Antitrust and Real Estate – What is On the Horizon?

Competing real estate brokerage firms have an obligation to cooperate in order to serve the interests of their clients and customers. They are also prohibited from engaging in practices that may violate federal and state antitrust laws. To put it bluntly, there are distinct differences between cooperation and conspiracy.

The National Association of Realtors (NAR) on March 10, 2022 posted on its website, “Window to the Law: Antitrust for Real Estate Professionals.” It states, in part: “Competition in today’s real estate market is vibrant….consumers have extraordinary choice [choices] regarding the level of service and price consumers pay for real estate services…. the antitrust laws aim to ensure that consumers continue to have optimum choices at optimum prices.” It adds: “Anticompetitive behavior…. can lead to criminal fines and imprisonment, and private plaintiffs seeking huge sums of money in damages.”

On May 8, 1950, in United States v. National Association of Real Estate Boards et al. the Court established that the federal antitrust laws applied to the real estate industry.

Recent antitrust cases pending before federal courts involving major real estate brokerage companies and the National Association of Realtors have gained attention, and the alarm bells have been ringing throughout the industry. Antitrust is an area of special legal expertise. For this article, I reached out to Michael M. Buchman, Member of the law firm, Motley Rice LLC. Mr. Buchman leads the firm’s antitrust team. He has more than twenty-five years of antitrust experience and has played an active role in some of the largest antitrust cases in the history of the Sherman Act. He also served as an Assistant Attorney General in the New York State Attorney General’s Office Antitrust Division.

JV: When was the first antitrust law passed in the United States?

MB: “On April 8, 1890, Congress passed the Sherman Antitrust Act.  It was initially designed to reduce the concentration of power that interfered with domestic commerce and prevented economic competition.  The Act prohibited businesses from colluding or merging to form a monopoly.”

JV: What are the provisions of the Sherman Act?

MB: “The Sherman Act Contains two principal substantive provisions. Section 1 prohibits two or more persons from entering into a contract, combination or conspiracy in restraint of trade. It does not define the offenses it proscribes. Unlawful conduct can take many different forms. Some conduct between competitors is so inherently anticompetitive and harmful that it is deemed to be per se unlawful such as price fixing, market allocation, bid rigging, and group boycotts/refusals to deal.”

JV: Can you provide examples of each category?

MB: “Price-fixing is an agreement between two or more persons to fix, raise, maintain or stabilize price in a market.”

“An unlawful market division arises when two or more competitors allocate markets along geographic lines. For example, if one competitor agrees to service all businesses east of the Mississippi River and and the other competitor agrees to service all businesses west of the Mississippi River. That could constitute unlawful geographic market allocation. Similarly, competitors who agree not to solicit or service particular customers engage in what is known as unlawful customer division.”

“Bid rigging involves coordination among bidders in what was intended to be a competitive bidding process. It frequently occurs when competitors agree in advance what the bidding will be and which firm will place it.”

“Section 2 makes it unlawful for a single person or entity to monopolize, attempt to monopolize or conspire to monopolize. Spectrum Sports, Inc v. McQuillan, decided by the Supreme Court in 1993 speaks to this issue. There is an important distinction between Sections 1 and 2 of the Sherman Act is Section 1 applies to conduct between two or more persons, while Section 2 covers single person/entity as well as concerted activity.”

JV: What are the penalties that may be enforced for violations of the Sherman Act?

MB: “Both Sections 1 and 2 provide for civil liability as well as criminal penalties. Criminal penalties under both Sections are a fine not exceeding $100,000,000 for corporations and $1,000,000 for other persons; imprisonment not exceeding 10 years ; and both fine and imprisonment. The statute of limitations for civil damage claims is four years.”

JV: What is the Clayton Act and when did it go into effect?

MB: “The Clayton Act went into effect in 1914. It affords private litigants the right to bring civil action for monetary damages and/or injunctive relief. Financially injured private litigants are permitted to pursue treble (triple) damage awards. The statute of limitations for civil claims under Clayton Act is four years.”

JV: What is the Donnelly Act?

MB: “States across the country have predominantly adopted their own version of the Sherman Act. In 1899 New York enacted its own antitrust statute known as the Donnelly Act. It is modeled off the Sherman Act and is commonly referred to as a ‘Little Sherman Act.’ It differs slightly from the Sherman Act in two ways. First, it proscribes “contracts, agreements, arrangements and combinations” that restrain trade. The inclusion of the word arrangement makes the Donnelly Act slightly broader in scope than the Sherman Act, but it does not proscribe unilateral conduct.  State v. Mobil Corp., 38 N.Y. 2d 460, 463, 381 N.Y.S. 2d 357 (1976)

“Second, unlike Section 2 of the Sherman Act which prohibits monopolization via unilateral conduct, the Donnelly Act only covers monopolization when performed by two or more persons/entities. The statute of limitations for civil damage claims under the Sherman and Donnelly Acts is four years. Like the federal antitrust laws, the Donnelly Act subjects a violator to a fine not exceeding $100,000 or imprisonment for not longer than four years. Criminal indictments or information are to be commenced within three years of the violation under the Donnelly Act.”

JV: Can you specify antitrust cases pending before Federal Courts?

MB: “Within the past three years, antitrust class actions have been filed in federal courts: Sitzer v. National Association of Realtors (NAR); Moerhl v. National Association of Realtors; Nosalek v. MLS Property Information Network.”

“Sitzer v. The National Association of Realtors et.al. concerns a “Buyer Broker Commission Rule” which may be imposed when listing a property on a multiple listing service . Total broker compensation in this country is typically five to six percent of the sale price of a residential transaction. Approximately half that amount is paid to the broker who represents the buyer in the transaction. Plaintiffs, home sellers allege that the defendant’s conspiracy has maintained the buyer broker commissions in the two and a half to three percent range for many years and that the Rule forces them to pay a commission that would otherwise be paid by the buyer and in a lower amount in a fully competitive market. The Rule also prohibits a buyer’s broker from making purchase offers contingent on a reduction of the broker’s commission. In sum, plaintiffs allege that defendants have engaged in a conspiracy to inflate buyer broker commissions home sellers are forced to pay causing them to be financially injured.”

“The antitrust cases filed to date have advanced beyond the motion to dismiss phase and appear to be gaining significant traction. The Sitzer case, which is more advanced than the other two cases, has been certified as a class action. A trial is presently scheduled for February 21, 2023. As the front runner challenging the rule, the Sitzer case may ultimately have a very profound impact on the Rule in 2023, and the way brokers compete and are compensated where the Rule has been implemented.”

The National Association of Realtors (NAR) identifies two per se restraints that have particular relevance to real estate brokers: conspiracy to fix prices, such as real estate commission rates, or to fix other terms or conditions of the broker-client relationship; group boycotts, or concerted refusals to deal with another competitor or supplier.

The NAR explains that agreements among competitors regarding terms of a listing agreement, such as length of the listing, the type of listing accepted, or the marketing services to be provided by the listing broker although not treated as per se violations the lawfulness of such agreements will in many cases be analyzed under the Rule of Reason.

The NAR also identifies boycotting, which is generally characterized as a per se violation, although certain boycott activities may be addressed under the Rule of Reason.

Author’s Note: In United States v. Foley, decided April 19, 1979, the U.S.Court of Appeals, Fourth Circuit, is an illustration of price fixing when six corporate and three individual defendants appealed their felony convictions for conspiracy to fix real estate commissions. The Court  of Appeals affirmed the District Court’s decision.