Georgia’s second-largest multiple listing service has been hit with a lawsuit alleging that the unusual method it employs to collect dues from member brokers amounts to an illegal kickback and price-fixing scheme.
Atlanta-based First Multiple Listing Service Inc. has charged its member brokers a fee every time their agents represent a buyer or seller in a transaction — an amount equal to $1.20 for each $1,000 of the home’s sale price. Once brokers have paid FMLS the minimum $1,500 in annual fees, they have been eligible to receive "patronage dividends" from a fund where the fees are collected.
The fee and the dividend payments violate anti-kickback provisions of the federal Real Estate Settlement Procedures Act (RESPA), claim attorneys representing three consumers who bought homes listed with FMLS in 2009, because they reward brokers for referring business to FMLS, and consumers are not informed about them or given the opportunity to opt out.
The lawsuit seeks class-action status to represent thousands of consumers who bought or sold homes during the previous four years. The suit seeks triple damages if FMLS is found to have violated RESPA in collecting and distributing the fees.
Because the fees collected by FMLS are based on a home’s sale price, the lawsuit also alleges that they violate federal antitrust law by establishing a "floor" or minimum commission rate on sales of homes in 21 counties in Northern Georgia at the expense of consumers, small brokerages, and firms providing flat-fee services.
The suit names FMLS, its 2,000 member brokers and their agents, two local Realtor associations, and several brokerages, who deny all of its allegations.
Lawyers for the defendants have filed a motion to dismiss the suit, claiming it "does nothing more than present inflammatory rhetoric" in an attempt to "transform a legitimate business model and competitive pricing structure into a multimillion-dollar class-action lawsuit."
The fees that FMLS charges are collected from member brokers, not consumers, attorneys representing the defendants said in a brief supporting their motion to dimiss the lawsuit. Brokers negotiate commissions with consumers independently, they said, and those fees are disclosed on the HUD-1 settlement statement,
"In other words, even based on (the lawsuit’s) far-flung allegations, none of the brokers would ever receive commissions any higher than those disclosed" to consumers, attorneys for the defendants said.
The lawsuit’s "pejorative labeling of the patronage dividends as ‘kickbacks’ reflects (the plaintiffs’) fundamental misunderstanding of the FMLS fee structure, and the fact that patronage dividends are well-recognized as legal and appropriate," defense attorneys said in their brief.
The lawsuit claims FMLS is the only MLS in the country to employ such a fee structure — a system allegedly created with the "sole reason" to "split fees and enable FMLS to provide (brokers) with kickbacks in exchange for referrals."
FMLS’ unique fee structure, in addition to fueling the MLSs’ rapid growth and boosting its profitability, has enabled brokers to collude in setting commissions, because the MLS collects information on the commission paid on each transaction and shares it with members, the lawsuit charges.
FMLS’ collection of information on commissions is evidence that it "invite(d), encourage(d) and facilitate(d) collusion among the members … with respect to commissions," according to the lawsuit.
Lawyers for the defendants do not dispute that FMLS collects HUD-1 settlement statements that includes the sale price and commission paid on each transaction. The information is collected to determine FMLS’ fee, they said.
"Other than vaguely stating that FMLS provides member brokers with ‘access’ to ‘commission information’ there is no specific allegation that FMLS shares any commission information other than the commission being offered to a selling broker, if any," attorneys for FMLS said.
Even if the fees "technically set a floor" for commissions — "much like the price of eggs technically sets a floor to the price of an omelet," — such allegations "do not state a price-fixing claim," lawyers for the defense said.
Marx Sterbcow, a New Orleans-based attorney representing plaintiffs in the case, said the National Association of Realtors has published guidelines instructing Realtor boards and MLSs not to base dues or fees on the sales price of homes because of antitrust issues.
NAR developed its "MLS Antitrust Compliance Policy" in consultation with the Federal Trade Commission, he said.
"This is exactly what NAR has been telling MLSs across the country not to do," Sterbcow said.
FMLS President Cantey Davis said today he would not comment on the lawsuit — including whether the challenged fee structure is still in place. Attorneys for FMLS did not immediately respond to requests for comment.
In seeking to have the lawsuit thrown out, attorneys for FMLS stated that NAR’s MLS antitrust guidelines are "not a statement of applicable law regarding Sherman Act violations," and should carry no weight in court.
