Will You Survive Until 2025? Does The DOJ Think Otherwise?

Like me, are you losing count of the staggering number of buyer-broker commission lawsuits?. And how about the targeting by class action attorneys of a variety of real estate industry defendants (NAR, franchises, large and small MLSs,  brokerages, even agents).

And, what is the position of the Department of Justice (DOJ) as to these cases? There’s been a lot of speculation and rumors of private discussions between plaintiff class action attorneys and DOJ staff. But nothing definitive – until now.

The DOJ has  filed a 33 page Statement of Interest In the settlement phase of the MLS PIN (Nosalek) lawsuit.

If you are into reading legal briefs with an abundance of supporting case/statute citations and footnote references, you are welcome to read the entire DOJ  Amicus Brief here  Amicus Brief Filed By United States Of America

Saul Klein’s reaction to the DOJ brief:

“We have been following this story since the early 1980s, and was clear then to anyone who was paying attention. The perfect time to change the rules was when Agency Disclosure laws swept the nation in the late 1980s. Instead, work arounds were created to perpetuate the existing structure. And now the day of reckoning has arrived.”

An earlier comment from Saul is telling: “We’ve said it before and we’ll say it again…The DOJ wants to remove the Offer of Compensation from the MLS Model Rules, and drive commissions down.”

Out to Destroy Residential Real Estate Sales as we know it…

For those of you looking for a digestable  summary of key points without citations:

Offers of Compensation from Listing Brokers soon to be a thing of the past

  • This is one of many cases alleging that buyer-broker commission rules stymie competition and raise prices for home sellers and buyers through artificially inflated real-estate broker commissions. In seeking approval for their proposed settlement, the Settling Parties assert that it will “eliminate . . . the allegedly anticompetitive rule at the heart of this Action.” That is not accurate. Far from curing the rule’s defects, the proposed settlement perpetuates the very same competitive concerns that trouble the current rule. Because the proposed settlement is not “fair, reasonable, and adequate” and would mandate a rule that raises its own antitrust concerns, the Court should deny preliminary approval.
  • First, the only guaranteed “benefit” to class members under the settlement is an injunction mandating certain changes to MLS PIN’s buyer-broker commission rule. These changes, however, would not create competition or reduce commissions. Instead, the settlement merely prescribes cosmetic changes, authorizing sellers to offer zero-dollar commissions, instead of the current minimum of one cent. But virtually no one will exercise that option for the same reason that they don’t offer one cent now: The modified rule still gives sellers and their listing brokers a role in setting compensation for buyers’ brokers.
  • As long as sellers can make buyer-broker commission offers, they will continue to offer “customary” commissions out of fear that buyer brokers will direct buyers away from listings with lower commissions—a well-documented phenomenon known as steering. When sellers make such offers, buyer-brokers need not compete on price to attract buyers. The settlement does not ameliorate these dynamics at the heart of Plaintiffs’ complaint.
  • As a result, commissions on home sales will remain inflated, reducing the net amount the seller receives for the home and driving up the purchase price paid by the buyer. The proposed rule therefore raises serious antitrust concerns in its own right. Worse still, the proposed injunction mandates that MLS PIN maintain the modified rule for at least three years. As a result, approving this settlement could unnecessarily interfere with the ability of the United States, other government enforcers, and private parties to “unfetter a market from anticompetitive conduct and ‘pry open to competition a market that has been closed.’
  • Second, the inadequacy of this settlement agreement is not for want of alternatives that would better serve the class. Attorneys representing a class of former home sellers need not pursue injunctive relief instead of monetary compensation. But when they do, the proposed injunctive relief must provide adequate benefits to the class. As noted above, the problem with the proposal here is that it makes cosmetic changes while authorizing the seller to continue to set compensation for the buyer’s broker. Instead, the parties could propose an injunction that would prohibit sellers from making commission offers to buyer-brokers at all. That injunction would promote competition by empowering buyers to negotiate directly with their own brokers.

