USA real estate fees
By Timothy W. Grooms (EDITOR’S NOTE: This article has more technical information about legal matters than usually found in AREC Newsletter articles. It contains important information which the reader may wish to discuss with an attorney. ) I. INTRODUCTION Until recent years, real estate professionals have had little contact with the federal Sherman Antitrust Act (the “Act”) However, a 1980 decision rendered by the United States Supreme Court, in addition to numerous lower federal court and state court decisions subsequent to that decision, have made it clear that the actions of real estate professionals and the professional organizations to which they belong are subject to the prohibitions and requirements of the Act. Familiarity with the provisions of the Act are critical in that violations thereof are punishable by both criminal and civil sanctions. A criminal violation of the Act is a felony punishable by imprisonment for up to three years and fines not exceeding 0,000 for individuals and description,000,000 for corporations.
Damages awarded to plaintiffs in civil actions are automatically trebled. II. THE TEST OF ILLEGALITY The literal language of the Act prohibits every contract, combination and conspiracy in restraint of trade. While early United States Supreme Court decisions suggested that “every” was to be taken literally, a “rule of reason” now prevails to merely prohibit those concerted actions which cause an “unreasonable restraint of trade. ” Nevertheless, the courts have held that certain conduct is so anti-competitive that it is not to be judged by the “rule of reason” analysis, but is instead illegal “per se. ” In the real estate brokerage industry, most civil and criminal litigation has centered around three challenged practices, any of which, if successfully proven, constitute “per se” violations of the Act. The balance of this article will concentrate on these three areas, involving price-fixing, group boycotts and tying arrangements.
III. PRICE-FIXING Agreements among competing brokers to set commissions is price fixing and hence illegal per se. However, illegal price-fixing is not limited to those cases where a specific fee or commission rate is agreed upon. Rather, the prohibition extends broadly to all agreements which have the effect of raising, depressing, fixing, pegging or stabilizing the price of real estate services. Cases under the Act have not required a showing of an express agreement to adhere to an illegal plan; tacit agreement to such a plan will suffice for a violation of the Act.
Real estate professionals are easy targets of price-fixing suits because studies indicate that commission rates have been relatively stable over time. Plaintiffs usually allege that such stability is due to either tacit agreement, express agreement, or other type of collusion among real estate professionals. However, it is equally convincing to this author that the fact of commission rate stability by itself should not establish a conspiracy. Indeed, the historical trend of inflexible rates may be the strongest evidence that the phenomenon is explainable solely by market forces, not by collusion.
Real estate professionals should be extremely cautious to never discuss with other brokers, in any setting, commissions which they are charging to their buyer or seller clients. These discussions, which the author can envision as being potentially “pro-competitive,” in that they might cause a broker to realize that he needs to lower his commission schedule to “meet the competition,” are so potentially devastating in either civil or criminal proceedings under the Act that they should be avoided in all circumstances. IV. GROUP BOYCOTTS A classic “group boycott,” also known as a concerted refusal to deal, is an agreement or combined action among industry members to drive a competitor from the industry by denying the competitor a source of supply or a source of customers. Such conduct is illegal per se.
Specifically regarding the real estate industry, numerous cases have dealt with alleged “group boycotts” in the context of multiple listing services (“MLS”) and local real estate boards. The common theory of these lawsuits has been that various challenged exclusions by a local MLS or real estate board was done for anticompetitive reasons in violation of the Act. So far, while the United States Supreme Court has failed to rule on the issue, in the context of the real estate profession, these matters have been analyzed under the “rule of reason” standard, as opposed to being declared illegal “per se. ” Thus, exclusions of industry members from either a local MLS, or a local real estate board, will be upheld if the MLS or the board can show that the membership exclusions are designed to reasonably protect the integrity of the organization and are narrowly tailored to accomplish the legitimate end sought. Federal district courts have upheld (i) the denial of a broker from board membership when such broker failed the requirement of having a favorable business reputation, (ii) the exclusion of non-board members from board decisions, and (iii) the exclusion from a local MLS of non-board members.
However, the most exhaustive analysis of the “group boycott” issue has been undertaken by the Fifth Circuit Court of Appeals, in United States v. Realty Multi- List. Inc. and the subsequent case styled Pope v. Mississippi Real Estate Commission.
In Realty Multi-List, the defendant MLS restricted access to the service to only those brokerage firms who (1) had an active real estate office open during all business hours, (2) had a favorable reputation and credit report, and (3) had purchased stock in the MLS corporation at a price to be determined by the MLS board. The Court refused to apply a “per se” analysis to these restrictions, instead analyzing the same under the “rule of reason” analysis discussed previously. However, even under a “rule of reason” analysis, the Court declared these access restrictions illegal, concluding that such restrictions exceeded the legitimate requirements of the MLS. The Court held that the “favorable credit report and business reputation” requirements were unnecessary to protect the MLS. It also found that the “business hours” requirement was needlessly harmful to part-time brokerages. Finally, the Court condemned the stock purchase requirement on the ground that the price of the stock was not related to the operational needs of the MLS. In Pope, the Fifth Circuit once again reviewed the exclusionary access provisions of a local MLS in a challenge by the largest brokerage firm in the relevant market area.
