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Phillip C. Querin, Partner
Partner - Portland, Oregon Office

philquerin@dwt.com
(503) 241-2300

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United States Department of Justice vs. National Association of Realtors®
[January 2006]

As most Realtors® know by now, their industry organization, the National Association of Realtors® or NAR, has been sued by the United States Department of Justice for alleged violations of the Sherman Antitrust Act. The lawsuit seeks to enjoin the NAR from maintaining or enforcing policies which, according to the Amended Complaint filed on October 8, 2005, “…restrain competition from brokers who use the Internet to more efficiently and cost effectively serve home sellers and buyers…” The DOJ believes that the brokers targeted by NAR’s policies are primarily those who operate websites that enable their customers to search for and obtain listings over the Internet. It is these alternative web-savvy business models that the DOJ believes provide “…an important competitive alternative to traditional ‘brick-and-mortar’ business models.”

How did we get to this point?

In the 1990’s, as the Internet grew, many information-based industries, such as Realtors®, were finding innovative ways to adapt this new technology to their specific needs. The NAR developed a national website, Realtor.com, which assembled an abbreviated version of the private listing information from its participating MLSs and made it available to the public. On January 1, 2000, NAR enacted its Internet Data Exchange (or “IDX”) policy, which permitted participating Realtor® websites to also display a public version of the private MLS information on their own company websites.

However, with the success of publicly available listing information came innovative brokerage businesses that made use of the MLS data entirely on the Web, and frequently discounted the cost of their services to the consumer. Some companies charged a comparatively small flat fee of a few hundred dollars to do little more than place a home on a Realtor® owned or controlled MLS, which was then displayed on Realtor.com and other publicly accessible sites across the country. So began the battle between the “traditional” bricks and mortar brokers and the new Internet-based brokers.

In an effort to address the increasing number of business models that were primarily located in cyberspace – and many of which offered discounted fees for reduced service - the NAR developed its virtual office website (or “VOW”) policy. VOW differed from IDX primarily in the amount of MLS information made available to the non-Realtor® viewer. According to NAR, a Virtual Office Website:

…refers to a Participant's Internet website, or a feature of a Participant's Internet website, through which the Participant provides real estate brokerage services to consumers with whom the Participant has first established a broker-consumer relationship (as defined by state law) where the consumer has the opportunity to search for MLS data, subject to the Participant’s oversight, supervision and accountability.

The most controversial aspect of the NAR’s VOW policy was its opt-out provisions, which permitted brokerages to opt out, either on a blanket basis (i.e. not permit any of its listings to be shown on other participants’ websites) or on a selective basis (i.e. to pick and choose which of their competitors’ websites could display their listings). Additionally, Realtor® MLSs were told by NAR that they could “…not adopt rules or regulations that are more or less restrictive than, or otherwise inconsistent with, these policies.” In other words, NAR’s VOW policy, which was adopted on May 17, 2003 and set to become effective on January 1, 2004, was mandatory. Needless to say, those companies that felt NAR’s VOW policy could be used to target their form of business, i.e. the discount models, complained the loudest. The dispute caught the attention of the U.S. Department of Justice, which informed the NAR that its mandatory VOW policy was potentially anti-competitive and a violation of federal antitrust laws. In October 2003 NAR confirmed that the DOJ had formally opened an investigation of the issue. The investigation continued through 2004 and part of 2005, during which time NAR repeatedly set dates for, and then suspended, implementation of its mandatory VOW policy. Neither side blinked.

On September 8, 2005, in an effort to fashion a less objectionable Internet policy, and to placate the DOJ, NAR modified its VOW policy, enacting an Internet Listing Display (or “ILD”) policy, which eliminated selective opt-outs but retained a modified form of blanket opt-outs. The U.S. Department of Justice was not satisfied. On the same day that NAR enacted its ILD policy, the DOJ filed suit. Since the initial lawsuit was directed primarily at the now-rescinded VOW policy, the DOJ filed an Amended Complaint alleging that it “… challenges both policies in this action as part of a single, ongoing contract, combination, or conspiracy.”

Paragraph 8 of the DOJ’s Amended Complaint underscores its view of NAR’s policies governing the display of listings over the Internet:

Defendant's VOW Policies restrict the manner in which brokers with efficient, Internet-based business models may provide listings to their customers, and impose additional restrictions on brokers operating VOWs that do not apply to their traditional competitors. Defendant thus denies brokers using new technologies and business models the same benefits of MLS membership available to their competitor brokers, and it suppresses technological innovation, discourages competition on price and quality, and raises barriers to entry. Defendant—an association of competitors—has agreed to policies that suppress new competition and harm consumers.

What does the MLS have to do with all this?

Most MLSs are an association of competing brokerages that have combined their listings in a shared fashion for the benefit of all their participants. Seller agents place their clients’ listing information in the local MLS, and buyer agents search it for a possible match with their clients’ needs. When a sale occurs, both the seller’s and buyer’s agents share the total commission. The percentage split between them is based upon an “offer of compensation” made by the listing agent to all other participating brokers at the time the home is initially placed in the MLS.

