Do Real-Estate Brokers Violate the Antitrust Laws By Charging Identical Commissions?

real estate agent antitrustI’ve often written about real estate on this blog. There are two reasons for this.

The first and most important reason is because my wife and I invest in real estate and thus talk about real estate, so it is on my mind. In fact, I have my California real-estate license. Bona Law PC also offers real-estate litigation services.

The second reason is that real-estate, in addition to its many advantages, creates many unique competition issues. Real-estate agents often engage in cut-throat competition with each other, sometimes even within the same brokerage firm. Yet, the nature of their job requires them to work together for almost every transaction.

In addition, the markets to sell real-estate are primarily local, even though national brokerage firms may dominate each individual geographic area. Within each locality, there are often a handful of large brokerage firms.

Finally, the market for real-estate services and commissions suggests some supra-competitive pricing in that most firms in a certain area will charge approximately the same commission. And the splits between the buying and selling agents are often equal as well. In the Minneapolis, Minnesota area for example, at least as of a few years ago, selling agents would often receive 3.3% and buying agents 2.7% of the purchase price. In my current market, a small village in North San Diego County, the buying and selling agents typically split the 5% commission.

Suspiciously, while technology and other competition has reduced relative prices for many professionals, commission percentages have held relatively steady for real-estate agents, despite the fact that buyers and sellers (especially buyers) can do much of their own homework online. How many of you have purchased a house without spending a lot of time online yourself looking at listings?

So does that mean that real-estate brokerage firms and agents are violating the antitrust laws all over the country? Should we coordinate a dramatic—made for the movies—event whereby federal agents knock down the doors of real-estate firms all over the country one morning, handcuffing and booking the agents that would do anything to get you in their car to show you some houses?

Probably not yet.

In November of this year, the Sixth Circuit decided a case called Hyland v. Homeservices of America, Inc. that nicely illustrates the line between antitrust violation and what is often called conscious parallelism or oligopolistic price coordination.

In Hyland, a class of people who sold residential real estate in Kentucky and used certain real-estate agents sued several real-estate brokerages as a class action under Section 1 of the Sherman Act. Plaintiffs alleged that defendants participated in a horizontal conspiracy to fix the commissions charged in Kentucky real-estate transactions at an anticompetitive rate.

Like agents in many localities, defendants each charged a typical or standard commission rate of 6%, and mostly resist any attempts to negotiate a lower rate. The buying agent’s commission is typically 3%. These numbers may look familiar to you if you bought or sold real estate recently, as real-estate services for most residential real-estate markets are similarly priced.

The case made it to summary judgment, where the district court dismissed it. The Sixth Circuit affirmed.

Here’s why: To survive summary judgment in an antitrust conspiracy case, a plaintiff can show evidence of a conspiracy in two ways: Direct evidence and circumstantial evidence. Direct evidence is explicit and requires no inferences to establish the conspiracy. This is the sort of case where you actually have a written agreement, for example. Direct evidence can be less than an actual written agreement, but you get the idea.

Most cases, however, are circumstantial-evidence cases. Most conspirators, after all, tend not to work off of written agreements, or put their collective decisions or votes in writing. At summary judgment, a plaintiff must show more than conduct that could be equally consistent with independent conduct. (As an aside, many courts have misunderstood this summary-judgment requirement to apply at the pleading stage).

It is quite common for pricing to be higher or services weaker in markets that are characterized by a small number of competitors, often called an oligopoly. And this can occur in the absence of an agreement to restrain competition. The market participants may play a game of follow-the-leader with pricing, without any actual agreement. Under current antitrust doctrine, this does not, by itself, violate the antitrust laws.

That is what both the district court and the Sixth Circuit concluded here. The prevailing evidence was that, even though the pricing was similar across the board, there wasn’t sufficient evidence of actual agreement between or among competitors. So the court upheld dismissal.

That doesn’t mean that if you are a real-estate agent or broker, you can breathe a sigh of relief. This case, like most such cases, turned on its facts. It does not take much imagination to see a case where the local brokerage firms did, in fact, discuss pricing sufficient to constitute an agreement to restrain trade. Indeed, it could have happened in Hyland and they just didn’t produce evidence of it.

The real-estate sales industry is full of antitrust land mines that I believe are not sufficiently appreciated by  real-estate brokers. It is exactly the sort of market where per se antitrust violations like price-fixing, market allocation, and group boycotts are likely to occur. It only takes a couple uneducated agents talking to embroil their brokerage firms in expensive antitrust litigation or a government antitrust investigation.

If you are a real-estate agent reading this, be cautious. If you run a brokerage firm, you might consider having your agents counseled on antitrust issues. You can access a power point that I created on antitrust and real-estate issues at a prior blog post about a presentation I did for the California Association of Realtors conference.

If you have any questions, you can reach me at 858-964-4589.