‘Longstanding conspiracy’: Why the bombshell commission suit matters

This is the second part in a week-long series examining the high stakes and potential impact of two closely watched federal lawsuits that take direct aim at how homebuyers pay commissions (read Part 1). Check back on Thursday for the real-world impact these court decisions could have on millions of real estate agents and on Friday, the plaintiffs’ evidence of price-fixing. 

Potentially millions of homesellers across the country may be able to seek billions in damages for commissions they paid to buyer agents between 2015 and 2020 if plaintiffs in the larger of two bombshell federal lawsuits have their way.

The plaintiffs allege that the current commission structure amounts to illegal price-fixing rather than being the product of a free market. That’s according to a sealed 1,286-page motion for class certification first filed in March. But it wasn’t until June that the court publicly released a partially redacted version of the motion, revealing the plaintiffs’ arguments and findings from experts they hired.

In March 2019, homeseller Christopher Moehrl filed a federal antitrust suit in the U.S. District Court for the Northern District of Illinois. It was against the National Association of Realtors and real estate franchisors Realogy, HomeServices of America, RE/MAX and Keller Williams.

The suit alleges that some NAR policies — including one requiring listing brokers to offer buyer brokers a commission to list a property in a Realtor-affiliated multiple listing service — violate the Sherman Antitrust Act by inflating seller costs. NAR has 1.5 million members nationwide; the vast majority are residential real estate agents and brokers.

The suit, like a smaller federal case in Missouri known as Sitzer/Burnett, seeks to have homebuyers pay their brokers directly, rather than having listing brokers pay buyer brokers from what the seller pays the listing broker. Sitzer/Burnett recently won class certification for homesellers in four MLS markets in Missouri and survived an appeals court challenge from the defendants.

By contrast, Moehrl is seeking class certification for homesellers in 20 MLS markets, nationwide.

The Moehrl case has been a bombshell since day one, but in the years since it began it has also become part of a broader set of forces putting pressure on the way agents — particularly those who work with buyers — get paid.

This week, Inman is diving into what that could mean to members of the industry. Part of that means digging into the legal status of the flagship Moehrl case. But in this series, Inman is trying to understand what the world might look like when all the dust settles. It’s a speculative project, but the hope is to tease out some scenarios that could become reality in the future by exploring different models that are a reality today. Because no matter what happens, there’s a very good chance that the future of real estate isn’t going to look like the present.

‘A longstanding conspiracy’

In their filing, the plaintiffs allege NAR and the largest firms in U.S. residential real estate have carried out “a longstanding conspiracy” in order to cause homesellers across 20 MLS markets to pay inflated commissions and impede the growth of brokerages “that would challenge the cartel’s uniformly high prices.”

“Plaintiffs specifically challenge NAR rules (a) requiring home sellers to make blanket unilateral offers of compensation to real estate brokers representing (and owing fiduciary duties to) buyers, (b) restraining negotiations of those offers, and (c) incentivizing and facilitating steering by brokers towards high commission listings and away from discounted listings,” attorneys for the plaintiffs wrote in the motion.

The proposed classes

The plaintiffs are asking the court to certify two classes:

• A damages class: Homesellers who paid a commission between March 6, 2015, and December 31, 2020, to a brokerage affiliated with a corporate defendant in connection with the sale of residential real estate listed on a covered MLS and in a covered jurisdiction.
• An injunctive relief class: Current and future owners of residential real estate in the covered jurisdictions, who are presently listing or will in the future list their homes for sale on a covered MLS.

The latter would prevent the enforcement of the NAR rules at issue in the case against the class.

“The proposed classes consist of thousands if not millions of homeowners in 20 of the largest U.S. metropolitan areas,” the filing said.

‘NAR’s bargain’

According to the filing, all but around 3 percent of MLSs nationwide are owned by Realtor associations and all of the covered MLSs either require Realtor membership for participation or have adopted NAR’s MLS Standards of Conduct. The latter duplicates some of the Realtor Code of Ethics requirements the lawsuit is challenging as restraints on commission negotiation, including NAR Standard of Practice 16-16 and NAR Standard of Practice 3-2.

