Why the ‘bombshell lawsuit’ might be a dud

With more than 1,000 Inman posts, Bernice Ross is a long-time contributor whose weekly column on real estate trends, luxury, marketing and other best practices publishes every Monday.

On March 6, 2019, attorneys for homeseller Christopher Moehrl filed a class action alleging that the National Association of Realtors (NAR), four major real estate brands — Realogy, HomeServices of America, RE/MAX and Keller Williams — and a number of multiple listing services (MLSs) controlled by local associations are “conspiring to require homesellers to pay the broker representing the buyer of their homes, and to pay at an inflated amount, in violation of federal antitrust law.”

With hundreds of billions of class action victories for the six firms and 16 attorneys representing Moehrl, should we be shaking in our boots?

Andrea Brambila and Rob Hahn have outlined the issues and the potential threat that the Moehrl lawsuit poses to the real estate industry, specifically in regard to sharing listings and compensation through the MLS. This two-part series does a deep dive into the mistakes, errors and problems contained within this complaint.

At the center: The buyer-broker commission rule

Rather than using the term “price” or “commission” fixing, the plaintiff’s attorneys coined the term “The Buyer Broker Commission Rule” to describe the second point of Section 1 of NAR’s Handbook on Multiple Listing Policy, which states what an MLS is:

A multiple listing service is a means by which authorized participants make blanket unilateral offers of compensation to other participants (acting as subagents, buyer agents, or in other agency or nonagency capacities defined by law).

The complaint states this provision has resulted in price competition among buyer brokers being restrained:

The Buyer Broker Commission Rule ensures that price competition among buyer brokers is restrained because the person retaining the buyer broker, the buyer, does not negotiate or pay his or her broker’s commission. In addition, the seller’s inflated commission offer cannot be reduced by buyers or their brokers, as Defendants also prohibit buyer brokers from making home purchase offers contingent on the reduction of the buyer broker commission.

The listing contract is between the seller and the brokerage. As the NAR handbook points out above, these blanket unilateral offers of compensation to other participants of the MLS are defined by law.

To illustrate this point, the California Civil Code 1624 states:

(a) The following contracts are invalid, unless they, or some note or memorandum thereof, are in writing and subscribed by the party to be charged or by the party’s agent:

(4) An agreement authorizing or employing an agent, broker, or any other person to purchase or sell real estate, or to lease real estate for a longer period than one year, or to procure, introduce, or find a purchaser or seller of real estate or a lessee or lessor of real estate where the lease is for a longer period than one year, for compensation or a commission.

Moreover, if an Exclusive Right to Sell Agreement exists between a seller and Jones Realty, and Smith Realty makes an offer that includes any commission amount other than what is stated in the Exclusive Right to Sell Agreement and the MLS, Smith Realty has engaged in “tortious interference.” (One attorney described agent/brokers who engage in this activity as “malicious interlopers” who are attempting to alter the Exclusive Right to Sell contract for their own gain, i.e., “tortious interference.”)

Attorneys unaware of robust competition among buyer agents

In addition to the “constraint” claim above, the complaint also states:

This method of setting the buyer broker commission is wholly different from the method that would exist absent the Buyer Broker Commission Rule. Absent this rule, buyer brokers would be paid by their clients and would compete to be retained by offering a lower commission.

The attorneys in the case are apparently unfamiliar with exactly how competitive the industry is not only for sellers, but for buyers as well. Examples that refute their claim include:

• Agents who work with buyers exclusively: The National Association of Exclusive Buyer Agents (NAEBA), a group that only represents buyers (never sellers), has served this specific market segment since the mid 1990s.
• Exclusive buyer agreements: This type of contract continues to grow in popularity, not only among exclusive buyer agents, but among agents who serve both buyers and sellers. The buyer’s agent is paid a specific commission amount, regardless of whether any seller/listing broker compensation is offered.
• Fee for service: This model unbundles real estate services that full-service brokers provide and allows the buyer to select the services they want. For example, if the buyer is purchasing from a neighbor but they need help navigating through the transaction and/or obtaining a loan, they can hire an agent to provide those specific services.
• One-party listing agreements for a single buyer: This model works especially well with off-market properties and For-sale-by-owners (FSBOs). When there is little inventory, agents are desperate to find something to sell. Many actively solicit one-party listings (a listing for a single buyer) for off-market and FSBO properties. The buyer is typically the exclusive agent of the buyer and negotiates a buyer commission that the seller will pay if the agent’s offer is accepted.
• Rebate models: One twist on this model is from Clever, where agents with traditional firms agree to provide a rebate to the buyers. Clever reports an average rebate of $3,000 for buyers or up to 1 percent of the agent’s commission at closing.

A clever — but flawed — strategy

Even though the attorneys have come up with a clever approach to try to reduce agent commissions, the first thing that struck me about the complaint was that it appeared to be written by attorneys who might be powerhouses when it comes to class action and antitrust litigation, but lack a deep knowledge of the real estate industry, its standards of practice and how the business is conducted.

In the filing of this suit, they seemed to have relied heavily on NAR’s Handbook on Multiple Listing Policy and the NAR’s Code of Ethics to draft the complaint. There was no reference to the extensive amount of legislation and regulations with respect to commissions, agency and contracts.

The most egregious example of this lack of knowledge was the following statement on page 10:

State licensing laws regulate who can represent sellers and buyers in the real estate market. There are two licensee categories: (1) the real estate broker (also known as a
“brokerage firm”); and (2) the individual real estate licensee or agent. Real estate brokers license individual real estate agents and are legally responsible for the activities of the agents they license.

Here’s another example, found on page 3:

Brokers must list a property for sale on an MLS to effectively market that property to prospective buyers, and in any event, are required to list all properties on the MLS if they are members of the MLS.

Virtually all MLSs have a provision for “Exempt Listings,” i.e., properties where the sellers opt out of having their listing published on the MLS.

What surprised me was that of the 16 attorneys on the case, none of them had extensive experience working with the real estate industry. One had been an advisor on an affordable housing campaign and the other had represented a member of the service against an illegal foreclosure action. The other 14 attorneys had no reference to real estate in their rather extensive online bios.

Besides these issues, there are additional issues with this complaint which are outlined in part two of this series.