– No one can predict the future of real estate, but preparation is important.
– Virtual Inman Connect on Nov. 1-2, 2023 and Inman Connect New York on Jan. 23-25, 2024 are events where tools for the future of real estate can be acquired.
– The Sitzer | Burnett antitrust trial in Kansas City involves plaintiffs and non-settling franchisor defendants.
– NAR’s policies, particularly its Participation Rule, are at the center of the litigation.
– The plaintiffs argue that NAR’s rule stifles innovation and competition.
– The rule requires homesellers to offer payment to the buyer broker, which the plaintiffs argue goes against economic sense.
– The rule also requires uniform compensation regardless of experience or quality of service.
– NAR and its corporate defendants enforce the mandatory NAR rules.
– Expert witness Dr. Craig T. Schulman argues that NAR’s rules have anticompetitive effects and keep commission rates at anticompetitive levels.
– Schulman offers a method to calculate damages and argues that sellers would not pay buyer broker commissions without NAR rules.
– NAR argues that it does not set commission amounts or determine how commissions are paid.
– NAR’s model rules do not require sellers to do anything and sellers are free to choose their agents and payment amounts.
– NAR’s trial brief does not mention the part of its MLS policy handbook regarding offers of compensation.
No one can predict the future of real estate, but you can prepare. Find out what to prepare for and pick up the tools you’ll need at Virtual Inman Connect on Nov. 1-2, 2023. And don’t miss Inman Connect New York on Jan. 23-25, 2024, where AI, capital and more will be center stage. Bet big on the future and join us at Connect.
Ahead of the Sitzer | Burnett antitrust trial in Kansas City, the plaintiffs and non-settling franchisor defendants — the National Association of Realtors, Keller Williams and HomeServices and its subsidiaries BHH Affiliates and HSF Affiliates — submitted trial briefs to the court telling their side of the story.
NAR’s policies, particularly its Participation Rule, which requires listing brokers to make an offer of compensation to a buyer broker in order to submit a listing into a Realtor-affiliated multiple listing service, are at the center of the litigation. Each party in the case has its own name for the rule being challenged.
Here’s a summary of the arguments each party laid out ahead of the trial earlier.
In their trial brief, the homeseller plaintiffs alleged that NAR’s rule, which they call the Mandatory Offer of Compensation Rule, is “a market-shaping and distorting rule” that stifles innovation and competition.
“The Rule requires every home seller to offer payment to the broker representing their adversary, the buyer, even though the buyer’s broker is retained by and owes a fiduciary obligation to the buyer (who may be told, falsely, that the services of the buyer broker are “free”),” the brief said.
The current setup, where homesellers pay buyer brokers who, in order to fulfill their fiduciary duty to their buyer client, must actively work against the seller’s interest by negotiating for a lower home sale price, “defies basic economic commonsense” and would not exist if not for anticompetitive restraints, according to the plaintiffs.
The rule also requires that the compensation offered be the same for every buyer broker in the MLS regardless of the experience or quality of service provided and, until recently, that compensation offer was readily viewable by buyer brokers and their agents, but not to their buyer clients, the brief noted.
“The mandatory NAR Rules have severed the decision to retain a buyer broker (which is done by a potential home buyer) from the negotiation of the price to be paid to the buyer broker (which is set in the listing agreement between a home seller and the listing agent),” the brief said.
“This artificial and severed market structure created by Defendants’ conduct deters price-cutting competition and innovation, resulting in inflated commissions. The Mandatory NAR Rules impede the ability of a free market to function in the residential real estate industry, and the plain purpose and/or effect of the Rules is to raise, inflate, or stabilize commission rates.”
The plaintiffs argued that NAR was not alone in enforcing its rules, including its MLS policies and code of ethics.
“Each of the Corporate Defendants embraces, adopts, and enforces the mandatory NAR Rules by, among other things, requiring their franchisees, subsidiaries, brokers, and agents to comply with the NAR Rules,” the brief said.
“The Corporate Defendants compel compliance in multiple ways, including by requiring their franchisees, subsidiaries, brokers, and agents become members of NAR; writing the NAR Rules into their own corporate documents; and requiring that their franchisees, subsidiaries, brokers, and agents become members of and participants in the Subject MLSs — entities that compel NAR membership and adopt the mandatory NAR Rules.”
Dr. Craig T. Schulman, director of Berkeley Research Group and professor of economic data analytics at Texas A&M University, will be an expert witness for the plaintiffs at trial. Schulman studied defendants’ and third-party transaction data and concluded “common evidence and methods are capable of showing that: (a) the NAR Rules have anticompetitive effects; (b) the NAR Rules caused a seller to pay his adversary (buyer broker) and that, but for the conspiracy, a seller would not pay the buyer broker; and (c) all class members were impacted,” according to the filing.
Schulman will also testify that NAR’s rules “have an observable effect of keeping and stabilizing commission rates at anticompetitive levels,” the filing added.