NAR Standard of Practice 16-16 says Realtors can’t use the terms of a purchase offer “to attempt to modify the listing broker’s offer of compensation” to brokers or make the submission of an executed offer to purchase “contingent on the listing broker’s agreement to modify the offer of compensation.”

According to the plaintiffs, this ethics rule “prohibits Realtors from even attempting to condition an offer to purchase a home on a seller-broker’s agreement to lower buyer-broker compensation or even from encouraging a buyer-client to do so.”

NAR Standard of Practice 3-2 reads: “Any change in compensation offered for cooperative services must be communicated to the other Realtor prior to the time that Realtor submits an offer to purchase/lease the property. After a Realtor has submitted an offer to purchase or lease property, the listing broker may not attempt to unilaterally modify the offered compensation with respect to that cooperative transaction.”

This rule replicates negotiation constraints in the buyer broker commission rule, which requires that changes to the blanket commission offer included in the MLS be communicated before an agent submits a purchase offer, according to one of the plaintiffs’ experts, Harvard law professor Einer Elhauge.

“Because homes may be shown to many potential purchasers, seller-brokers may not be able to identify that a given buyer-broker will be submitting an offer of purchase, or the economic need to vary a commission offer to such a broker, until after the offer to purchase is submitted,” Elhauge’s report, included among the filing’s exhibits, said. “And, at that point, under NAR’s rules it is too late to vary a commission offer.”

The alleged conspiracy between NAR and the real estate franchisors is one in which all benefit from inflated commissions, according to the plaintiffs.

“NAR offers its co-conspirators the following agreement: they can participate in the MLS and gain the attendant benefits — supra-competitive pricing and protection from competition — as long as they adhere to and promote the anticompetitive restraints set forth in NAR’s MLS Rules and NAR’s Code of Ethics,” plaintiffs’ attorneys wrote.

“Each of the Corporate Defendants has accepted NAR’s bargain. For one, the Corporate Defendants require that their company-owned brokerages, franchisees, and/or affiliated agents join Realtor associations, join local MLSs, and/or follow NAR’s Code of Ethics.”

The filing also pointed to NAR governance participation by franchisor leaders including Alex Perriello, M. Ryan Gorman and Sherry Chris.

“The Corporate Defendants also participate in the conspiracy through their extensive involvement in and influence over NAR and the real estate industry,” the filing said.

“Common evidence shows that Defendants’ executives, employees, and their affiliated agents occupy key positions on NAR committees and advisory boards and NAR’s Board of Directors, which is responsible for approving NAR’s MLS Rules and NAR’s Code of Ethics.”

‘Illegal price-fixing’

The plaintiffs also said that the defendants’ affiliated brokerages maintain policies that prohibit or strongly discourage agents from agreeing to commissions below 5 percent or 6 percent, and that they also maintain policies about offering a particular commission split to cooperating brokers. Details on what those policies are have been redacted from the filing.

“An agreement need not literally fix prices to be condemned as illegal horizontal price-fixing,” plaintiffs’ attorneys wrote.

“'[A] combination formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity in interstate or foreign commerce’ constitutes price-fixing.

“The Supreme Court has thus had little difficulty concluding that agreements between horizontal competitors that ‘impede[] the ordinary give and take of the marketplace’ with the effect of elevating or stabilizing prices (as here) are unlawful.”

Incentives for inflated commissions exist even if steering is rare

According to Elhauge, the NAR policies at issue inflated commissions classwide by creating “strong incentives” for sellers and their brokers to offer buyer-broker commissions that are both uniform and above what a normal competitive market would support “to prevent buyer brokers from steering buyers away from their homes to listings offering higher commissions.”

Those incentives exist even if steering is rare, according to the filing.

“If sellers or seller brokers generally perceive steering as a potential threat, they have a strong incentive to offer the standard supra-competitive buyer-broker commissions,” the filing said.

“And because inflated commissions marketwide are the primary anticompetitive effect of the Challenged Restraints, no individualized inquiry into whether a given seller was in fact steered against or was even aware of the possibility of steering is needed. The harm to each class member flows from the higher commissions they paid as a result of the threat of steering, rather than from being steered against.”

