I have taken an initial look at the United States Department of Justice’s complaint filed in federal court against the National Association of Realtors (Case No. 05 C 5140). Here are some initial observations (please do not construe any of the following as legal advice), for what they are worth:
The lawsuit, filed by the DOJ’s Antitrust Division, names only the NAR as a defendant. Though not presently named as defendants, the DOJ alleges that “[v]arious others” (presumably various NAR member-boards) have conspired with the NAR in the violations alleged in the complaint. I note that the complaint does not challenge any of the recently enacted state minimum service or rebate-barring statutes, or name any state commissions or associations as defendants.
The policy challenged here by the DOJ, the VOW – or Virtual Office Websites – Policy, “permits brokers to selectively or generally withhold their clients’ listings from VOW operators by means of an “opt-out” right . . . allow[ing] traditional brokers to block the customers of targeted competitors from using the Internet to review the same set of MLS listings that the traditional brokerage provide to their customers.” Before adoption of the policy, the NAR apparently did not allow brokers to withhold their clients’ listings from rival brokers. The DOJ further alleges that the working group that crafted the policy was well aware of the anticompetitive effects it would have on consumers. The government also attacks the policy’s anti-referral provisions and advertisement prohibitions, each aimed only at VOW operators.
The complaint alleges that the NAR has required all 1,600 of its member boards to implement the VOW Policy by 1/1/06, and notes that 200 have already complied. For brokers that may be inclined to ignore or only partially abide by the association’s dictate here, the VOW policy “provides for remedies and sanctions for violation of the Policy, including financial penalties and termination of MLS privileges.”
Anticompetitive effects of the policy cited by the DOJ include (i) the suppression of technological innovation; (ii) the reduction of competition on price and quality; (iii) the restriction of efficient competition among brokers; (iv) an increased likelihood of express or tacit collusion; (v) raising barriers to entry; and (vi) denying brokers using new technologies and business models the same benefits of MLS membership available to competitors. Having apparently done its homework as to actual harm, the DOJ’s complaint makes reference to one broker that had to ‘discontinue’ his website “because all of his competitor brokers had opted out.”
The allegation that most struck a cord with me, and perhaps best sums up the DOJ’s concerns, reads as follows:
The VOW Policy thus prevents brokers from guaranteeing customers access through the Internet to all relevant listing information, increases the business risk and other costs associated with operating an efficient, Internet-intensive brokerage, denies brokers a source of high-quality referrals, and withholds from Internet brokers revenue streams permitted to other participants in the MLS. Moreover, the opt-out provisions provide brokerage an effective tool to individually or collectively punish aggressive competition by any Internet-based broker.
The Department of Justice, having alleged that “MLS joint ventures have market power in almost every relevant market,” asks the Court to declare that the alleged conspiracy unreasonably restrains trade and is illegal, and, furthermore, to prohibit the NAR from requiring or permitting its member boards (or the MLSs with which they are affiliated) to adopt rules implementing the opt-out and anti-referral provisions. Furthermore, the DOJ asks the Court to prohibit the NAR from requiring or permitting member boards (or the MLSs with which they are affiliated) to adopt rules that restrict (or condition MLS access or MLS participation rights on) the method by which a broker interacts with its competitors, competitor brokers, or other persons or entities. The complaint does not seek monetary or punitive relief.
The DOJ, apparently aware of a recently proposed substitute for the VOW policy, further alleges that such revised policies “continue to discriminate against brokers who use the Internet to more efficiently and cost effectively serve home sellers and buyers.”
If filing of the suit wasn’t enough to signal the federal government’s (at least the Antitrust Division’s) perception of internet brokers, note the DOJ’s acknowledgment of brokers’ use of the internet “in connection with their delivery of brokerage services” as “an important competitive alternative to traditional ‘brick-and-mortar’ business models.” Commenting on the benefits of password protected, VOW-operating brokers in particular, the government noted the (i) reduction/elimination of time and expense involved in identifying and providing relevant listings and otherwise educating their customers; (ii) reduction of time spent on home tours; and (iii) provision of discounted commissions to sellers or commission rebates to buyers.
The case was assigned to District Court Judge Mark Filip of the Northern District of Illinois. Judge Filip took the bench in March 2004, and his case management procedures provide that the Court will set all newly-filed cases for status approximately 60 days after the filing of the complaint. I would expect the NAR to appear and file a responsive pleading on or before such date.
From 1993 to 1994, Judge Filip served as a law clerk for United States Supreme Court Justice Antonin Scalia. Afterwards, he joined the United States Attorney’s Office in Chicago, where he served as an Assistant United States Attorney in the Criminal Division. Subsequently he joined the litigation department of the Chicago office of Skadden, Arps, Meagher & Flom, specializing in complex commercial litigation. In addition to his duties on the bench, he teaches at the University of Chicago Law School.
I found two cases that have come before Judge Filip during his short tenure on the bench that involve Section 1 Sherman Act claims. In both cases, Judge Filip dismissed the Sherman Act claims, with leave to refile. I note that in one of the cases the plaintiff was not represented by counsel. In each case (both private actions) Judge Filip emphasized the plaintiff’s obligation to demonstrate that the defendant has market power and that the challenged action has an actual adverse effect on competition as a whole in the relevant market.
While this lawsuit (including appeals) could take years to resolve, there are several potential near-term effects: (i) termination (at least for now) of any ongoing discussions between DOJ and the NAR on the challenged policy and/or other issues on the feds’ minds; (ii) cause some local boards (and perhaps state legislatures) to delay consideration and/or implementation of potentially controversial rules such as the VOW policy until the Court has ruled on the DOJ’s claims; (iii) capitulation by the NAR, in part to avoid negative press and/or negative legal precedent; (iv) increased lobbying by the NAR and its allies; (v) increased public awareness of the services offered by discount brokers’, and the challenges they face; (vi) favorable press; (vii) encourage organizational efforts by discount brokers nationwide; (viii) embolden state attorneys general and/or private litigants to file additional legal challenges, particularly those that may be able to demonstrate an entitlement to compensatory or other damages; (ix) public distrust of realtors/brokers/agents, regardless of business model; and (x) increased government scrutiny of the real estate industry.
Shortly after I wrote these comments last year, the government amended its complaint to expressly account for NAR's Amended VOW Policy. Among the main alterations, the amended policy does not contain a selective opt-out provision.