DOJ Disrupts the most efficient real estate market in the world

  • INTEREST OF THE UNITED STATES — Purchasing a home is often the most expensive transaction of Americans’ lives, and homeownership is an important vehicle for wealth accumulation. Yet despite the advent of the Internet and the popularity of services like Zillow and Redfin, which allow potential home buyers to search online for homes, real-estate broker commissions have barely budged from the 5–6% charged for decades—two to three times more than in other developed economies.
  • The vast majority of home sales in the United States involve real-estate brokers, costing home sellers and buyers some $100 billion in broker fees annually. Broker-members of MLS PIN likely collected more than $2 billion in fees in 2022 for residential real estate in Massachusetts. These stubbornly high broker fees owe in large part to rules and practices perpetuated by multiple listing services like MLS PIN. As private entities composed of competing brokers, these associations “have economic incentives to restrain competition and . . . standards set by such associations have a serious potential for anticompetitive harm.”
  • Over the years, such rules and practices have included price lists for real-estate agents, United States v. Nat’l Ass’n of Real Est. Bds., (1950), rules permitting brokers to exclude prospective homebuyers represented by virtual brokers from competing for a home sale, United States v. Nat’l Ass’n of Realtors, (2005), and excluding listings by discount brokerages from multiple listing services, Realcomp II, Ltd. v. FTC, (2011). For decades, the Department of Justice’s Antitrust Division (along with the Federal Trade Commission) has fought to inject competition in residential real-estate markets. The United States has a strong interest in protecting American home sellers and buyers and ensuring that private class-action settlement agreements do not perpetuate serious competitive concerns. In addition, Congress authorized the Attorney General to send “any officer of the Department of Justice . . . to any State or district in the United States to attend to the interests of the United States in a suit pending in a court of the United States.”
  • Real-estate brokers, typically called buyer-brokers or buyer agents on the buyer side and seller’s brokers or listing agents on the seller side, earn commissions in return for representing buyers or sellers in residential real-estate transactions.  Instead of billing buyers and sellers separately for their services, real-estate brokers typically collect a percentage of the sale price.  The cost of both the buyer’s and the seller’s broker is therefore embedded in the purchase price of a home. Higher real-estate commissions harm home sellers (who receive less of the proceeds from the home sale) and buyers (who end up paying through higher home purchase prices).
  • Multiple listing services, such as MLS PIN, operate databases of real-estate listings in particular regions. In their current form, MLSs are private, geographically localized organizations that are owned and maintained by competing local real-estate professionals. MLS databases facilitate the sharing of information on properties listed for sale, including information related to past and current home listings in the area, and enable searching of nearly all of the listed properties in an area. Membership in the local MLS is critically important for any broker seeking to serve clients efficiently, and MLS access is key to being a successful broker. Because MLS PIN lists “the vast majority” of available properties in its region, “nearly all” real-estate brokers in MLS PIN’s region are members. These rules are promulgated by MLS leadership, which consists of competing brokers in the region.  Thus, through their control of MLSs, brokers effectively dictate many of the terms on which most residential-property transactions occur.

The Industry’s History of Resisting Commission Competition.

  • When MLS systems first rose to prominence in the early 1900s, they shared not only property information but also cooperative compensation agreements between brokers. Local real estate associations later required their members to use fee schedules with fixed commission rates. In 1939, the National Association of Real Estate Boards—the predecessor to the National Association of Realtors (“NAR”)—formed a “Uniform Commission Committee,” which campaigned to “standardize commission rates across the country,” and by 1950 the 5% commission rate was “an industry standard” with “calls for 6 percent soon follow[ing].”
  • The Supreme Court ruled in 1950 that the adoption by a local real-estate board—the Washington Real Estate Board—of standard rates of commission for its members was illegal. Yet it took nearly two more decades of litigation to bring an end to standard rate lists at the local levels of broker associations across the country.
  • Nonetheless, local real-estate boards continued to suppress competition from nontraditional broker services that could lower the “industry standard” commission rates. In fact, until NAR banned the practice in 2022, buyer brokers would represent to buyers that their services were “free or available at no cost” because their commissions were (and continue to be) paid by the seller rather than directly by the buyer. But any suggestion that buyer-broker services are “free or available at no cost” is inaccurate and misleading. The buyer-broker commission has a very real cost to homebuyers, who ultimately pay through higher purchase prices. Even now, buyer brokers often tell clients that sellers pay the cost of their services,  which perpetuates the inaccuracy that buyer-broker commissions are provided at no cost to the homebuyer.

