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REBA is monitoring certain class-action lawsuits against the National Association of Realtors (“NAR”), various multiple listing services, and other brokerages and industry participants concerning how real estate brokers are compensated. As most readers of REBA News are aware, last October, a federal jury in the case of Burnett v. NAR (W.D. Mo.) found NAR (and other industry defendants) liable in a case challenging some longstanding practices that, according to the plaintiffs’ arguments, violate antitrust laws and artificially inflate broker commissions.
Burnett is one of several similar cases making their way through the courts, including Nosalek v. MLS PIN (D. Mass), and Moehrl v. NAR (N.D. Ill.), the latter of which is not expected to go to trial until the end of 2024 at the earliest.
While
each case is unique, they all challenge the requirement (enforced by NAR and
other industry groups) that sellers must offer to compensate a buyer’s broker in
order to list a property on an MLS listing service, or other similar databases. As the plaintiffs in Moehrl argue,
this arrangement is anticompetitive and inflates commissions because, among
other reasons, (i) it creates a system wherein sellers are shouldered with an
extra cost that would normally be borne by buyers in a competitive market, (ii)
it compels sellers to offer the same compensation to every buyer-broker,
regardless of their experience or the services they provide, (iii) it creates
an incentive for sellers to offer the (arguably high) industry-standard
commission rates out of fear that buyers brokers will “steer” their clients
away from listings that offer a lower commission. As the plaintiffs in Burnett summarize,
the foregoing factors result in the perpetuation of inflated commissions for
buyer-brokers in a world where recent technological and social changes (e.g.,
the rise of the internet) should have led to savings in transaction costs being
passed on to consumers like in other industries (e.g., travel booking,
insurance and banking).
While
the implications of these lawsuits on the real estate industry will not be
clear for some time, recent settlement agreements may offer some clues as to
where the industry is going. In a recent proposed settlement in Nosalek,
MLS PIN agreed to amend its rules by, in pertinent part:
(1)
eliminating the requirement that a
seller must offer compensation to a buyer-broker; (2) requiring the broker for
the seller to provide notice to the seller that (a) the seller is not required
to offer compensation to the buyer-broker and (b) if the buyer-broker requests
compensation from the seller, the seller can decline; and (3) if the seller
elects to make an initial offer to the buyer-broker and the buyer makes a
counter offer (effectively rejecting the seller’s offer), then any commission
to be paid to the buyer-broker is negotiated among the seller, the buyer, the
seller-broker and the buyer-broker.
In
a similar settlement in Burnett and Moehrl, RE/MAX agreed to
several business practice changes, including (i) not requiring its agents to be
members of NAR, (iii) encouraging franchisees to be “very clear that
commissions are negotiable and not set by law or . . . corporate policy”, and
(iii) not providing software that allows franchisees to filter listings by the
amount of compensation offered to buyer-brokers. It should be noted that the foregoing
settlements are limited to certain defendants, and both the Nosalek and Moehrl
cases are continuing.
NAR
has yet to participate in a settlement, and despite the setback in Burnett,
former NAR President Tracy Kasper stated in October of 2023 that the matter “is
not close to being final”, arguing that:
[c]onsumers
are better off and business competition is able to thrive because of our rules
and how well local MLS broker marketplaces function. In fact, the NAR
cooperative compensation rule for local MLS broker marketplaces ensures
efficient, transparent and equitable marketplaces where sellers can sell their
home for more and have their home seen by more buyers while buyers have more
choices of homes and can afford representation.
Given
that these cases are being heard in different courts and include different
participants and unique arguments, industry professionals who are advising
clients should pay close attention to both the substantive rulings of the
courts and the reactions (and potential rule changes) that follow from local
trade groups and market participants. If
you are advising residential buyers or sellers, it would be prudent to advise
them that the traditional commission structure is the subject of multiple
lawsuits and, depending on their location and how the property in question is
being marketed, they may have additional options for the way in which
commissions are paid in their transaction. REBA will continue to monitor
developments in these cases, including NAR’s appeal in Burnett.
A
member of REBA’s Title Insurance and National Affairs Section, Chris is an
associate at the international law firm of Proskauer Rose LLP. He represents
and advises businesses and organizations in all aspects of real estate
transactions, commercial leasing, and land use and development. Chris has experience in drafting and
negotiating purchase sale agreements and managing due diligence for commercial
real estate transactions involving industrial, office, multi-family residential
and retail properties. Chris’s email
address is CMercurio@proskauer.com.
