Thursday, November 30, 2006

USA v. NAR - The Government's Opposition to NAR's Motion to Dismiss (written on 4/24/2006)

Having finally reviewed the government's opposition brief, I thought I'd share my two main observations with the group here.

First, while it may not prove fatal at this stage, it would appear that the amended complaint is thin on the subject of present adverse effects. More on this when I summarize last week's status hearing, but suffice it to say, it was difficult for the DOJ to make specific allegations regarding how competition has been harmed, because the amended ILD rule was promulgated around the time the initial complaint was filed. Thus there isn't much of a factual record here to draw from. Even if the DOJ survives the motion to dismiss, this issue will likely return.

Second, I was taken by the following statement by the DOJ, which appears about half-way into its brief: "Effective competition in the real estate marketplace depends on having access to - and the ability to show customers - virtually all listings of homes for sale." In a way, this is one of - if not the - central principles being advocated by the DOJ. A lot will rest on the government's ability to convince the court of this proposition.

Again, Judge Filip has taken the motion under advisement, and could rule at any time.

USA v. NAR - Settlement? (written 4/20/2006)

Here's the short summary of the status conference I attended this morning: the case is definitely NOT on the verge of settling. Interestingly, what would appear to be a major stumbling block is the NAR's refusal to enter into a 'consent decree' with the DOJ. Instead, it would only settle if the case was terminated by means of an 'Agreed Order of Dismissal'

UPDATE: Here's the detailed version of the 4/20 status hearing:

Craig Conrath of the Department of Justice appeared on behalf of the United States, and Jack Bierig of Sidley Austin LLP appeared on behalf of NAR.

Judge Denlow asked counsel to report on the status of apparently ongoing settlement discussions. NAR counsel addressed six specific issues that had been discussed at the prior status hearing, and are set forth below from least controversial to most controversial (according to Bierig):

6. Branding issues (some progress reported)

5. Data feed issues (some progress reported)

4. Opt-out element of ILD. Apparently at the last settlement conference, the Court asked the parties to consider permitting the new rule to 'play out', thereby developing a factual record for the Court and the parties to consider. DOJ was not keen to this idea, and gently reminded the Court that it is permitted to file suits to prevent prospective illegal conduct. It would not appear that the government is going to voluntarily suspend the litigation to allow the ILD and other challenged practices to take effect.

3. Definition of who can participate in an MLS. Perhaps for settlement purposes only, there appears to be some agreement amongst the parties that Realtors have a "right to exclude true outsiders". NAR demonstrated some flexibility on this point, and the DOJ suggested drawing the line at whether someone was a 'broker' as defined by state statute (NAR declined this suggestion). Counsel briefly discussed whether to permit the exclusion of VOWs that utilize a referral model. The NAR's position was that these folks should be allowed to do business, but they should not be allowed to use the MLS because they are not competitors.

2. Procedural resolution of case. The NAR is looking for an ‘Agreed Order of Dismissal’, while DOJ is insisting upon a ‘Consent Decree’. NAR counsel called this a ‘non starter’ for the NAR. Again seeming to side with the NAR’s position, the Court asked the government’s counsel to be mindful that there are gradations of conduct and gradations of treatment. He noted that an inflexible approach may discourage cooperation in the future in this and other cases in which DOJ is a party. NAR counsel added that even if the NAR’s conduct here is illegal, it’s a ‘very marginal violation of the law’ (I’m not aware of a de minimis exception to the federal antitrust laws). Offering support for its position, and probably seeking to influence the Court, the government’s attorney added that NAR General Counsel Laurie Janik had previously stated that she’d prefer a court order (over volunteering to restrict the association’s practices here), because association members would be ‘pissed’ if NAR made a deal with the government. I believe it was NAR’s counsel, signaling the importance of this issue to the organization, that said that “dismissal transcends this case”.

1. Stipulations. The government submitted three proposed stipulations to the NAR after the NAR delivered ten such stipulations to the DOJ. These are documents whereby the parties could conceivable agree in advance to certain factual and legal matters in advance of a trial or the like. Apparently the parties are not on the verge of entering into any stipulations. However, the Court encouraged the parties to try and narrow the issues, hopefully requiring only the live testimony of just a handful of witnesses. Acknowledging the parties’ differences, the Court remarked that it was his understanding that ‘hurdles are very high to resolve this’ at the DOJ.

The government’s lawyer opined that it was not likely the parties would reach a settlement agreement any time soon regarding the lawfulness of the opt-out provision and/or the referral issue. Counsel repeated the government’s concern that the mere threat of an opt-out could have an anticompetitive effect on the marketplace.

NAR’s attorney wasn't as pessimistic (it’s possible he was simply hoping to come across as reasonable before the Court). He explained that the NAR’s policy decision had been to implement the ILD, and let the facts emerge. He suggested the parties to stop spending more in legal fees if they allowed the rule to take effect, knowing that DOJ could rush to the courthouse at anytime and seek a preliminary injunction if problems emerged.