MLS PIN’s Buyer-Broker Commission Rule

  • . As alleged, MLS PIN’s Buyer-Broker Commission Rule (the “Rule”) is another attempt to suppress price competition among brokers. The Rule currently requires the listing broker to make an “unconditional” and “blanket unilateral offer[] of compensation to” the buyer broker, which the buyer broker knows “prior to initiating any sales effort. Under MLS PIN’s current rules, the offer could theoretically be as low as one penny. Nonetheless, “[t]he Rule creates tremendous pressure on sellers to offer the ‘standard’ supra-competitive commission” because “[s]eller-brokers know that if the published, blanket offer is less than the ‘standard’ commission, many buyer brokers will ‘steer’ home buyers to the residential properties that provide the higher standard commission.” The Rule, Plaintiffs contend, “diminish[es] price competition and stabiliz[es] and fix[es] the buyer broker charges imposed on home sellers at or near the ‘standard real [e]state commission’ level.”
  • The seller’s offer of compensation to buyer brokers is set “without regard to the experience of the buyer-broker or the services or value they are providing.”
  • Numerous lawsuits across the country are challenging buyer-broker commission rules akin to MLS PIN’s Rule. . On October 31, 2023, a jury found such a rule anticompetitive and awarded pre-trebled damages of $1.785 billion to a class of home sellers in Missouri. See Burnett v. Nat’l Ass’n of Realtors.
  • The Pending Class Certification and Settlement Proposals. The Settling Parties filed their original proposed settlement agreement on June 30, 2023 , a first amended agreement on September 5, 2023 , and a second amended stipulation and settlement agreement on January 5, 2024 . After three filed versions, however, the settlement remains essentially the same.  The $3 million in compensation, which the Settling Parties have renamed as the “Settlement Fund,” will be held in reserve for the purpose of paying attorneys’ fees and litigation expenses as awarded by the Court.  None of the $3 million is specifically allocated to injured class members, and no money will be distributed to any class members (apart from the named plaintiffs) until, at earliest, the conclusion of litigation against all other defendants. – amended proposed press release) at 8-10.  In response to the United States’ concerns, the Settling Parties modified the settlement agreement to stipulate that Noerr-Pennington immunity does not apply and to carve the United States expressly out of the class definition. These changes, unfortunately, do not alleviate the United States’ concerns.
  • Instead of guaranteeing any monetary relief, the settlement purports to benefit class members primarily through an injunction.
  • When proposed relief is primarily equitable, courts should “[q]uestion whether injunctive relief will truly benefit class members.” Key questions in this inquiry include: (1) “How much is the injunction worth to the class as a practical matter?”; (2) “What is the dollar value the relief might yield?”; and (3) “Might an emphasis on injunctive relief and proposed certification of a Rule 23(b)(2) class amount to a tactical move to avoid more stringent certification requirements and opt-out rights associated with a damages class under Rule 23(b)(3)?”