The lawsuit alleges that FMLS’ fee structure generates profits "far in excess" of those generated by rival Georgia MLS (GAMLS), the state’s largest MLS, or or other "similarly situated" MLSs.
Lawyers for FMLS say that in many instances where a broker has more than one agent, GAMLS’ fees are actually higher than those charged by FMLS.
FMLS’ $1,500 annual fee is $60 more than GAMLS charges brokers with one licensed agent, lawyers for FMLS acknowledged.
But FMLS’ fee is the same no matter how many agents a broker employees, while GAMLS charges brokers $20 a month extra for each licensed agent working for them. Each additional agent therefore increases GAMLS’ annual fee by $240, attorneys for FMLS said.
Historically, the lawsuit claims, FMLS charged a fee that equaled 4 percent of the total commission on a sale. If the commission was 6 percent, FMLS’ fee would be 0.24 percent of the sale price (4 percent of 6 percent).
The lawsuit alleges that the formula was changed to maintain the fee at the same level in the event that commissions on a particular sale fell below 6 percent.
Currently, the FMLS fees — which are due within 10 days of a sale’s closing — amount to $240 per transaction on a $200,000 home if both the listing agent and buyer’s agent are with the same broker.
If each agent is affiliated with a different brokerage, each brokerage pays the fee, so a $200,000 home sale would generate a $480 fee.
Once FMLS member brokers have paid FMLS fees equal to the $1,500 minimum annual fee, they are then eligible to receive "patronage dividends" — payments that the lawsuit alleges equal or exceed whatever transaction-related fees each brokerage pays above and beyond the $1,500 annual fee.
The largest and most successful broker members — the MLS’ stockholders — allegedly receive the most dividends. Some brokers don’t do enough transactions to cover the $1,500 annual fee, and must cover the difference out of their own pocket.
Those brokers are not eligible to receive dividends, leaving a larger pot to split among the rest, the lawsuit contends.
Another alleged problem with FMLS fee structure that brokers offering "MLS only" flat-fee services pass the fees on directly to consumers.
The lawsuit alleges that the FMLS transaction fees are paid out of the brokers’ commissions, and funds from multiple settlements are allegedly "co-mingled" into a fund used to make patronage dividend payments to brokers outside of closing.
That means FMLS member brokers who accept patronage dividends are therefore sharing "hidden settlement fees" in which they are not the broker or agent of record and are unaffiliated with the settlement, the suit alleges.
FMLS does not provide settlement services governed by RESPA, and the homebuyers named as plaintiffs in the suit "did not pay for the FMLS services," attorneys for the MLS said. "These simple facts alone provide a sufficient basis on which this court can and should dismiss the RESPA claims."
Although member brokers and their agents both contribute to the fund through commissions, only the brokers receive the dividends. FMLS and its members have not disclosed the dividend payments to clients, or even to their agents, the lawsuit claims.
The lawsuit nevertheless names the agents who represented the three named plaintiffs, saying they "acquiesced in splitting … commissions with FMLS."
Broker compensation in the three sales cited as examples in the case ranged from a low of 5 percent to a high of 5.63 percent. The FMLS fees paid out of those commissions ranged from $369 to $575. In the case of a home that sold for $239,000 for example, total broker compensation was $11,995, and the FMLS fee was $575.
Even if a "significant portion" of the fees are returned to brokers as patronage dividends, that does not explain why the defendant brokers and agents split their commission with FMLS in the first place, lawyers for the plaintiffs said.
"Which of the defendant brokers receive the bulk of the patronage dividends, and why, is also a matter to be resolved in discovery," they said in answering FMLS’ motion to dismiss the case.
Lawyers for FMLS urged the court to "summarily reject plaintiffs’ desperate request to conduct discovery in order to properly plead their claims."
The bottom line, they said, "is that the FMLS rules constitute nothing more than a voluntary agreement entered into between independent players in the real estate industry," attorneys for FMLS said.
Nothing in the MLS rules "impacts or alters the wholly separate agreements" FMLS member brokers entered into with consumers in the three transactions cited in the lawsuit as examples, they said.
A hearing on the motion is scheduled for Oct. 12 before a U.S. District Court judge in Atlanta.