The filing noted that, according to data from the 20 covered MLSs, the buyer-broker commission rates offered “cluster around a standard commission in each market.” The Consumer Federation of America has made similar findings.

“This is precisely what economic theory predicts would happen to reduce the risk that buyers might be steered to other properties,” plaintiffs’ attorneys wrote.

NAR aware of steering, but ‘failed’ to deter it

They allege that NAR and franchisor leaders — including Perriello, Gorman, Keller Williams co-founder Gary Keller, HomeServices CEO Gino Blefari, and former RE/MAX CEO Adam Contos — have acknowledged that the buyer-broker commission rule facilitated the threat of marketwide steering, though the filing redacts those alleged acknowledgments.

“Senior NAR officials, including its former CEO [Dale Stinton], were repeatedly made aware of the incentives for and practice of steering, but failed to take steps to punish or prevent it,” the filing said.

In addition, Elhauge said buyers “have little incentive” to either not use buyer brokers, limit their use, or to negotiate a lower price, because their commissions are set by sellers and listing brokers.

“Buyer-brokers thus have limited incentive or ability to compete by lowering the price of their services, which fosters supra-competitive commissions,” Elhauge said.

‘Classwide overcharges’

Elhauge also argued that the defendants’ conspiracy has led to “classwide overcharges,” highlighting that “(a) buyer-broker commission rates in the U.S. are much higher than in comparable international markets; (b) have remained stable despite technology reducing the value of buyer brokers and their transaction costs all while housing prices have increased (meaning that commissions paid are much higher today); and (c) the challenged rules have impeded price discounters from entering and disrupting the anticompetitive equilibrium.”

He argued that all or nearly all class members were impacted by the challenged rules, because absent the rules, “most buyers would have decided not to retain a broker (and thus neither sellers nor buyers would have paid that broker’s commission) and any brokers that were retained by buyers would have received a reduced buyer-broker commission (by virtue of increased competition and reduced steering incentives).”

Up to $41 billion in damages

Another plaintiff expert, Nicholas Economides, professor of economics at NYU’s business school, compared the U.S. residential real estate market with those of Australia, the Netherlands, and the United Kingdom and came to similar conclusions. He found that in those countries, buyer brokers are rare, typically paid by buyers, their fees are lower than in the U.S., and seller broker fees are typically the same or lower than in the U.S.

According to Economides, the average of the buyer-broker commission rates paid in those countries is 1.55 percent, and therefore, on the “conservative assumption” that absent the NAR rules all buyers would have retained buyer brokers and all sellers would have paid buyer broker commissions, he compares what sellers actually paid to that 1.55 percent benchmark and calculates that total class damages are $13.7 billion. If the court awards treble damages, that figure could go up to $41.1 billion.

‘Not the natural consequence of the free market’

“Common evidence shows that the Challenged Restraints were not the natural consequence of the free market,” plaintiffs’ attorneys wrote, asserting that the policies are a continuation of NAR and its members’ “extensive history of anticompetitive conduct.”

The filing asserts that for much of the 20th century, NAR’s Code of Ethics required its members to follow fixed commission schedules and local Realtor associations set the commissions their members were required to charge. Antitrust challenges then lead NAR to prohibit those commission schedules in 1971, which NAR replaced with MLS rules mandating that brokers make a blanket offer of compensation to subagents (agents that work with buyers but are subagents of the seller), in order to list a property in the MLS.

Legal challenges prompted NAR to abandon subagency and, in 1993, NAR adopted the buyer-broker commission rule (also called the participation rule) at issue in this case.

“NAR did so despite reviewing an FTC Report documenting widespread steering of buyers to listings offering higher commissions and its own former general counsel’s opinion that requiring sellers to make blanket offers of compensation to buyer brokers would create a ‘conflict of interest’ for buyer brokers,” the filing said.

Read the redacted motion for class certification (without exhibits):

What do you think of the plaintiffs’ arguments? Let us know in the comments below.

Email Andrea V. Brambila.

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