The Proposed Injunction Fails to Provide Any Meaningful Relief to Class Members

  •  Here, the settlement is not fair, reasonable, or adequate, because it provides no meaningful benefit to class members. It makes insignificant and largely cosmetic changes to the Rule, while perpetuating the existing structure that drives supra-competitive commissions. There is no reason to believe that the settlement will reduce broker commissions for the class. To the contrary, several current cases allege that analogous rules are anticompetitive for the same reasons that the current Rule is, and analogous rule changes reflect no meaningful benefit for home sellers or buyers.
  • The proposed settlement would preserve the core concern with MLS PIN’s buyer-broker commission rule. Under the settlement, like the current Rule, the listing broker “shall specify, on each Listing Filed with the Service,” any compensation, and that such compensation must be “unconditional, except that entitlement to compensation shall be conditioned on the Broker’s performance as the procuring cause of the sale.”  The rule thereby gives decision-making authority for setting buyer-broker commissions to sellers, and it rewards buyer brokers a fixed amount regardless of the services buyers actually receive. When sellers set buyer-broker compensation, they “know that if the published, blanket offer is less than the ‘standard’ commission, many buyer-brokers will ‘steer’ home buyers to the residential properties that provide the higher standard commission.”
  • Buyer brokers can steer their clients in several ways: They can decide which properties to show, they can discourage or encourage bids on particular properties, and they can decide how vigorously to pursue a property on behalf of a client. The Rule thus “creates tremendous pressure on sellers to offer the ‘standard’ supra-competitive commission that has long been maintained in this industry.” For sellers, refusing to offer a “customary” commission can come at the expense of views, bids, and offers on their property. This remains true whether a seller is hypothetically allowed to offer “one cent” or “zero cents.” The critical issue is not how much a seller should offer a buyer broker, but whether a seller should set buyer-broker compensation at all. This is not a theoretical concern.
  • As the complaint alleges, “[t]he prevalence of such steering has been widely reported in government reports, economic research and the trade press[.]”  One published economic analysis analyzed the effect of steering on commissions using market data from the Greater Boston Area from 1998 to 2011. The authors concluded that properties listed with lower commissions were less likely to sell and took longer to sell.  Another recent study reached similar conclusions. As one court recently recognized, “[c]ommon sense suggests that a buyer-broker is highly unlikely to show their client a home when the seller is offering a penny in commission.” Moehrl v. Nat’l Ass’n of Realtors; see also Moehrl, (declaration analyzing 602 phone transcripts in which buyer brokers refused to show a property after learning the seller was not offering a pre-set buyer-broker commission).
  • The Settlement Makes No Meaningful Changes to MLS PIN’s Rule. Instead of addressing this core concern, the proposed settlement makes a few superficial tweaks and restates existing policy. None of the proposed changes, either individually or together, would meaningfully address the competitive concern alleged in Plaintiffs’ complaint. First, the primary proposed change allows cooperative offers of compensation to buyer-brokers to be zero, rather than the current minimum offer of a penny. (“[S]ellers can comply with the Rule by offering any compensation amount they desire, even as low as $0.01.”). A rule change that merely expands the theoretical range of allowable buyer-broker commission offers by one cent is unlikely to reduce broker commission rates. If virtually no sellers make one-cent offers of compensation to buyer brokers now, they are unlikely to make zero-cent offers under the new Rule. Second, the revised Rule states that home sellers and buyers, as well as their brokers, can negotiate compensation different from the offer of compensation made through the multiple listing service. But this is not a new rule at all. MLS PIN already interprets its current Rule to Case permits this kind of negotiation, and the theoretical potential for negotiation has not driven down commissions.
  • And after the proposed settlement was announced, one broker put it even more bluntly: If the Court approves the settlement, we expect that listing brokers will bury their notification requirement in the fine print. If a seller questions why they should pay the buyer’s broker fee, we have no doubt that listing agents will pull out the same old canned sales script. Sellers will be terrified that their property will be blackballed by the realtor community – it’s a mild form of extortion.