Over the years, the methods of making MLS information available to customers has changed as technology has evolved. Beginning in the 1920s and up through the 1990s, most brokers used a printed MLS book. With the development of the Internet, however, potential home buyers began searching cyberspace for information about available homes for sale. In the late 1990s, a number of Realtors® began creating password-protected websites that enabled potential home buyers who registered as customers of the broker and agreed to certain restrictions on their use of the data, to search the MLS database themselves. In return, they received access to MLS listings over the Internet. These websites were the “VOWs” that became the subject of NAR’s policy that resulted in the present antitrust lawsuit.

Unfortunately, the MLS concept is now a victim of its overwhelming success. In many markets, it is the only available comprehensive source for property listings. Broker participation is not only necessary in order to price, market, sell and buy homes, but it is expected by today’s consumers. It has now become such an essential part of the residential real estate transaction, some brokers believe that to restrict or limit their MLS access is akin to denying them their livelihood. According to this view, any policy short of unlimited access to the MLS is inherently anti-competitive and therefore illegal.

The Internet is also being used by some Web-based companies to support a "referral" business model. These companies (sometimes known as “lead aggregators”) provide brokers with information about potential buyers in return for a share of the commission paid at closing if the lead results in a completed transaction. This arrangement is not dissimilar to the practice of traditional brokers charging a fee for a customer referral, with one exception – the Internet makes this simple referral model financially viable as a stand-alone business, without the need for any other brokerage-related revenue streams. With the continued erosion of commission dollars because of discount brokerage, commission compression, and Internet FSBO companies, it is easy to see how purely Internet-based lead aggregators would be viewed by the traditional brokerage community. The DOJ believes that NAR’s original VOW policy, as well as the modified ILD policy, places restrictions on participant’s MLS activity in such a way as to also discourage Internet lead aggregation companies.

What is the current status of the lawsuit?

On December 6, 2005 NAR filed a motion to dismiss that portion of the Amended Complaint that deals with the old VOW policy, since it is no longer in effect. They have also challenged the DOJ’s attack on the opt-out provisions contained in its new ILD policy, asserting that NAR members are not encouraged to select one course of action over another, and as such, they exercise their own independent judgment in making any opt-out decisions.

Where will all this end up?

Where do 99 percent of all lawsuits end up? With a settlement. The need for bragging rights is greater than the need to “win.” Besides, no one, not even the DOJ, is sure of the outcome if they went to court. So, most likely, each side will give up a little to get a little. They will probably arrive at a compromise near the middle, so each side can claim a victory for the consumer. There will probably be some form of “VOW-lite” policy, which will permit NAR to retain a certain amount of control over access to Internet listing data, though less than what it has now.

The alternative – grinding and costly litigation - is unsatisfactory to both sides: A win for the DOJ could result in destroying the MLS system as the public has come to know it. The largest national brokerages could simply take their listings “inside” for the benefit of their own agents and customers. How would that benefit the consumer or the smaller brokerages, both traditional and non-traditional? How would the DOJ explain that the very groups they sought to empower by their lawsuit were actually harmed by the outcome? Conversely, a win for NAR could result in a backlash against that organization and its own MLS policies, anger the growing non-traditional business models, and encourage the creation of a non-Realtor® controlled national MLS.

What’s a traditional broker to do?

You’re under the spotlight. The DOJ says you’re being anti-competitive by trying to stifle those companies whose business model is different from yours. They say that the consumer benefits when competition is encouraged, not discouraged. Yet these companies, many of whom are based upon limited fees for limited service, are merely a Darwinian product of the marketplace. In a seller’s market, some of the more efficient and innovative models will survive. However, the Internet and a buyer’s market have never co-existed for any significant length of time. It remains to be seen how some of the lower cost, minimum service, business models will fare in the long run.

If traditional brokers have anything of value to sell, it is their skill, knowledge and experience. This will never be digitized. And, there is no better place to get the word out than over the Internet. So, as a traditional broker, your task is to keep your finger on the pulse of the local market; anticipate and be prepared to deal with changes nationally; know what’s happening on the Internet and figure out how to use it to your advantage; and most importantly, educate your clients and potential clients about the fact that you know real estate better than the competition.

What’s a non-traditional broker to do?

Your biggest challenge may not be the traditional brokerage businesses, but the marketplace itself. You must constantly re-evaluate the consumer’s need for your business model. You must prepare for the same innovative Internet competition that assisted you. Increasing your market share and defending against new Internet-based businesses means understanding your niche and then capitalizing on it faster and better than the competition.

As interest rates increase and homes remain on the market longer, lower fees for reduced service may hold less attraction than they do today. This is not a race to the bottom. In a slower market – which we have yet to see – many consumers may choose value over price. You must focus on the efficiencies that the Internet provides and figure out how to use them to your advantage sooner than everyone else.

© Copyright 2006. Phillip C. Querin, Davis Wright Tremaine. No part may be reproduced without the author’s express written consent.