateral offer of compensation to any broker who finds a buyer for the home. The Handbook further prohibits “general invitations by listing brokers to other participants to discuss terms and conditions of possible cooperative relationships.” As a result of Section 2-G-1 (the Buyer-Broker Commission Rule), a homebuyer does not have to pay any compensation to his broker.  Indeed, the NAR’s Code of Ethics permits and encourages buyer-brokers to tell clients that their services are free.  Buyer-brokers instead receive their commission out of the total commission paid by the seller.  Specifically, in the listing agreement, the seller will set the total commission to be paid to the seller-broker with the expectation that a portion of the commission will be paid to the buyer-broker.
  • Because Section 2-G-1 requires a blanket offer, home sellers must provide the listed offer of compensation without regard to the buyer-broker’s experience or the value of services the buyer-broker provides to the buyer client. Consequently, there is substantial uniformity in the compensation paid to buyer-brokers.
  • Next, various NAR rules effectively limit both buyers’ and sellers’ abilities to negotiate lower commissions. As discussed above, the NAR’s Code of Ethics contains a provision allowing buyer-brokers to inform their clients that their services are free.
  • Another NAR ethical rule forbids buyer-brokers from attempting to negotiate a buyer broker commission offer through the submission of a purchase offer. Consequently, a buyer-broker violates the NAR’s Code of Ethics where they present an offer to a seller that is contingent on the seller reducing the buyer-broker commission. Finally, the NAR has deemed it unethical for a buyer-broker to urge the buyer to negotiate directly with the seller to reduce commissions.
  • Plaintiffs have brought the present action on behalf of themselves and a class of similarly situated individuals. The proposed class would cover any home seller that paid a buyer-broker commission during the four-year period prior to the initiation of this action in connection with the sale of a residence listed on one of twenty MLSs covering various regions across the United States.
  • To state a claim under § 1 of the Sherman Act, a plaintiff must allege: “(1) a contract, combination, or conspiracy; (2) a resultant unreasonable restraint of trade in a relevant market; and (3) an accompanying injury.”
  • Viewing all of the above factual allegations together, the Court concludes that Plaintiffs have sufficiently pleaded the Corporate Defendants’ participation in the conspiracy. Plaintiffs’ allegations plausibly demonstrate that each Corporate Defendant has participated in an agreement that centralizes control over how real estate brokers are compensated with the NAR. Thus, as pleaded, the Corporate Defendants’ actions satisfy the conspiracy element because their actions “deprive[d] the marketplace of independent centers of decision making,” at least with respect to buyer-broker commissions.
  • Defendants contend that Plaintiffs fail to allege facts showing that the NAR’s Buyer-Broker Commission Rules had an anticompetitive effect within the market. In undertaking this analysis, This Court focuses solely on whether Plaintiffs have met their burden of pleading anticompetitive effects. But to the extent Defendants contend that the Buyer-Broker Commission Rules have a procompetitive effect on balance, the Court will not consider such arguments at this stage.
  • When viewing the Buyer-Broker Commission Rules as a whole, it is easy to understand how they could plausibly result in inflated commission rates. First, under Section 2-G-1, the seller-broker must list the property with a blanket offer of some compensation to the buyer broker. That requirement, by itself, raises antitrust concerns given that the offer is the same regardless of the buyer-broker’s experience or the value of services provided by the buyer-broker.
  • Consequently, prospective homebuyers who locate a prospective home online must still retain a buyer-broker. And if the homebuyer chooses to buy a home they found by themselves online, the buyer-broker is entitled to the same blanket buyer broker commission offer as a buyer-broker who worked directly with the prospective homebuyer to initially locate the home.The fact that a buyer-broker for a client that first found their home online is compensated the same for doing less work raises an additional antitrust concern.
  • But even if the seller or buyer were inclined to negotiate the buyer-broker commission, the NAR rules make it a practical impossibility. According to the NAR’s rules, the only time a buyer broker can negotiate the listed commission amount is prior to showing the listed property to a potential buyer. It is difficult for a buyer-broker to gauge a client’s interest in a property that the client has not even seen. Nor can the buyer-broker circumvent the rule by urging the buyer to negotiate with the seller directly. Conversely, once a seller-broker has received an offer on a property, they are prohibited from attempting to modify the buyer-broker commission unilaterally. Taken together, the NAR’s rules allow for the hypothetical possibility of negotiation but it is difficult to imagine how such negotiation could occur.
  • Accepted as true, Plaintiffs’ allegations suggest a pricing system in which the seller is essentially locked into a buyer-broker commission rate upfront that neither the buyer nor the seller have the incentive or ability to negotiate. The Court thus concludes that Plaintiffs have sufficiently alleged “an agreement limiting consumer choice by impeding the ‘ordinary give and take of the market place’ [that] cannot be sustained under the Rule of Reason.
  • In sum, Plaintiffs’ allegations plausibly show that the Buyer-Broker Commission Rules prevent effective negotiation over commission rates and cause an artificial inflation of buyer-broker commission rates in the markets served by the MLSs identified in the CAC. Thus, Plaintiffs’ allegations are sufficient to survive dismissal under the Rule of Reason analysis. This conclusion is in accord with that reached by a district court outside of this Circuit addressing essentially the same issues. Sitzer v. Nat’l Ass’n of Realtors, 420 F. Supp. 3d 903, 913–15 (W.D. Mo. 2019).
    The Court finds that Plaintiffs have sufficiently pleaded that they suffered an antitrust injury from Defendants’ conspiracy. Each Plaintiff was a home seller required to pay a commission to the buyer-broker for the person who purchased their home. But-for Defendants’ conspiracy, each Plaintiff would have paid “substantially lower commissions.” Such an injury is assuredly of a type that the Sherman Act was designed to prevent.

Who will prevail if the lawsuit goes to trial?

Will it be the Plaintiff, the Defendants, the Class Action sellers? To help you decide, take a closer reading of the Judge’s opinion in the Motion To Dismiss, although, do note that many of the defenses the NAR wanted to present were not addressed by the court at this stage and were deferred as factual questions to be best handled at trial. “The Court rejects the Corporate Defendants’ argument in their motion to dismiss that Plaintiffs fail to allege anticompetitive effects in the relevant market. That argument is based on the Corporate Defendants’ contention that Plaintiffs’ allegations ignore the corresponding benefits to both home sellers and home buyers. For now, it is sufficient that Plaintiffs have pleaded that buyers are injured by the limitation of their ability to compete for the purchase of a home by negotiating a lower amount of the buyer-broker commission to be paid by the seller. Also, whether challenged conduct has a procompetitive effect on balance so as to survive scrutiny under a rule-of-reason analysis presents a factual issue that cannot be resolved at this stage of the case.”

And there’s more…

This ongoing battle has taken a serious twist and, for NAR, it is not a good one.  The outcome no matter how big or small is sure to impact the real estate industry in ways that were not envisioned and in a manner that will seriously impact real estate professionals, national, state and local associations.

Stay tuned…..The Data Advocate is on it!







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