The crux of the challenge was twofold. First, the challenger attempted to reargue the same points that had been successful in Realty Multi-List. Second, the challenger contended that it would be paying over half the fees collected by the MLS, because of the number of dues paying agents in its firm, and that such a requirement was unfair and thus anticompetitive. The Fifth Circuit quickly dismissed these arguments, finding that the MLS in question was in full compliance with the Realty Multi-List decision, and that common sense would properly require the largest brokerage firm, which would, of course, be the largest user of the MLS, to pay the largest fee.
Real estate boards and MLS systems should carefully review their membership requirements in light of the decisions discussed above, to be sure that every condition of membership serves a legitimate and lawful purpose, and to be sure that such condition is narrowly tailored to accomplish that purpose and no other. If a review is completed to assure satisfaction of the requirements of the Act, then the local real estate board or MLS should be in compliance with the Act. Before leaving this issue, it is important to note that, where membership or access conditions to either real estate boards or MLS services are directed at improperly coercing the behavior or business practices of third parties, they will not be analyzed under the “rule of reason,” but instead will be struck down as illegal “per se”. This article should not be construed to mean that only the situations discussed herein can give rise to liability under the Act.
To the contrary, any time a sufficient number of brokers in a given market area act in concert to drive a competitor from the market area, or to influence the competitor’s business practices in an anticompetitive manner, a violation of the Act has occurred. For example, in Park v. El Paso Bd. of Realtors, several brokers were found liable “per se” under the Act for damages suffered by a competitor when the defendant brokers tried to drive the competitor from the market by damaging his reputation and refusing to treat the competitor’s listings on a par with the listings of other brokers in the market. V. TYING ARRANGEMENTS A tying arrangement is the conditioning of the sale or purchase of one product to the sale or purchase of another product.
This practice is perhaps best exemplified in the real estate industry by the alarmingly common practice known as a “list-back” agreement. Under such an agreement, a real estate broker will, for example, condition the sale of lots to a builder on the agreement of such builder to list with the broker the homes built on such lots. Several state and federal courts have found such agreements to be illegal under the Act. While “list-back” agreements are the most easily identifiable forms of arguably illegal tying arrangements, real estate professionals should be aware of and cautious concerning the general principles discussed in this article before conditioning the sale or purchase by the professional of one product on the requirement that the other party to the transaction purchase from or sell to such professional another product.
VI. CONCLUSION In an era of ever-increasing litigation and liability for Real estate professionals, it is difficult (and sometimes impossible) to avoid all areas of legal exposure. However, the author wanted to provide the information contained in this article to all Real estate licensees because of the devastating consequences which can occur if a violation of the Act is proven. Money judgments by disgruntled buyers and sellers and regulatory disciplinary actions by the Commission are crushing; however, even these actions seem to pale in comparison with a criminal imprisonment and fine which can be (and has in other states been) imposed by the federal government for violations of the Act. 15 U. S. C. Subsection 1, et seq. (Supp. 1982). McClain v.
Real Estate Bd. of New Orleans. Inc. , 444 U. S. 232 (1980). This “rule of reason” was initially enunciated in the United States Supreme Court opinion of United States v. Standard Oil Corp. , 221 U. S. 1 (1911).
United States v. National Assn. of Real Estate Boards,339 U. S. 485 (1950). Park v. El Paso Bd. of Realtors, 1985-1 Trade Cases (CCH) Paragraph 66, 659 (5th Cir. 1985).
See, e. g. , 1 Federal Trade Commission Staff Report, The Residential Real Estate Brokerage Industry 195-202 (1983). Brown v. Indianapolis Bd. of Realtors, 1977-1 Trade Cases (CCH) Paragraph 61, 435 (S. D. Ind. 1977). Martin-Trigoma v.
National Assn. of Realtors, 1978-1 Trade Cases (CCH) Paragraph 61,915 (E. D. Ill. 1978). Murphy v. Alpha Realty. Inc. , 1978-2 Trade Cases (CCH) Paragraph 62,388 (N. D. III. 1978). 629 F. 2d 1351 (5th Cir. 1980). 872 F. 2d 127 (5th Cir. 1989).
See, Hartrampf v. First Multiple Listing Service. Inc. , 1983-2 Trade Cases (CCH) Paragraph 65,518 (N. D. Ga. 1983) (wherein the termination of an MLS member for subscribing to a competitive MLS system was struck down as illegal “per se”); Penne v. Greater Minneapolis Bd. of Realtors,604 F. 2d 1143 (8th Cir. 1979) (where a discount commission broker was discriminated against under MLS rules pursuant to “punitive commission splits,” the practice was illegal “per se”).
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