Magistrate Judge Denlow repeatedly expressed an interest in further developing the facts in this case (read: let the rule take effect, and see what happens, but in any event create a record). On the subject of whether a consent decree was appropriate in this case, the Court encouraged the government to keep an open mind. The Court’s order, issued later in the day, explained that the “[p]arties having advised the Court that there are several key impediments to settlement, the parties are encouraged to continue conversations, and, in the event, they wish to set a further settlement conference, the parties are to contact Judge Denlow’s courtroom deputy.” Another status hearing was set for June 20.

USA v. NAR - Minor developments (written on 2/6/06)

I had some time today to probe the case file, and noted the following developments.

1. DOJ filed, then withdrew, then refiled a motion for a protective order. Apparently the parties could not agree to the terms of such an order on their own, so DOJ asked the Court to impose an order upon the parties. I didn’t read the amended motion in full, but it would appear to relate to materials the DOJ obtained prior to filing suit (presumably from disgruntled brokers, etc.) that it does not want to make public. A protective order was recently entered, and I’ve attached a copy of it here.

2. Prudential Real Estate Affiliates, Inc. filed a motion to intervene in the case. The Court treated it as a motion for permission to file an amicus brief and granted the motion (Prudential was not granted leave to intervene). Robert Butters and Richard Hellerman are representing Prudential. Prudential has not filed an amicus brief with the Court as of today.

USA v. NAR - Initial status hearing before U.S. District Judge Filip (written on 10/26/2005)

While attending the DOJ/FTC workshop yesterday, I had a colleague sit in on the initial status hearing in the US v. NAR case.

The DOJ demonstrated an interest in settling the matter, but added that another Judge (Magistrate Judge Denlow, who is also assigned to the case) should preside over any settlement discussions given that this would be a bench (non-jury) trial). Judge Filip agreed. NAR also demonstrated an interest in settling the matter, but did not want Magistrate Judge Denlow (presumably not because they have anything against him, but because they want everything in front of the trial judge) to handle any settlement conference. DOJ lawyers made a point of telling the judge that it wasn’t until just a few days ago that NAR demonstrated any willingness to settle the case (he was presumably referring to statements made in the status report that I circulated on Monday).

NAR, as was stated in the status report, intends to file a motion to dismiss. The DOJ suggested that any such motion be delayed until settlement discussions occurred.

Judge Filip entered an order providing for a briefing schedule on NAR’s motion to dismiss. The motion is due December 5, after which DOJ will have 60 days to respond, and NAR will have 30 days after that to reply. After the motion has been fully briefed, the parties will appear before Judge Filip (February 1, 2006), at which time he will refer the case to Magistrate Judge Denlow for settlement discussions. Thus settlement discussions likely will not occur until March 2006 (at least discussions that are ‘moderated’ by a federal judge).

NAR ILD Policy - Original Complaint filed in USA v. NAR (written on 9/8/2005)

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.


My name is Michael Erdman. I have been practicing law for about ten years, and presently am a partner at the Chicago law firm of Teeple & Leonard. Ever since I used a flat-fee real estate broker to sell my condominium in the spring of 2005, I have been interested in the efforts of nontraditional residential real estate brokers and non-broker innovators across the country. I have participated in an online alternative real estate broker forum, attended a DOJ/FTC joint workshop on competition in the real estate brokerage market, and assisted with the formation of the American Real Estate Broker Alliance.

Over the past year I have considered a variety of issues facing nontraditional real estate brokers, including (i) state laws mandating minimum levels of service; (ii) state anti-rebate legislation; (iii) the United States' lawsuit filed last year in federal court in Chicago against the National Association of Realtors, challenging NAR's initial and amended ILD (Internet Listing Display) Policy under federal antitrust law; (iv) FTC proceedings in Texas, Michigan and elsewhere relating to MLSs that withhold the listings of alternative brokers from their uploads; (v) boycotts of nontraditional real estate broker listings; and (vi) a recent NAR rule permitting individual brokers to exclude certain listings from their websites. I started this blog to chronicle the efforts of nontraditional brokers and others from a lawyer's perspective.

None of the opinions or other content contained on this blog should be construed as legal advice. Please consult an attorney if you need legal advice on any of the topics discussed on this blog. Finally, none of the opinions or other content contained on this blog are necessarily the thoughts of Teeple & Leonard, any of its clients, AREBA, or any other person or entity.

Let me add that I have twice used the services of a traditional, full service real estate broker - one to buy a place in Chicago, another to buy a place in the suburbs. Both agents were very impressive. I got the home I wanted at a fair price, with few if any obstacles. Each agent paid close attention to what I wanted and the important details related to the purchase. I would recommend each of them to anyone looking to buy or sell real estate and looking for a full service agent. There is, and likely always will be, a place for quality, full service brokers in the residential real estate brokerage marketplace.

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