 Proposed Rule Will Not Change Market Participants’ Conduct or Lower Commissions

  • Recent experience confirms that the proposed injunction would not limit steering or reduce buyer-broker commissions. For example, in October 2019 and October 2022, the dominant MLS in the state of Washington, NWMLS, made two sets of changes to its buyer broker commission rule that mirror the proposed settlement here. In October 2019, NWMLS removed the requirement that a seller make a minimum offer of compensation when listing a property for sale. Then, in October 2022, NWMLS made another rule change, purportedly “to ensure that the buyer understands the buyer brokerage firm compensation and to create an opportunity for discussion and negotiation.” Neither revision appears to have led to a decrease in buyer-broker commissions. Academic and media reports show that the 2019 rule change had no apparent effect on either the 9 NWMLS revised its Rule 101(a)(i) in October 2022 to provide that “[t]he buyer [broker’s] compensation shall be paid (1) as published in the listing if accepted by the buyer on behalf of the buyer [broker] in the purchase and sale agreement; or (2) as modified by the buyer, the buyer [broker], and the seller in the purchase and sale agreement.” According to NWMLS, “[t]he purpose of this revision is to ensure that the buyer understands the buyer brokerage firm compensation and to create an opportunity for discussion and negotiation
  • Indeed, NWMLS itself expected “business as usual” after that change. The Antitrust Division’s own analysis of buyer-broker prices in large metropolitan areas in NWMLS’s region shows that the October 2022 change likewise had no meaningful effect. If that revision promoted buyer-broker competition, buyer-broker prices in large metropolitan areas in NWMLS’s region should have declined relative to buyer-broker prices in other large metropolitan areas where there were no similar changes to MLS rules. The Antitrust Division’s analysis, however, found no meaningful difference between the change in buyer broker prices in large metropolitan areas in NWMLS’s region and the change in buyer-broker prices in other large metropolitan areas in the period after the October 2022 rule change.
  • As NWMLS’s experience reflects, MLS PIN could voluntarily adopt the settlement’s proposed changes without meaningfully altering commission-setting practices or increasing competition. Indeed, many MLSs have voluntarily adopted analogous changes to their own buyer-broker commission rules.  On October 6, 2023, NAR issued a reinterpretation of its buyer-broker commission rule, which governs approximately 600 affiliated MLSs, to allow $0 commissions. That many MLSs have recently allowed zero-compensation offers unilaterally—without receiving any release of claims from injured home sellers or buyers—confirms that the proposed injunction provides little benefit. It also calls into question Plaintiffs’ assertion that “[w]ithout this Settlement, it could be several years at best before the substantive rule change embodied in the Settlement would be implemented, even assuming Plaintiffs win at trial.
  • The Eleventh Circuit recently held that a district court did not abuse its discretion in approving an antitrust settlement where the conduct allowed under the settlement was not a per se violation of the antitrust laws. See In re Blue Cross Blue Shield Antitrust Litig. MDL  In this posture, the United States takes no position on the merits of the Eleventh Circuit’s decision or whether MLS PIN’s modified rule would constitute a per se violation. Here, the proposed injunction would not provide adequate relief to the class precisely because the new rules raise the same anticompetitive concerns as the current Rule.
  • A prohibitory injunction would regardless of which mode of antitrust analysis would apply to the new rules, the court should not accept a settlement that fails to remedy the problem

An Alternative Injunction Would Better Serve the Class.

  • To address the competitive problem alleged by Plaintiffs, the Settling Parties could agree to an injunction that prohibits offers of buyer-broker compensation by MLS PIN participants. If MLS PIN rules prohibited sellers and listing brokers from deciding what buyer-brokers would be paid, sellers would be responsible for determining only the compensation of their own broker in the listing contract, while buyers would be responsible for determining the compensation of their own broker in a buyer-broker representation contract.
  • (“The report concludes by recommending that Federal agencies and the courts seek to prohibit the coupling (or tying) of listing agent and buyer agent commissions so that buyers can negotiate buyer agent compensation rather than having it set and paid by listing agents (and sellers). This uncoupling would increase competition in broker fees (now at least $100 billion annually), align agent compensation to a much greater extent with agent service, and increase value received by consumers.”); Rob Hahn & Greg Robertson interviewing Ed Zorn (VP & General Counsel at California Regional MLS), “You do realize under this system (of the seller paying the buyer’s agent directly inside the contract) a closing statement at a title company or an escrow company looks 100% identical as it does today. With both commissions on the seller side. Nothing changes. The only thing that changes is the number that shows up for the buyer’s agent in that closing statement was negotiated between the buyer directly and the buyer’s agent and had nothing to do with the seller or the listing agent. That’s the one thing that’s different.”).
  • Preventing sellers and listing agents from setting buyer-broker commissions would promote greater price competition and innovation in the market for brokers’ services. If buyers set the compensation for their own brokers directly, some buyer brokers might choose to offer flat fees or hourly rates in lieu of percentage commissions, since the amount of time and effort required by a buyer-broker has a weak correlation, if any, to the ultimate sales price of the house. And most, if not all, buyers would likely prefer a fee structure that does not reward their broker for helping them to pay more for a home. A change that makes it the buyer’s responsibility to negotiate broker commissions directly with her buyer-broker would not force buyers to pay those commissions out of pocket. While some buyers might choose to pay their buyer-brokers out of pocket, other buyers might request in an offer that the seller pay a specified amount to the buyer-broker from the proceeds of the home sale.
  • Thus, the current practice could continue, where the seller factors the commissions into the offer the seller is willing to accept. If a buyer requests in an offer that the seller pay her buyer-broker from the proceeds of the home sale, it would be straightforward for a seller to compare offers that include a request for the seller to pay the buyer’s broker (e.g., an offer to pay $700,000 for a home with the seller paying $14,000 to the buyer’s broker, resulting in a net price of $686,000) with offers that do not include such a request (e.g., an offer to pay $680,000 for the home and no payment to the buyer broker).  The average home price in MLS PIN in 2022 was $696,318. A seller only has to compare net dollar amounts.
  • This type of “conditional” offer is already permitted under federal government lending programs. Those programs do not require buyers to come up with additional funds at closing in order to compensate their brokers in these types of “conditional” offers. Buyers therefore would not need to come up with additional funds at closing in order to compensate their brokers. Instead, they and other buyers would benefit from increased competition between buyer-brokers. Unlike the proposed settlement, a rule removing sellers and their brokers from the determination of buyer-broker compensation would help address the anticompetitive conduct alleged in the complaint. Buyers have a wide variety of needs and circumstances, and they are best positioned to assess the quality, services, price, and value that a particular buyer broker offers to them. Such relief would likely increase competition for buyer-broker services—the competition Plaintiffs allege has been broken by the Rule—to the benefit of home sellers and buyers alike.
  • Plaintiffs’ counsel has not offered a detailed accounting of how much of the $3 million might ultimately be distributed to class members, or how much distribution of funds would cost. Counsel’s back-of-the-envelope math appears to assume class counsel is awarded 30% of the $3 million (i.e., $900,000 for attorneys’ fees), expense reimbursements are $200,000, claims administration costs are $250,000, and named plaintiffs are awarded $7,500, leaving a remaining balance of $1,642,500. With an estimated 280,000 putative class members , the per-class-member distribution appears to be about $5.87 before reasonable distribution costs
  • CONCLUSION For the foregoing reasons, this Court should deny preliminary approval of the proposed settlement in this action. Dated: February 15, 2024 Respectfully submitted,  $3 million – $200,000 of incurred costs and expenses – $250,000 for claims notices – $7,500 to class representatives = $2.54 million. $2.54 million / $3 million = 85%.