“Specifically, Dr. Schulman determined that, in the Subject MLSs, the offered commission rates are highly uniform, and the offered rates are almost always the rate that is paid.”
He will testify that commission rates have for many years “remained uniform and steady” at about 6 percent, which “does not make economic sense and could only occur in a market with anticompetitive restraints.”
It also doesn’t make economic sense that “buyer agent commissions do not vary based on competitive forces or market conditions, including agent experience or quality, seasonal trends, or competition in the market,” according to Schulman.
He will argue that it ”makes no economic or competitive sense for sellers to pay buyer brokers anything” and will compare the U.S. real estate market to the Australian market in order to show what the U.S. market would look like “if the mandatory NAR Rules never existed.”
Schulman will also offer a method to calculate damages in the case that argues that sellers would not pay buyer broker commissions absent NAR rules.
“The Class-wide damages therefore are the total of all buyer broker commissions paid by the Class during the Class Period,” the brief said.
“To date, Defendants have siphoned off well more than $1.3 billion in economically irrational and unlawful commissions from the Class.”
Because this is an antitrust case, the damages may be trebled to about $4 billion.
The National Association of Realtors
In its trial brief, NAR argued it does not receive, study or track commissions, set commission amounts, determine who receives commissions, or decide how commissions are paid. The nearly 1.6 million-member trade group also noted that its code of ethics specifically states that Realtors are not obligated to “share commissions, fees, or to otherwise compensate another broker.” NAR’s model rules also “do not require sellers to do anything, and do not prevent sellers from doing anything” or “fix, set, inflate, or suggest commission amounts,” the filing said.
All 500 or so MLSs owned by Realtor associations nationwide must follow NAR’s mandatory model rules. The association’s Policy Statement 7.23, also known as the Participation Rule, is the primary rule being challenged in the case.
According to the filing, the rule reads:
“In filing property with the multiple listing service, participants make blanket unilateral offers of compensation to the other MLS participants and shall therefore specify on each listing filed with the service the compensation being offered by the listing broker to the other MLS participants. This is necessary because cooperating participants have the right to know what their compensation will be prior to commencing their efforts to sell.”
“The listing broker retains the right to determine the amount of compensation offered to subagents, buyer agents, or to brokers acting in other agency or nonagency capacities, which may be the same or different.”
NAR’s brief asserts that three facts about this rule are “undisputed”: “(1) it imposes no obligations on sellers; (2) it imposes no particular amount the agent representing the seller must offer to pay the agents helping her sell the home; and (3) it explains that its purpose is to make sure agents know how much they will be paid before they do any work.” This means that “sellers are free to choose their agents, how much to pay them, and how they are paid; and under the Model Rules, sellers have no obligation to pay anything to anyone, including the buyer agents.”
NAR’s trial brief does not mention the part of its MLS policy handbook that says “Multiple listing services shall not publish listings that do not include an offer of compensation expressed as a percentage of the gross selling price or as a definite dollar amount, nor shall they include general invitations by listing brokers to other participants to discuss terms and conditions of possible cooperative relationships.”
NAR has consistently said in legal filings and public statements that the Participation Rule stipulates that listing brokers can offer buyer brokers “as little as” one cent or one dollar in order to list a property in a Realtor-affiliated MLS, but the trade group has recently changed its interpretation of the rule to allow listing brokers to offer buyer brokers nothing. The trial brief does not mention this change.
The trial brief goes on to say that neither NAR’s model rules or its code of ethics prevent sellers from negotiating commissions with their agents or prevent agents from negotiating with other agents. “While NAR prohibits one agent from unilaterally changing the compensation she is being paid … it ‘does not preclude the listing broker and cooperating broker from entering into an agreement to change cooperative compensation.’”
Moreover, NAR argued that agents affiliated with the defendants would make offers of compensation through the MLS without NAR’s model rules and that attending NAR meetings “where there is no evidence that the Offer of Compensation Model Rule was even referenced,” did not constitute a conspiracy.
“There is no direct evidence that the Defendants agreed with each other to enforce or follow NAR’s Model Rules,” NAR’s attorneys wrote.
“Plaintiffs’ conspiracy allegations boil down to an argument that trade associations are walking conspiracies, which courts routinely have rejected,” they added.
The brief suggests the plaintiffs will claim that offers of compensation have been clustered at certain levels, but says that the plaintiffs “ignore the fact that there is competition—including commissions decreasing, offers of different compensation rates in Missouri, and negotiations of commissions between listing agents and sellers.”
Lastly, NAR said it would argue that the plaintiffs don’t have standing to sue for damages because under federal and Missouri antitrust law, only “direct purchasers” can be allowed to sue and the plaintiffs have not bought anything from NAR or the other defendants.
“[W]hen a listing agent makes an offer to pay cooperating agents, the listing agent is the direct purchaser (of the cooperating agent’s services), not Plaintiffs or other sellers,” the brief said.
