HEDGESVILLE – On October 31, a federal jury in Missouri found the National Association of Realtors and several real estate brokerage franchisors liable in the amount of $1.8 billion for violating U.S. antitrust laws.
The National Association of Realtors and real estate brokerage franchisors, including HomeServices of America and Keller Williams Realty, were accused of conspiring to inflate or maintain high commission rates for home sales, thereby harming consumers. The case, Burnett et al. v. NAR et al., is a private class-action lawsuit. A similar private class-action lawsuit filed in federal court in Illinois — Moehrl et al. v. NAR et al. — is scheduled for trial in early 2024. The final outcome of these lawsuits could significantly impact the residential real estate industry in the United States.
The plaintiffs in both class-action suits are home sellers who previously listed their properties on different Multiple Listing Services (“MLS”). Both class-action cases challenge the National Association of Realtors' adoption and implementation of a cooperative compensation rule for listing brokers and buying brokers.
To elaborate, buyers and sellers of residential real estate often engage real estate brokers who have exclusive access to a local MLS database of homes for sale in the area. Under the current cooperative compensation rule, it is a requirement for listing brokers, when listing a home on a local MLS database, to unilaterally offer compensation to cooperating brokers who assist in procuring the sale of the home, i.e., buyer brokers. Commission splitting is the typical form cooperative compensation takes.
This means that the seller broker is required to offer up-front and without any prior negotiation to split their total commission with an eventual buyer broker when listing a home on a local MLS database. The average commission rate sellers pay their broker is around five to six percent of the home’s sale price, with the buyer broker typically receiving a commission rate in the range of two to three percent, paid from the seller broker’s commission.
This arrangement was how, until recently, buyer brokers were able to represent their services as free despite receiving a commission, albeit in a somewhat circuitous manner.
In Burnett et al. v. NAR et al., plaintiffs claim that the cooperative compensation rule violates the federal Sherman Antitrust Act and various state antitrust laws by placing anticompetitive restraints on the free market and artificially inflating home prices and the commissions paid by the seller. Defendants, such as the National Association of Realtors, argue that if the plaintiffs prevail, consumers will be negatively impacted by disrupting a streamlined model that brings together motivated buyers and sellers.
Section 1 of the Sherman Antitrust Act makes illegal “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations[.]” The plaintiffs' argument is that the majority of MLSs are controlled by local NAR associations.
To gain access to a local MLS, brokers must be a member of the National Association of Realtors and agree to the mandatory cooperative compensation rule. The plaintiffs argue that the cooperative compensation rule both overcharges sellers by requiring them to pay for services provided by the buyer’s broker and fixes the buyer’s broker commission compensation at rates that would not otherwise exist in a competitive market.
The plaintiffs further allege that because only the buyer’s agent has access to the unilateral commission rate offer, it incentivizes the buyer’s broker to steer buyers away from lower-commission homes and toward more expensive homes. Thus, the seller’s broker makes artificially high commission rate offers to entice the sales of more expensive properties as it benefits both the seller and buyer brokers.
Additionally, plaintiffs point out that despite the ups and downs in the housing market, commission rates have always hovered around five to six percent.
Finally, plaintiffs argue that untethering the cooperative compensation rule from MLS access would create a marketplace where buyers would freely negotiate commission rates with their broker directly, likely causing those commissions to decrease from their current average.
Ultimately, a federal jury agreed with the plaintiffs in Burnett et al. v. NAR et al. and found the National Association of Realtors and others liable for nearly $1.8 billion in damages after a two-week trial. Under U.S. antitrust law, those damages can be tripled at the court’s discretion to over $5 billion.
In addition, the federal court has the authority to prohibit the enforcement of the cooperative compensation rule. Damages in the Moehrl et al. v. NAR et al. could reach upwards of $41 billion. The lead attorney for the plaintiffs filed a new national class-action suit covering home sellers anywhere in the country shortly after the verdict was announced.
Jeffries is an attorney in Hedgesville.