 

 

Share This Post

7 Responses

  1. Great article! Of particular interest to me, as a long-time broker and educator, was the observation that not all buyer agents provide the same level of service. They do not, and in many cases, I have sat at the closing table in silent disgust that the buyer agent was getting ANY fee, based on how poorly that person did their job.

  2. Nice piece John.

    This result of the latest DOJ move was to be expected and it has been clear since the early 1980s, and even before that the DOJ has a long institutional memory and does not give up.

    Last year, when others asked “What does the DOJ want?” We answered that it wants to “remove the Offer of Compensation from MLS” and that “going to $0 was not enough.”

    Now, it should be apparent to all. If the DOJ has its way, Buyer Broker Agreements will become the norm (we have been advocating for them since the late 1980s), and commission amounts will decline, as new models appear (hourly compensation, flat fees, fee for service, inverse commission).

    At the California Association of REALTORS (CAR) Directors Meetings in Monterey last week, the CAR Board of Directors passed a motion directing CAR to sponsor legislation that would make buyer broker contracts mandatory for all real estate licensees working with buyers.

    What the legislation, if any, will look like in the end is pure speculation, but it is a start. We have all probably heard the expression that creating legislation is like sausage making…not pretty, and compromises made are often shortsighted and ineffective (as was the case with Agency Disclosure Laws passed in the 1980s and 1990s).

    The writing, which has been on the wall for quite some time, is becoming visible, and real.

  3. Excellent! I’ve been saying for years…”why should another agent determine my value!” In San Diego we have seen a few listings offering no buyer commission, one stating: Buyer Brokerage to negotiate commission through the RPA (Residential Purchase Agreement) which provides the ability to do so, only with a Buyer Representation Agreement which includes an agreed-to fee. Our State Association, C.A.R. implemented this a couple years ago on our Purchase Agreement. Grateful.

    1. Thanks for the input, Raylene. Your firm’s approach should satisfy the concerns of the DOJ in that the amount of the buyer-broker fee is negotiated between the buyer and the buyer-broker, and the payment of that fee is a negotiated part of the RPA between the buyer and the seller. This approach could become a trend in real estate practice. I can understand why you are “grateful” for C.A.R. implementation.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Stay connected.

Get up to the minute updates and resources.

Search
Other Articles

Stay Connected.

Get up to the minute updates and resources.