“And, according to those same Model Rules and listing agreements, Plaintiffs did not directly pay cooperating agents, NAR, or the other Defendants; sellers only directly pay their listing agents and only directly receive services from their own agents.
“Therefore, at best, Plaintiffs might claim that they paid their listing agents (who are not parties to this case) who, only then, paid Defendants. But such an indirect claim is prohibited by Supreme Court case law.”
In its trial brief, Keller Williams argued that it “did not participate in any conspiracy” and that the evidence at trial will show that “Keller Williams has had little to no role whatsoever in the National Association of Realtors and no role whatsoever in any activities relating to the Cooperative Compensation Rule at issue in this case.”
The company suggested the plaintiffs will assert evidence that they allege has “nothing to do with the NAR rules at issue” and but rather reflects independent decision-making by the franchisor, including KW’s requirement that its agent affiliates join their local Realtor association and MLS, educational materials that include example commission amounts, and presentations allegedly shown to agent audiences at KW’s annual Family Reunion events that included national average commission rates for the company’s affiliated agents.
Keller Williams said the company joined in NAR’s trial brief.
The HomeServices defendants
In their trial brief, HomeServices and its subsidiaries argued that there is no evidence that any of the HomeServices defendants had “any involvement of any kind” with NAR’s Participation Rule, much less that they conspired to “follow and enforce” it.
Specifically, the company said there was no evidence that any “officer, director, employee or representative of any HomeServices Defendant ever discussed” the rule internally or with any third party, including the other defendants, or that they had “ever even thought about” the rule before this lawsuit was filed. The company also said there was no evidence anyone from NAR had invited anyone from the HomeServices defendants to take any action relating to the rule or that any HomeServices defendant required their franchisees or subsidiaries to join NAR, any MLS, or to follow and enforce the rule.
The HomeServices defendants suggested that the plaintiffs will offer five types of evidence that would not be sufficient to justify a verdict in favor of the plaintiffs: evidence of general involvement with NAR, sporadic contact with competitors at industry events and social gatherings, internal training materials that refer to a 6% commission, BHH’s requirement that its franchisees follow NAR’s Code of Ethics; and HomeServices’ public support of a different NAR rule, the Clear Cooperation Policy, whose stated goal was to curb pocket listings.
The HomeServices defendants also said they joined in NAR’s trial brief.
Property Chomp's Take:
No one can predict the future of real estate, but it's important to be prepared for any changes and developments in the industry. That's why attending events like Virtual Inman Connect and Inman Connect New York can be so valuable. These conferences bring together industry professionals and experts to discuss the latest trends and technologies shaping the real estate market.
One of the key issues currently being debated in the industry is the Sitzer | Burnett antitrust trial in Kansas City. The trial involves the National Association of Realtors (NAR), Keller Williams, HomeServices, and its subsidiaries BHH Affiliates and HSF Affiliates. The plaintiffs in the case have raised concerns about NAR's policies, particularly its Participation Rule, which requires listing brokers to offer compensation to buyer brokers in order to submit a listing into a Realtor-affiliated multiple listing service.
The plaintiffs argue that this rule is anticompetitive and stifles innovation and competition in the market. They claim that it forces home sellers to pay buyer brokers, who may be working against their interests by negotiating for a lower home sale price. The plaintiffs also argue that the compensation offered to buyer brokers is the same regardless of their experience or quality of service, which further hinders competition and innovation.
On the other hand, NAR defends its policies, stating that it does not set commission amounts or determine who receives commissions. The association emphasizes that sellers are free to choose their agents and decide how much to pay them. NAR's Participation Rule is intended to ensure that agents know how much they will be paid before they start working.
The trial will feature expert witnesses who will present evidence and arguments supporting their respective positions. Dr. Craig T. Schulman, director of Berkeley Research Group and professor of economic data analytics at Texas A&M University, will testify on behalf of the plaintiffs. Schulman's research concludes that NAR's rules have anticompetitive effects and have resulted in sellers paying buyer broker commissions that they would not have paid otherwise.
While it is impossible to predict the outcome of the trial, its impact on the real estate industry could be significant. If the plaintiffs are successful, it could lead to changes in NAR's policies and potentially lower commission rates. On the other hand, if NAR's defense is upheld, it could reinforce the association's role in setting industry standards.
Regardless of the trial's outcome, it is clear that the real estate industry is undergoing significant changes. Technology, AI, and new business models are reshaping the way properties are bought and sold. Attending events like Virtual Inman Connect and Inman Connect New York can provide valuable insights and tools to navigate these changes and stay ahead of the curve.
In the ever-changing world of real estate, it is crucial to stay informed and prepared for whatever the future may bring. Whether it's attending conferences, staying up to date with industry news, or networking with other professionals, taking proactive steps can help you navigate the challenges and opportunities that lie ahead.